[WPRT 108-3]
[From the U.S. Government Publishing Office]



108th Congress 
 1st Session                COMMITTEE PRINT                       WMCP:
                                                                  108-3
_______________________________________________________________________
 
                       SUBCOMMITTEE ON OVERSIGHT

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS

                     U.S. HOUSE OF REPRESENTATIVES

                               __________

                            WRITTEN COMMENTS

                                   ON

                       TAXPAYER RIGHTS PROPOSALS


    [GRAPHICS NOT AVAILABLE IN TIFF FORMAT]


                             MARCH 25, 2003

         Printed for the use of the Committee on Ways and Means





                       U. S. GOVERNMENT PRINTING OFFICE
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                      COMMITTEE ON WAYS AND MEANS

                   BILL THOMAS, California, Chairman

PHILIP M. CRANE, Illinois            CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida           FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut        ROBERT T. MATSUI, California
AMO HOUGHTON, New York               SANDER M. LEVIN, Michigan
WALLY HERGER, California             BENJAMIN L. CARDIN, Maryland
JIM MCCRERY, Louisiana               JIM MCDERMOTT, Washington
DAVE CAMP, Michigan                  GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota               JOHN LEWIS, Georgia
JIM NUSSLE, Iowa                     RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas                   MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington            WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia                 JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio                    XAVIER BECERRA, California
PHIL ENGLISH, Pennsylvania           LLOYD DOGGETT, Texas
J.D. HAYWORTH, Arizona               EARL POMEROY, North Dakota
JERRY WELLER, Illinois               MAX SANDLIN, Texas
KENNY C. HULSHOF, Missouri           STEPHANIE TUBBS JONES, Ohio
SCOTT MCINNIS, Colorado
RON LEWIS, Kentucky
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia

                    Allison H. Giles, Chief of Staff
                  Janice Mays, Minority Chief Counsel



Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public 
hearing records of the Committee on Ways and Means are also published 
in electronic form. The printed hearing record remains the official 
version. Because electronic submissions are used to prepare both 
printed and electronic versions of the hearing record, the process of 
converting between various electronic formats may introduce 
unintentional errors or omissions. Such occurrences are inherent in the 
current publication process and should diminish as the process is 
further refined.









                            C O N T E N T S

                               __________
                                                                   Page
Advisory of Wednesday, March 12, 2003, announcing request for 
  written comments on taxpayer rights proposals..................     1

                                 ______

American Institute of Certified Public Accounts, Robert A. 
  Zarzar, letter.................................................     2
Center for Economic Progress, Chicago, IL, David Marzahl, 
  statement......................................................     8
Council for Electronic Revenue Communication Advancement, 
  Alexandria, VA, Anthony T. Tullo, letter and attachment........    12
Gold, Jeffrey S., statement and attachment.......................    14
Independent Sector, statement....................................    17
National Association of Enrolled Agents, Gaithersburg, MD, Judith 
  A. Akin, letter................................................    19
National Payroll Reporting Consortium, Inc., Fairport, NY, letter    19
National Society of Accountants, Alexandria, VA, statement.......    22
National Treasury Employees Union, Colleen M. Kelley, statement..    24
New York State Department of Law, New York, NY, William 
  Josephson, and Karin Kunstler Goldman, letter..................    25














ADVISORY

FROM THE 
COMMITTEE
 ON WAYS 
AND 
MEANS

                       SUBCOMMITTEE ON OVERSIGHT

                                                CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
March 12, 2003
No. OV-2

  Houghton Announces Request for Written Comments on Taxpayer Rights 
                               Proposals

    Congressman Amo Houghton (R-NY), Chairman, Subcommittee on 
Oversight of the Committee on Ways and Means, today announced that the 
Subcommittee is requesting written comments for the record from all 
parties interested in legislative proposals concerning taxpayer rights, 
including those contained in the National Taxpayer Advocate's 2001 and 
2002 Annual Report to Congress, reports by the U.S. Department of the 
Treasury and Joint Committee on Taxation (JCT) mandated by the Internal 
Revenue Service (IRS) Restructuring and Reform Act of 1998 (RRA '98) 
(P.L. 105-206), and the President's fiscal year 2004 budget proposal.

BACKGROUND:

    Congress passed the first ``Taxpayer Bill of Rights'' in 1988. It 
expanded taxpayer protections in the ``Taxpayer Bill of Rights 2'' in 
1996 and, in that legislation, established the National Commission on 
Restructuring the IRS. The Restructuring Commission's June 1997 report 
contained recommendations that were the basis for RRA '98. The RRA '98 
contained many more taxpayer rights guarantees; it directed the IRS to 
place a greater emphasis on serving the public and meeting taxpayers' 
needs.

    The RRA '98 established the Office of the Taxpayer Advocate, and it 
requires the National Taxpayer Advocate to submit an annual report to 
Congress that contains legislative recommendations to resolve problems 
encountered by taxpayers. The Taxpayer Advocate's 2001 and 2002 Reports 
to Congress contain many such recommendations.

    Also, pursuant to RRA '98, the JCT and the Treasury Department 
submitted separate reports to Congress recommending legislative options 
to reform the penalty and interest provisions, and the confidentiality 
and disclosure provisions of the Internal Revenue Code.

    Finally, the President, in his fiscal year 2004 budget proposal, 
has made several recommendations to improve tax administration. The 
Subcommittee is seeking comments on the legislative recommendations 
contained in all of the aforementioned documents and on any other 
proposal that relates directly to the protection of taxpayer rights or 
the administration of Federal tax laws.

    In announcing this request for comments, Chairman Houghton stated, 
``I look forward to hearing from taxpayers and tax professionals about 
ways in which we can improve the administration of our tax laws. The 
combination of written comments and testimony at this year's hearing 
will permit the Subcommittee to develop better legislation to guarantee 
taxpayer rights.''

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

    Any person or organization wishing to submit written comments for 
the record should send it electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, by close of business, Tuesday, March 25, 2003. Please 
Note: Due to the change in House mail policy, the U.S. Capitol Police 
will refuse sealed-package deliveries to all House Office Buildings.

FORMATTING REQUIREMENTS:

    Each statement presented for printing to the Committee by a 
witness, any written statement or exhibit submitted for the printed 
record or any written comments in response to a request for written 
comments must conform to the guidelines listed below. Any statement or 
exhibit not in compliance with these guidelines will not be printed, 
but will be maintained in the Committee files for review and use by the 
Committee.

    1. Due to the change in House mail policy, all statements and any 
accompanying exhibits for printing must be submitted electronically to 
[email protected], along with a fax copy to 
(202) 225-2610, in Word Perfect or MS Word format and MUST NOT exceed a 
total of 10 pages including attachments. Witnesses are advised that the 
Committee will rely on electronic submissions for printing the official 
hearing record.

    2. Copies of whole documents submitted as exhibit material will not 
be accepted for printing. Instead, exhibit material should be 
referenced and quoted or paraphrased. All exhibit material not meeting 
these specifications will be maintained in the Committee files for 
review and use by the Committee.

    3. Any statements must include a list of all clients, persons, or 
organizations on whose behalf the witness appears. A supplemental sheet 
must accompany each statement listing the name, company, address, 
telephone and fax numbers of each witness.

    Note: All Committee advisories and news releases are available on 
the World Wide Web at http://waysandmeans.house.gov.

                                 

                 American Institute of Certified Public Accountants
                                               Washington, DC 20004
                                                     March 25, 2003
The Honorable Amo Houghton
Chairman
Subcommittee on Oversight
Committee on Ways and Means
U.S. House of Representatives
1136 Longworth House Office Building
Washington, D.C. 20515

    Dear Chairman Houghton:

    The American Institute of Certified Public Accountants commends the 
Subcommittee on Oversight for the panel's long-standing support for 
proposals designed to improve the tax administration process and 
protect the rights of American taxpayers. In this regard, we are 
pleased to have the opportunity to offer comments on taxpayer rights 
proposals as requested by the Subcommittee's March 12, 2003 advisory. 
Our comments herein specifically address a number of the taxpayer 
rights and tax administration provisions contained in (H.R. 5728) the 
Tax Administration Reform Act of 2002. Although H.R. 5728 passed the 
House of Representatives in 2002, it did not become law. We anticipate 
that these same provisions are likely to receive serious consideration 
by the Committee on Ways and Means in 2003.
    The AICPA is the national, professional organization of certified 
public accountants comprised of more than 350,000 members. Our members 
advise clients on federal, state, and international tax matters, and 
prepare income and other tax returns for millions of Americans. They 
provide services to individuals, not-for-profit organizations, small 
and medium-sized businesses, as well as America's largest businesses.
    H.R. 5728 contains a number of provisions designed to promote 
taxpayer rights and tax administration. We would like to offer comments 
on the following provisions of H.R. 5728 that we consider particularly 
significant to tax practitioners and their clients; specifically the 
provisions involving: (1) an April 30 due date for electronically filed 
returns; (2) low income tax clinics; (3) penalties and interest; (4) 
the collection process; and (5) a better means of communicating with 
taxpayers.

1) EXTEND THE DUE DATE FOR ELECTRONICALLY FILED RETURNS

    Section 205 of H.R. 5728 would provide an April 30 due date for 
individual income tax returns that are e-filed. The AICPA supports 
electronic filing and wants it to work well for all taxpayers. We 
applaud the creativity of this proposal to encourage e-filing, but 
believe that the same incentive could be achieved by deferring the 
processing of electronic payments on e-filed returns until April 30, 
without changing the due date. This would avoid the complexities and 
problems, detailed below, of a separate e-file due date.

The Incentive to E-File

    Most taxpayers who file electronically do so to accelerate the 
processing of refunds. Treasury's proposal would provide a similar 
cash-flow benefit for ``tax-due'' returns by allowing taxpayers to hold 
on to their cash until April 30. It is difficult to predict how much of 
an incentive this delay would provide, given that the difference 
between an immediate charge on April 30 and the slower processing of 
checks mailed on April 15 might result in additional ``float'' of less 
than a week. However, the delayed due date would at least remove the e-
filing disincentive of immediate electronic payment on April 15.
    This cash flow incentive is an important factor in the e-filing 
decision process because the public and practitioners continue to have 
concerns over electronic filing. Predominant among these concerns are 
that, contrary to IRS advertising: (1) e-filing does not reduce tax 
paperwork for taxpayers and practitioners; (2) computer-prepared paper 
returns are no less accurate than those submitted electronically; and 
(3) e-filing is more--not less--expensive. Finally, there are lingering 
concerns about privacy and the government's ability to collect more 
information from electronically filed returns than from paper returns.
    In light of these considerations, we believe that deferring 
processing of electronic payments on e-filed returns until April 30 
would achieve the same cash flow incentive to e-filing as would a 
delayed filing date.

Extended Due Date Issues

Return Processing Problems

    Under H.R. 5728, taxpayers would gain the maximum cash-flow benefit 
by filing on April 30. This last-day (and potentially last-minute) rush 
of returns will cause processing problems for practitioners and the 
IRS, and could cause some returns to be filed late as a result of 
processing log-jams. By processing electronic payments from e-filed 
returns on April 30--no matter when the return was filed--the IRS and 
practitioners could process electronically filed tax-due returns 
normally through the tax season and still give the maximum incentive to 
e-file.

Estimated Tax Payment Problem

    H.R. 5728 does not extend the due date for estimated payments, 
although crediting of overpayments of prior years taxes is considered 
timely through April 30 on e-filed returns. Without a general extension 
of the estimated payment due date, taxpayers might have to 
substantially complete an e-filed tax return by April 15 in order to 
calculate and make timely estimated payments within the safe harbor 
based on prior year's taxes. Also, by allowing overpayments on April 30 
e-filed returns to be timely credited towards estimated taxes that 
would otherwise be due on April 15, there may be different due dates 
for some federal and state estimated tax payments (see the section 
below on state tax conformity).

Federal Extension Problems

    As an alternative to filing their individual returns on April 15, 
taxpayers may request an automatic four-month filing extension. The 
proposal does not address whether this automatic extension would be 
lost if a taxpayer who intended to e-file by April 30 was unable to do 
so and had not filed an extension by April 15. This could occur, for 
instance, if the return could not be processed electronically for some 
reason beyond the taxpayer's control, for example, the taxpayer died 
between April 15 and April 30, or there was a processing glitch such as 
where someone else erroneously filed using the taxpayer's social 
security number or where an error is made in copying an employer 
identification number. Without an additional opportunity to file an 
extension before May 1, prudent taxpayers and practitioners would file 
extension requests on April 15 even if they plan to complete the return 
electronically by April 30. This could result in the IRS receiving an 
extension request for every e-filer expecting to take advantage of the 
later due date. Finally, if a taxpayer could file for an automatic e-
filing extension on April 30, the legislation should clarify that the 
extended due date would be August 15, not August 30 or 31. By allowing 
deferred processing of payments for e-filed returns instead of a later 
due date, these problems are avoided.
    Deferring processing of electronic payments would also give the 
government an opportunity to encourage e-filing for extended individual 
returns. If the government deferred processing of electronic payments 
for 15 days where an extended return is filed electronically, this 
would provide a powerful cash-flow incentive to e-file many extended 
returns. Again, the IRS could easily accomplish this change, without 
adding complexity or changing the tax law. The proposal, as currently 
written, provides no e-filing incentive for extended returns.

State Tax Conformity

    The change in the due date for federal e-filed returns causes a 
number of potential problems for taxpayers and state and local 
governments, unless these governments conform their laws to the April 
30 due date for e-filed returns.

          LTaxpayers would have to prepare their federal 
        returns by April 15 in order to prepare their state returns.

          LIf taxpayers extend their state returns because they 
        haven't completed their federal return, states could see a 
        substantial increase in the number of extensions.

          LMany states require a copy of a federal extension 
        request as part of a state extension request; April 30 e-filers 
        could not comply with that requirement if they did not request 
        a federal extension.

          LTaxpayers could erroneously assume that their 
        electronically filed state tax return is due on the same day as 
        the federal return, resulting in state late-filing penalties.

          LThe proposal allows timely crediting of overpayments 
        of prior year's taxes against current year's estimated taxes on 
        April 30 for e-filed federal returns. Either states would have 
        to conform their rules or taxpayers would have to pay state 
        estimated taxes by April 15 to avoid state late payment 
        penalties.

    Thus, unless states change their laws to conform with an extended 
federal due date for e-filed returns, much taxpayer confusion and state 
tax filing complications could result. Implementing this proposal for 
the next filing season would not allow enough time for most state 
legislatures to change state laws in time to avoid these problems. 
These state tax conformity issues would not arise if the federal 
government simply defers processing of electronic payments until April 
30 rather than extending the due date.

Complexity

    H.R. 5728 would create different rules--based on filing method--for 
return due dates, tax payments, and filing extensions. Many of these 
rules are already complex. Multiplying the number of filing rules would 
add a layer of confusion. Deferring electronic payment processing 
rather than extending the due date offers a much simpler approach to 
promoting e-filing.

Maintain April 15 as the Well-Known Filing Date

    April 15 has been engraved into our national psyche as the date by 
which we must take some action on our taxes. Although one intent of 
this proposal is to help people who have trouble getting organized by 
April 15, we suspect that further delay in getting organized may 
result, yielding one last haven for procrastinators.
    In general, tax practitioners would prefer a firm deadline, which 
is not easily by-passed, to lend some finality to the annual crush of 
tax return work. Practitioners do not relish extending their busy 
season 15 days and creating a last minute April 30 push to take maximum 
advantage of the ``float'' on tax-due returns.
    We believe that returns should continue to be due by April 15, with 
deferred processing of electronic payments on e-filed returns. This 
would keep April 15 as the date by which taxpayers must address their 
tax obligations, but still provide e-filing incentives.
    The AICPA supports efforts to make e-filing more appealing to 
taxpayers, and believes that this proposal is helpful. However, we 
believe that deferred processing of payments for e-filed returns would 
provide the same incentive and would avoid the complexities and return 
processing problems of a separate due date for e-filed returns. The 
IRS, state governments, and practitioners could process returns more 
easily, and taxpayers would be better served.

2) LOW-INCOME TAXPAYER CLINICS

    Section 106 of H.R. 5728 would increase federal funding to low-
income taxpayer clinics (LITCs), but limit funding to clinics that 
represent taxpayers in controversies before the IRS. This change in the 
law has already been imposed administratively by the IRS, after 
applications for the current year had already been submitted, leaving 
many low-income preparation clinics without expected matching funds.
    Although assisting low-income taxpayers with controversies is an 
important and necessary function, it requires an intensive focus on the 
issues facing a fairly limited number of taxpayers. Clinics that 
prepare ``routine'' returns provide broader, more basic compliance 
assistance to many more individuals. In some Congressional districts, 
citizens don't have the language and math skills or the convenient 
access to the government that allows them to comply with our complex 
tax requirements. VITA programs are helpful, but they are seasonal, 
often changing location from year to year, with taxpayers not knowing 
where to go and whether they will find their records there or anyone 
who is familiar with their return. VITA is administered by the IRS, 
with some taxpayers suspecting whether the program serves their best 
interests.
    We urge Congress to fund LITCs that offer return preparation 
assistance, because without this assistance (1) low-income taxpayers 
will struggle--and often fail--to file correct returns; (2) low-income 
wage earners will not receive tax benefits Congress intended for them; 
and (3) the IRS will expend more resources on compliance problems.

Return Preparation Complexity

    Tax law complexity hits low-income taxpayers particularly hard. 
Often these taxpayers lack the education and skills to prepare their 
own tax returns. For many, English is their second language; tax forms 
and instructions are difficult enough for those native English 
speakers.
    Low-income taxpayers cannot afford to hire the return preparers 
that over half of all American taxpayers use to cope with tax return 
complexity. LITCs can and do supply tax compliance assistance not 
otherwise available to low-income taxpayers. IRS taxpayer assistance 
alone cannot provide the quality and quantity of assistance needed. 
Even commercial return preparers who try to serve the low-income market 
by keeping their prices down cannot devote much time to each return and 
often supplement their revenues by marketing refund anticipation loans 
which low-income taxpayers can ill-afford.

Loss of Congressionally Intended Benefits

    Without low-cost professional assistance, many low-income families 
may not even learn about the benefits that Congress intended to help 
them, like the child tax credit or the earned income tax credit (EITC). 
The EITC's complexities deter some low-income taxpayers; others try to 
claim the EITC on their own, but make errors that can lead to penalties 
and disqualification. In attempting to find help, still other taxpayers 
fall victim to tax scams that have plagued the EITC.
    Congress implemented the EITC to offset the regressivity of income 
and employment taxes on low-income wage earners, and it can make a real 
difference in the quality of life for low-income families. Support for 
LITCs that prepare returns will facilitate these complex filings and 
get the benefit into the hands of the working poor who need it most.

Increased Cost of Administration

    LITCs reduce the IRS's administrative burden by helping taxpayers 
prepare ``clean'' returns that can be processed without delays, missing 
information, or mis-claimed benefits. Professionals who work with 
clinics are subject to standards of conduct that help assure honest 
returns and limits controversies.
    Thus, LITCs help low-income taxpayers receive the intended tax 
benefits, while helping to prevent fraud and errors. By reducing the 
IRS burden in processing these returns, LITCs strengthen the tax system 
and allow the Service to focus on more productive issues. Congressional 
funding of LITCs is very effective. In order to qualify for federal 
funds, LITCs must solicit private matching donations and mobilize 
volunteer professionals.
    The AICPA supports the remainder of H.R. 5728, Section 106, which 
would increase LITC funding and authorize Treasury and the IRS to 
``promote the benefits and encourage the use of LITCs. We believe that 
Congressional efforts on behalf of low-income wage earners would be 
most effective by continuing support for low-cost, professional return 
preparation services for those near the bottom of America's economic 
ladder.

3) PENALTIES AND INTEREST

Estimated Tax Penalty

Interest Charge and Threshold

    H.R. 5728, Section 301 would modify the current failure-to-pay 
estimated tax penalty by (1) converting the current estimated tax 
penalty into an interest provision for individuals, estates, and 
trusts; (2) increasing the threshold for estimated tax underpayments 
from $1,000 to $2,000; and (3) authorizing a simplified averaging 
method for determining whether the estimated tax underpayment threshold 
is met.
    The AICPA supports converting the estimated tax penalty into an 
interest provision for individuals, estates, and trusts. In addition, 
we also recommend that the legislation be amended to provide for 
conversion of the estimated tax penalty into an interest provision for 
corporations. Conversion of the estimated tax penalties into interest 
charges should result in a more accurate characterization since the 
penalties are essentially fees for the use of money. We also support 
increasing the estimated tax penalty threshold to $2,000 for 
individuals, and enacting the simplified averaging method.

Rate

    Section 301 would apply only one interest rate per underpayment 
period--the rate applicable on the first day of the quarter in which 
the payment is due. Currently, if interest rates change while an 
underpayment is outstanding, separate calculations are required for the 
periods before and after the interest rate change. Having only one 
interest rate apply per underpayment period would end the potential for 
multiple interest calculations occurring within one estimated tax 
underpayment period. The AICPA supports this provision as simplifying 
the computations.

Underpayment Balances

    Section 301 would also simplify the calculation of estimated tax by 
(1) eliminating the requirement to track each underpayment separately; 
and (2) making underpayment balances cumulative. Under this proposal, 
taxpayers would no longer need to track each outstanding underpayment 
balance until the earlier of the date paid or the following April 15. 
The AICPA supports this provision as simplifying the computations.

Leap Year Issue

    Under Section 301 of the legislation, a standard, 365-day year 
would be established for calculating estimated tax penalties. Current 
IRS procedures require separate calculations when outstanding 
underpayment balances extend through a leap year. The AICPA supports 
this provision as simplifying the computations.

Exclude Interest on Individual Federal Income Tax Overpayments

    H.R. 5728, Section 302 generally provides for an exclusion from 
gross income of the interest paid to individuals by the federal 
government on overpayments of tax. The AICPA believes this provision is 
a constructive proposal by attempting to provide equivalent effective 
interest rates on underpayments and overpayments for individuals.

Interest Abatement

    H.R. 5728, Section 303 expands the circumstances under which 
interest on a tax underpayment may be abated to include (1) any 
erroneous refund not caused by the taxpayer; and (2) underpayments 
attributable to erroneous written advice furnished by the IRS. The 
AICPA supports this provision.

Deposits to Suspend Interest

    Section 304 of the bill permits taxpayers to limit their 
underpayment interest exposure in a tax dispute--without affecting 
their ability to be heard in Tax Court--by allowing them to make cash 
deposits to suspend the running of interest. These accounts are 
intended to help taxpayers better manage their exposure to underpayment 
interest without requiring them to surrender access to their funds or 
requiring them to make a potentially indefinite-term investment in a 
non-interest bearing account. Further, under this proposal generally, 
taxpayers would be permitted to withdraw the deposited amount with 
interest or to allocate and apply it to tax underpayments.
    The AICPA supports the proposal in concept. We believe that the 
initiative blends some good features of several current law approaches 
to avoid deficiency charges.

Modifying Interest Netting Rules for Individuals

    There are several special rules under current law whereby taxpayers 
and the government are given grace periods to take certain actions 
without accruing additional interest charges. For example, the 
government is generally provided 45 days to process refund claims 
without a requirement to pay interest on the overpayment of tax. H.R. 
5728, Section 305 modifies current law by applying the interest netting 
rules to individual taxpayers without regard to this 45-day period.
    We support the provision on interest netting, as the measure is 
designed to ensure that individual taxpayers are not charged interest 
on amounts where no true liability actually exists. Section 305 should 
mitigate taxpayer resentment over the imposition of interest on 
equivalent outstanding amounts under the pretext that a true liability 
exists where none does.

Waiving Certain Penalties for First-Time Unintentional Minor Errors

    Under Section 306 of the bill, the IRS is permitted to waive, once 
per taxpayer, the IRC Section 6651 failure-to-file or failure-to-pay 
penalties when an individual taxpayer has committed unintentional, 
minor errors. In considering this waiver, the IRS would take into 
account: (1) the taxpayer's compliance history; and (2) the likelihood 
that imposing the penalty would be grossly disproportionate to the 
action or expense necessary to have avoided the error.
    The AICPA supports this provision. In addition, we recommend 
expanding this waiver option to cover other penalties, particularly 
those that are mechanical in nature like the failure-to-deposit 
penalty. We believe that this penalty safe harbor would encourage and 
create vested interests in compliance, because a history of compliance 
would be more likely to result in relief. Also, expanding this 
provision would reduce the time spent by both the Service and taxpayers 
on proposing an assessment, initiating and responding to 
correspondence, and negotiating subsequent abatement.

Frivolous Tax Returns and Submissions

    Under current law, the IRS has the authority to impose a $500 civil 
penalty against individuals who file frivolous original or amended 
returns. Section 307 of H.R. 5728 would modify present law, regarding 
submissions that raise frivolous positions or that are intended to 
delay or impede tax administration, by increasing the frivolous filing 
penalty to $5,000 and by expanding the penalty's scope to cover 
collection due process hearings, installment agreements, offers-in-
compromise, and taxpayer assistance orders. The bill would also require 
the IRS to publish a list of positions, arguments, requests, and 
proposals that the Service has determined to be frivolous.
    The AICPA supports increasing the frivolous filing penalty to 
$5,000 and the proposed expansions in its application. In fact, our 
February 6, 2003 letter to (Acting) Commissioner Robert E. Wenzel 
states that this penalty proposal is potentially preferable to the 
regulatory proposal designed to control frivolous offer-in-compromise 
filings by assessing a user fee. Nevertheless, we would not want the 
frivolous penalty proposal to be used to stifle--overtly or 
inadvertently--legitimate taxpayer submissions whether that submission 
is an offer-in-compromise, a filing involving a collection due process 
hearing, an installment agreement, or a taxpayer assistance order.
    Although we are pleased that the proposal would require the IRS to 
publish guidance regarding what constitutes a frivolous position, we 
recommend expanding this requirement to also provide guidance regarding 
the meaning of the legislative language (from last Congress) involving 
``a desire to delay or impede the administration of Federal tax laws.'' 
It is particularly critical that the guidance regarding what 
constitutes ``a desire to delay or impede the administration of Federal 
tax laws'' be restricted to truly frivolous positions or actions. Such 
guidance would go along way to ameliorate concerns about the potential 
misuse of the expanded penalty's application, especially if the IRS 
consults with the practitioner community in the development of such 
guidance.


4) COLLECTION PROCESS

Partial-Payment of Tax Liability in Installment Agreements
    H.R. 5728, Section 101 clarifies that the IRS is authorized to 
enter into installment agreements that do not require full payment of 
the taxpayer's liability over the life of the agreement. Further, the 
bill requires the Service to review these partial-payment installment 
agreements at least every two years.
    The AICPA supports this proposal because it gives the IRS more 
tools for settling taxpayer accounts. However, we would have 
reservations about the proposal if the initiative were drafted to also 
require an extension of the collection period.

Extending Time Limit for Contesting IRS Levies
    Under current law, a taxpayer is generally required to bring an 
action for wrongful levy within nine months of the date of the IRS 
levy. H.R. 5728, Section 102 would extend the period to contest a levy 
from nine months to two years. This proposal is contained as a 
recommendation in the National Taxpayer Advocate's Fiscal Year 2001 
Annual Report to Congress (dated December 31, 2001). The AICPA supports 
this initiative.

5) BETTER MEANS OF COMMUNICATING WITH TAXPAYERS

    Section 221 of the legislation requires the Treasury Inspector 
General for Tax Administration to issue a report to Congress on ways to 
improve IRS communications with taxpayers, particularly focusing on 
technological advances such as e-mail and fax communications. This 
provision is consistent with our long-standing support for (1) 
fostering electronic communications between the IRS, taxpayers, and tax 
practitioners; and (2) a dramatic increase in IRS use of e-mail and fax 
communications as alternatives to regular mail.
          *****
    Thank you for considering the AICPA's views on H.R. 5728. Should 
you need any further feedback on our positions regarding this bill or 
any other taxpayer rights initiative, please do not hesitate to contact 
us. If you have any additional questions, please contact me at (202) 
414-1705 or [email protected]; William R. Stromsem, AICPA 
Director, at (202) 434-9227 or [email protected]; or Benson S. 
Goldstein, AICPA Technical Manager, at (202) 434-9279 or 
[email protected].

            Sincerely,
                                                   Robert A. Zarzar
                                                              Chair
                                            Tax Executive Committee

cc:

House Ways and Means Committee Members
Senate Finance Committee Members
IRS Oversight Board Members
Pam Olson, Treasury Deputy Assistant Secretary-Tax Policy

                                 

  Statement of David Marzahl, Executive Director, Center for Economic 
                      Progress, Chicago, Illinois
    Mr. Chairman and Members of the Subcommittee:

    My name is David Marzahl. I am submitting written comments in my 
capacity as Executive Director of the Center for Economic Progress (the 
Center). The Midwest Tax Clinic (the Clinic) is a program of the 
Center, a 501(c)(3) corporation in Chicago, Illinois. The Clinic 
provides: (1) pro bono representation to low-income Illinois taxpayers 
in federal and state tax controversies; (2) English as a Second 
Language (ESL) outreach programs to educate taxpayers on their rights 
and responsibilities in conjunction with their federal and state tax 
filing obligations; and (3) limited tax preparation assistance as 
needed in cases where prior year returns were filed incorrectly, 
incompletely, or otherwise in need of modification before resolution of 
the case or controversy may be reached.
    I sincerely appreciate the opportunity to submit written comments 
for the record concerning taxpayer rights, particularly the rights of 
low and moderate income taxpayers. I submit these comments on behalf of 
my colleagues at the Clinic, the Tax Counseling Project (the Project), 
and the Center as a whole. My comments will primarily touch upon the 
National Taxpayer Advocate's 2002 Report to Congress, on the 
President's fiscal year 2004 budget generally and on our 
recommendations for improvements to the current EITC program, 
particularly the soon to be instituted EITC precertification program.

LBACKGROUND ON THE CENTER FOR ECONOMIC PROGRESS AND THE MIDWEST TAX 
        CLINIC
    The Clinic achieves its objectives with the assistance of volunteer 
attorneys, accountants, tax professionals and an in-house staff that is 
bi-lingual, including Salvador Gonzalez, the Clinic Director, who is a 
CPA and MBA. In fiscal year 2002, the Clinic was awarded funding under 
the Low Income Taxpayer Clinic Grant Program, instituted by IRC 
Sec. 7526. The Clinic represents approximately 200 individual cases a 
year for clients with income at or below 250% of the federal poverty 
level.
    In addition, the Clinic relies greatly on its partnership with the 
Center, chiefly due to the Center's lead program, the Tax Counseling 
Project (the Project). Launched in 1994 to meet the tax preparation 
needs of homeless individuals, the Project is one of the nation's 
largest free statewide tax preparation services for working families. 
Each year, trained volunteers set up shop at community colleges, 
libraries, banks, and other locations to provide free tax preparation 
assistance for low-income clients. In 2002, more than 800 volunteers 
prepared 27,000 federal and state income tax returns. The Project 
brought back over $19.5 million in refunds to working families. 
Moreover, the Project's volunteers can boost the incomes of working 
poor families up to 35% by helping them claim the federal Earned Income 
Tax Credit (EITC). Many of the families served are making the 
transition from welfare to work. The Project currently receives funding 
from state, city, and private sources.
    The Clinic counts its success due to the necessary relationship 
maintained with the Project. It is often the case that a taxpayer must 
complete or amend prior year returns in order to begin work toward 
resolution of their tax controversy. During tax season, the Clinic is 
able to refer taxpayers to one of the Project's 25 Illinois tax sites. 
Thus, the taxpayer is able to have prior year returns completed or 
amended while they wait and the Clinic is able to free up resources to 
concentrate on preparing Offers-in-Compromise (OIC), Audit 
Reconsiderations and other important services. Similarly, the Project 
is able to refer clients to the Clinic and referrals run the gamut from 
ITIN applications, prior EITC denials, and tax deficiencies requiring 
OICs.
    Following are my comments on the aforementioned points:

         Lthe National Taxpayer Advocate's 2002 Report to 
        Congress;
         Lthe President's fiscal year 2004 budget generally; 
        and
         Lour recommendations for improvements to the current 
        EITC program, particularly the soon to be instituted EITC 
        precertification program.

FY 2002 NATIONAL TAXPAYER ADVOCATE REPORT TO CONGRESS

Free U.S. Individual Income Tax Return Preparation

    The National Taxpayer Advocate recommends that ``Congress authorize 
and appropriate funding for a grant program, modeled after the Low 
Income Taxpayer Clinic program, for community-based coalitions to 
provide low income taxpayers with free tax preparation and education 
about and opportunities to bank and save their tax refunds.'' (Topic 
#13, Most Serious Problems section, p. 103) In addition, the Report's 
preface discusses low-income taxpayer reliance on Refund Anticipation 
Loans (RALs) and the correlation between reliance on RALs and being 
unbanked, where taxpayers lack a bank account in which to receive a 
direct deposit. The preface states that RALs will not disappear until 
the IRS is able to return refunds within two to four days if low-income 
taxpayers are banked.
    The Center has a financial literacy program, First Accounts, which 
recognizes this very key relationship between securing a bank account 
and averting the hazards of RALs, which impose extraordinarily high 
interest rates upon a population that can afford them the least. The 
Center fully supports the recommended initiative for the funding of 
free tax preparation and financial education. Moreover, the Center is a 
testament to the success that can be achieved when community-based 
coalitions provide low income taxpayers with free services they would 
otherwise be unable to access. The Center, via the Tax Counseling 
Project, has provided low income families with free tax preparation 
assistance and been instrumental in getting refunds to taxpayers 
without the need for RALs by getting families banked. The Center has 
helped families pull themselves out of poverty and into their own homes 
by partnering with organizations such as the North Lawndale 
Collaborative which offers Individual Development Accounts (IDAs), 
where refunds deposited for the purpose of saving a home are matched 2 
to 1. While quite proud of these accomplishments, we still recognize 
the need for more community-based programs across the nation, precisely 
why increased funding for free tax preparation and financial education 
programs for low income taxpayers is absolutely crucial.

Regulation of Federal Tax Return Preparers

    As the 2002 NTA Report states, there are no national standards that 
a person is required to satisfy before presenting him or herself as a 
federal tax preparer and selling tax preparation services to the 
public. So used car dealers can and do prepare income taxes for 
taxpayers to use their refunds ``as down payments toward automobiles, 
preparers in check-cashing storefronts charge pay-day loan rates for 
refund loans and disappear without a trace after April 15th, and 
preparers in migrant or immigrant communities get a percentage fee of 
any (incorrect) refund. Each of these preparation outlets provides a 
product, at a high cost to taxpayers who do not always have strong 
bargaining positions or additional preparation options. The high profit 
margin on tax return-related products, including refund anticipation 
loans, attracts legitimate and illegitimate preparers alike. To date, 
the IRS has not launched an effective enforcement initiative against 
the illegitimate preparers.'' (Legislative Recommendations, Section Two 
p. 225)
    The Center has regrettably seen cases where taxpayers, turning to 
the Tax Counseling Project after dealing with unscrupulous tax 
preparers, are then referred to the Clinic when it is discovered that 
the preparer has absconded with all or part of their tax refund and 
left them with a heinous tax mess to be cleared up with the IRS. We 
have seen cases where over 15 families were brave enough to step 
forward, file police reports and the guilty party (of the ``kitchen 
table preparer'' variety) was prosecuted by the State's Attorneys 
office, tried in criminal court and after pleading guilty, walked with 
one year misdemeanor probation and no fine. The NTA Report cites that 
IRC Sec. 6694(a) ``imposes a $250 penalty where a preparer takes a 
position on a return or refund claim but knew or should have known that 
there was `not a realistic possibility of being sustained on its 
merits' and that preparer is subject to a $1,000 penalty if the 
understatement is attributable to the preparer's willful attempt to 
understate the tax liability or is due to the preparer's reckless or 
intentional disregard of rules or regulations. IRC Sec. 6694(b)'' 
However, the Report also clarifies that the ``IRS rarely assesses this 
penalty.'' (citing Office of Professional Responsibility, August 2002, 
NTA Report, p. 220).
    Experiencing first hand the havoc unscrupulous unenrolled tax 
preparers wreak on often unsophisticated, low income individuals who 
are merely trying to comply with their federal and state tax 
obligations, regulation of unenrolled tax return preparers would make 
monumental strides in curbing the dishonesty and fraud initiated upon 
innocent taxpayers by unlawful preparers. The taxpayer outreach 
campaign suggested in the NTA Report will also prove extremely helpful 
in alerting individuals on the importance of retaining the services of 
a licensed attorney, CPA, enrolled agent, IRS VITA program volunteer, 
or other similarly authorized programs or regulated preparers for tax 
return preparation.

EITC Recertification Compounds Taxpayer Burden

    The NTA Report states that ``taxpayers experience a multitude of 
problems when they try to recertify their eligibility for the EITC in 
years after the credit has been disallowed. These problems include: (1) 
EITC disallowance letters do not give taxpayers an explanation of the 
documentation necessary to establish EITC eligibility in subsequent 
years; (2) A blank Form 8862, Information to Claim Earned Income Credit 
After Disallowance, is not provided at the end of the process; rather, 
the taxpayer must seek out the form independently; (3) The timing of 
recertification audits negatively impacts the EITC claims made by the 
taxpayers for subsequent years; (4) Taxpayers mistakenly receive EITC 
math error disallowance notices and requests to file the Form 8862 in a 
subsequent year, because the IRS does not remove recertification 
indicators from taxpayers' accounts when warranted; (5) The Form 8862 
does not advise the taxpayers that the recertification process will 
delay any refund; (6) The information that taxpayers are required to 
provide on the Form 8862 is not used in the examination recertification 
process; and (7) the IRS is not meeting contact timeframes promised in 
IRS letters. (NTA Report to Congress, Most Serious Problems, Problem 
Topic #11, p. 81)
    The Center serves low income taxpayers who work hard and rely on 
their yearly EITC refund to pay bills and otherwise make ends meet. The 
Center has seen an increased number of individuals who qualify for the 
EITC experience undue delays in receiving the EITC refund. As the 
Report states ``too many low income taxpayers struggle to determine 
EITC eligibility and even when their determinations are correct, they 
may not be able to make their cases under current processes unless they 
seek judicial intervention.'' (NTA Report, Most Litigated Tax Issues, 
Issue #5, p. 326) It is simply unfair that taxpayers of limited 
economic means must seek out professional representation to prove their 
entitlement to a credit that is far too complex to maneuver without 
assistance. The recertification process, and the precertification 
process (discussed below), will continue to place a great burden on low 
income taxpayers, many of them single parents raising children, who do 
not possess the resources, literacy level or sophistication required to 
unquestionably prove EITC eligibility.

PRESIDENT BUSH'S FY 2004 BUDGET

    ``President Bush's budget proposes new eligibility requirements 
that would make it more difficult for low-income families to obtain a 
range of government benefits, from tax credits to school lunches and 
President Bush is asking Congress for $100 million and 650 new 
employees to identify potentially erroneous EITC claims in advance, 
before money is paid out.'' (New York Times, February 5, 2003, p. A1)
    The Administration is proposing a $100 million EITC 
``precertification'' initiative for FY04 which will essentially be an 
audit of low-income taxpayers before they file their tax returns. This 
proposal is intended to reduce Earned Income Tax Credit error. We feel 
that rather than serving as a ``filter'' to ensure that ineligible 
taxpayers do not receive the credit, this precertification initiative 
may instead be a barrier for eligible families and individuals 
accessing the credit. The Administration's initiative could cause 
delays for tens of thousands of low-income taxpayers in its first year 
alone.
    We urge that provisions are made so that the initiative does not 
overly burden taxpayers, driving them away from the EITC or out of the 
tax system altogether. We feel that there are alternatives. We strongly 
feel the need to work toward limiting the documentation burden on 
taxpayers and promote approaches to reducing error which are less 
burdensome to taxpayers including a request to the IRS to open up the 
process of developing the administrative regulations they are creating 
to implement the precertification initiative to public comment. We 
believe this option will allow affected taxpayers and organizations 
such as ours that provide free tax preparation to thousands of low-
income taxpayers to help provide input to make this a workable program.

EITC PRECERTIFICATION COMMENTS

    The Earned Income Tax Credit (EITC) is our country's most effective 
program to lift working families out of poverty. In 1999, for example, 
the EITC lifted 4.7 million people out of poverty, including 2.5 
million children. At the same time, the EITC promotes work. The Center 
is continuously working toward ensuring that low and moderate income 
workers who are eligible for the Earned Income Tax Credit access the 
credit.
    Former President Ronald Reagan called the EITC, ``the best 
antipoverty, the best pro-family, the best job creation measure to come 
out of Congress.'' In Illinois last year, 754,673 households claimed 
the credit, bringing back over $1.25 billion to the state, an average 
of $1650 per household. Research shows that the majority of EITC 
recipients spend their return quickly on rent, food, utilities and 
other essentials, providing economic stimulus to the communities in 
which they live.
    The impetus for Bush's EITC ``precertification'' initiative is a 
February 2002 IRS study claiming that approximately $9 billion, or 30 
percent, of the 1999 tax year EITC should not have been paid. However, 
any EITC error rates will be much lower because the IRS and Congress 
have simplified the EITC tax code since 1999. This simplification of 
the tax code addresses the three largest sources of error which the IRS 
study reveals.
    Rather than determining if measures to lower the EITC error rate 
over the last three years have been successful, the 
``precertification'' initiative will place an unacceptably heavy burden 
on the working poor to prove that they are eligible for the tax credits 
which they are due. The initiative will also increase the complexity of 
tax administration, driving up costs for taxpayers and the IRS. 
Instead, efforts should focus on reducing errors by paid tax preparers 
who complete 68 percent of all EITC returns. Further reducing EITC 
errors can be achieved without creating unnecessary hardship for 
millions of low-income families. Simplification of the tax code would, 
as always, be the best way to continue to reduce error. In addition, 
the $100 million allocated for EITC pre-certification and/or additional 
resources could have a greater impact through a combination of 
approaches: some compliance activities, increased regulation of paid 
tax preparers, increased outreach and education efforts to EITC-
eligible taxpayers, and an increase in IRS support for free tax 
preparation programs and low-income clinics serving EITC taxpayers 
around the country. All of these approaches were highlighted in the 
National Taxpayer Advocate 2002 Report to Congress.

                                 

           Council for Electronic Revenue Communication Advancement
                                         Alexandria, Virginia 22314
                                                     March 25, 2003
The Honorable Amo Houghton
1102 Longworth House Office Building
Washington, DC 20515

    Dear Mr. Chairman:

    The Council for Electronic Revenue Communication Advancement 
(CERCA) is pleased to respond to your request for comments on the 
proposal to extend the tax filing and payment deadline for individuals 
who e-file their returns.
    CERCA strongly supports the Congressionally-mandated goal of 
achieving 80 percent electronic filing by the year 2007. Indeed, along 
with promoting other aspects of electronic tax modernization, CERCA's 
reason for existence is to promote e-filing. Notably, and most 
recently, CERCA played a very central role, as you well know, in 
facilitating the development of the Free File Alliance, which provides 
free e-filing and tax preparation to many American taxpayers. Well over 
60 percent of taxpayers are eligible to participate in this program. At 
present, over 2 million taxpayers have already taken advantage of Free 
File, a remarkable accomplishment for a program growing out of an 
agreement between industry and government that was only formally 
reached on October 30, 2002.
    Stimulating e-filing usage is a complicated challenge, however. 
While CERCA members recognize the intent to support electronic filing 
inherent in this proposal, we must report that, after very serious 
analysis, CERCA cannot endorse changing the tax filing deadline to 
April 30 for e-filers as the best course to take.
    CERCA believes the proposal is problematic. Benefits fail to 
outweigh costs and there are obvious threats to taxpayer understanding 
of the operation of the tax system. CERCA concludes that:

         LThe cost to the national tax preparation industry 
        would be quite significant. Much of this industry operates, of 
        course, on the premise of closing down offices after April 15.

         LIt is quite significant that the resulting 
        inconsistency with many state filing deadlines could create 
        serious challenges, both for the IRS and state agencies.

         LAbandoning (for some) the famous April 15 tax 
        deadline, a date most Americans know as well as their own 
        birthdays, might well lead to serious taxpayer confusion.

    Taxpayers can already receive an automatic four-month extension, of 
course. Thus, the 15 days in April featured in this proposal really 
offer no advantage to those who will receive refunds, but who, for some 
reason, have not been able to finish their returns on time. Thus, the 
truly attractive element to the proposal relates to balance due filers, 
who would receive an additional 15 days before their payments are 
required, an option that would only exist if e-filing; those filing on 
paper would still be required to file and pay by April 15.
    CERCA believes, however, that there may very well be merit in 
exploring an extension of the payment date for balance due filers to 
April 30, as long as the return is e-filed . . . by April 15. Further, 
the payment would need to be made electronically.
    A payment deadline extension to April 30 would probably be a real 
incentive for many taxpayers, and thus boost e-file volume. We believe 
that this alternative approach may be well worth the investment, and 
would not carry with it the very serious set of problems inherent in 
the proposal to extend both the filing and payment date to April 30 for 
e-filers. To be sure, the economic impact of such a payment deadline 
extension would warrant very careful investigation.
    We hope that this concept can be seriously studied by the 
Subcommittee, and we would certainly volunteer to assist in any way 
that our industry could during your examination of such an idea.
    A full list of CERCA member companies is attached.

            Sincerely,
                                                   Anthony T. Tullo
                                                           Chairman
                               __________

------------------------------------------------------------------------
                         CERCA Member Companies
-------------------------------------------------------------------------
                                               National Assoc. of Tax
                    ADP                             Professionals
------------------------------------------------------------------------
American Express                            National Tax Services, Inc.
------------------------------------------------------------------------
Anexsys                                     Nelco
------------------------------------------------------------------------
AT & T                                      New York State Dept. of Tax
                                             & Rev.*
------------------------------------------------------------------------
Bank of America                             Official Payments Corp.
------------------------------------------------------------------------
Bank One, NA                                On-Line Taxes, Inc.
------------------------------------------------------------------------
Ceridian Tax Service, Inc.                  Orrtax Software, Inc.
------------------------------------------------------------------------
Computer Sciences Corporation               Paychex, Inc.
------------------------------------------------------------------------
Creative Solutions                          Petz Enterprises, Inc.
------------------------------------------------------------------------
Discover Financial Services                 ProBusiness
------------------------------------------------------------------------
Drake Enterprises, Ltd.                     Republic Bank/Refunds Now
------------------------------------------------------------------------
FileYourTaxes.com                           River City Bank, Inc.
------------------------------------------------------------------------
Fleet Libris Information Solutions          Santa Barbara Bank & Trust
------------------------------------------------------------------------
govOne Solutions, L.P.                      2nd Story Software, Inc.
------------------------------------------------------------------------
H & R Block                                 Social Security
                                             Administration*
------------------------------------------------------------------------
Household Technologies                      South Carolina Dept. of
                                             Revenue*
------------------------------------------------------------------------
IBM Corporation                             Tax Refund Express
------------------------------------------------------------------------
Intuit, Inc.                                Tax Simple
------------------------------------------------------------------------
Jackson Hewitt, Inc.                        Tax Slayer/RCS
------------------------------------------------------------------------
Lacerte Software*                           Tax Systems /File Safe, Inc.
------------------------------------------------------------------------
Liberty Tax Service                         Tax Technologies
------------------------------------------------------------------------
Massachusetts Dept. of Revenue*             Tax Works
------------------------------------------------------------------------
MasterCard International                    TRW
------------------------------------------------------------------------
Microsoft Corporation                       Unisys
------------------------------------------------------------------------
Miller & Chevaliera                         Universal Tax Systems
------------------------------------------------------------------------
Mitre Corporationa                          Van Scoyoc Associates, Inc.
------------------------------------------------------------------------
                                            Wood Associates
------------------------------------------------------------------------
* Non-voting affiliate members


                                 

              Statement of Jeffrey S. Gold, Washington, DC

Background
    The principal author of these comments is Jeffrey S. Gold, JD, CPA, 
founder and past chairman of Community Tax Aid, Inc. (CTA), the first 
tax clinic in the country founded in 1969-70 and now in its 34th year. 
CTA remains an all-volunteer program, with no paid staff and ten to 
eleven locations that offer tax return preparation in several languages 
and representation when required.
    CTA was replicated in Washington, DC, where the author wrote two 
successful LITC grant applications. He served on IRS Commissioner 
Donald C. Alexander's Advisory Group for two years and testified 
several times before House and Senate committees, the IRS and the DC 
City Council on matters concerning low-income taxpayers. He has been a 
panelist at several LITC conferences.
    Past Taxpayer Bill of Rights legislation starting in 1988 has been 
a great help to taxpayers, particularly those with low income. But for 
all the steps forward, some have been backward and other issues have 
not been addressed. The focus of these comments is on low-income 
taxpayers.
    This group of many millions of people cannot articulate their own 
concerns, partially because so many are functionally illiterate and 
because English is not their native language. Nor can this group afford 
to form an interest group or hire lobbyists to speak for them. And, 
sometimes their own representatives in Congress do not pay enough 
attention to their concerns and needs--although there has been some 
slow progress in this area.
    Some of what appears below has been said in prior testimony, most 
recently at the Oversight Subcommittee's hearing on July12, 2001. It 
bears repeating. And new issues need to be added.

Earned Income Credit

    Many of the tax problems that face low-income taxpayers involves 
the Earned Income Credit (EIC), one of the most complex areas of our 
tax law. Even at its most generous level, the credit is entirely phased 
out when a single parent with one qualifying child has income more than 
$30,200, and a married couple filing jointly with two qualifying 
children has income more than $34,178.
    How serious are the problems faced by this group? The National 
Taxpayer Advocate's 2002 Annual Report to Congress lists 22 serious 
problems encountered by all taxpayers. Of the 22 problems, about half 
are either directly related to the EIC or often have a direct bearing 
on the credit (such as math error authority). Fortunately, we have a 
superb National Taxpayer Advocate who, from the start of her tenure, 
has actively sought to bring the full authority of her office to bear 
to solve existing problems.
    Congressional Help is Essential. Starting with hearings about 
issues that bear heavily on low-income taxpayers, Congressional 
committees need to recognize that the growing safety-net community that 
serves this community is small and almost without exception is involved 
with low-income tax issues only as a part of their usual work. They 
certainly do not have anywhere the resources of more powerful interest 
groups. Two issues should be addressed: more time to submit comments 
and prepare testimony is essential, and hearings need to include 
seasoned representatives who work with low-income taxpayers regularly.
    Penalty Relief. The Taxpayer Relief Act of 1997 included compliance 
provisions that one law professor commentator observed were 
``draconian'' (1997 Tax Legislation: Law, Explanation and Analysis, CCH 
Incorporated, p. 189). The provision, now in Internal Revenue Code 
(IRC) section 32(k), denies the EIC to taxpayers who claim it 
fraudulently or recklessly.
    I was at the hearing at which the penalty was proposed. Only IRS 
and Treasury witnesses were invited to testify. Clearly a tax law 
provision that resulted in billions of dollars of overclaims needed a 
serious remedy. But the one chosen was, in the view of many, extreme.
    First, many of those who incorrectly claim the EIC trust someone 
else to prepare their tax return. Having started my pro bono career 
helping low-income taxpayers several years before the EIC existed, I 
can tell you that from the start I have had to file many amended 
returns to correct EICs that both commercial preparers and VITA 
volunteers (trained by the IRS and generally limited to ``simple'' 
returns) did not prepare correctly. Two years ago I saw one where a 
commercial preparer claimed the EIC based on a state tax refund 
reported on Form 1099-G.
    When a taxpayer signs his or her return, s/he takes responsibility 
for it--even when s/he does not understand the first thing about it, 
other than does s/he get a refund. I compare this to a successful small 
businessman I knew for several decades whose CPA prepared his tax 
return. The taxpayer signed it when it was complete, never questioning 
it, always trusting his tax professional.
    Why then are low-income taxpayers who claim the EIC held to a 
standard (at least as measured by the penalties) far higher than other 
taxpayers? Two examples will help illustrate the point:

        1. LA preparer who fails to comply with the due diligence rules 
        for the EIC (IRC section 6695) is penalized $100.

        2. LA preparer who is guilty of ``willful or reckless conduct'' 
        (IRC section 6694(b)) faces a penalty of $1,000.

    But taxpayers who follow incorrect advice of preparers who are 
guilty of the above misconduct can lose the EIC for two or ten years--a 
penalty that can exceed, at today's EIC rates, $40,000. More than 
$40,000! Something is very wrong here.
    It is long past due that the penalty be a rebuttable presumption so 
the burden can be shifted to the preparer. This would likely be a more 
effective deterrent to EIC overclaims. Of course, taxpayers would need 
to be adequately informed of this new provision for it to be effective.
    At the very least, this penalty should be reduced. After all, 
denying the EIC for ten years almost certainly covers more than half 
the time the otherwise qualifying child would be eligible for it. Who 
is being punished by this extreme penalty: the parent or the child?
    User fees. The entire scheme of user fees needs to be revisited by 
Congress, the source of the authority the IRS uses to impose these 
fees. At least one current user fee is particularly unjust: the 
seemingly small $43 application fee for an installment agreement.
    This was imposed about ten years ago when the IRS budget was left 
about $119 million short by Congress. The same Congress reminded the 
IRS that it had the authority to impose user fees to remedy this 
shortfall. The IRS dutifully considered several options and then 
imposed the application fee for an installment agreement.
    I was one of only three witnesses to testify at the IRS hearing, 
all of us against the proposal. The only organization of tax 
professionals that testified was the Association of Enrolled Agents. No 
one else spoke up for the many low-income taxpayers who would be 
adversely affected. At the IRS's FOIA reading room, I found several 
letters from brave IRS employees who also believed this fee was unjust. 
Another writer noted that to someone in Washington $43 may be the cost 
of a business lunch but to folks in his area of Appalachia $43 was, in 
his words, ``real money.''
    Most installment agreements at the time were for less than $5,000 
and involved more than one tax year. Three common-sense situations 
resulted in the need for these agreements: (1) two-earner couples whose 
literacy was not enough to understand that they both could not claim 
their children for withholding, (2) taxpayers who were treated by their 
employers as self-employed--too often improperly--and owed substantial 
self-employment tax in addition to any income tax, and (3) people who 
received unemployment compensation benefits not realizing these were 
taxable (happily, this last situation was later remedied when taxpayers 
could elect to have tax withheld).
    In each instance these taxpayers did not understand the law so, in 
addition to penalties for underpayment or late filing plus interest, 
they had to pay an added $43--deducted from their first payment, of 
course. This is not my idea of tax justice for someone who is ready, 
willing and able to pay their income tax but simply cannot understand 
the complexities.
    One other area of user fees should be mentioned: a new user fee 
proposed to apply for an offer-in-compromise, which is an arrangement 
under which qualifying taxpayers can settle their tax debts for less 
than 100 cents on the dollar. The rules have ebbed and flowed so often 
in the past decade that the field is like an old pinball machine with 
no one to call ``tilt.'' It is understandable that IRS resources are 
being ``wasted'' by many proposed offers that do not come close to 
meeting the standards for approval. But even with a low-income 
exemption for a user fee, many in the LITC community believe that a fee 
has a chilling effect that would deter otherwise valid offers from 
being submitted.
    Free Assistance for Low-Income Taxpayers. A gnawing question is how 
to deliver the level quality assistance needed by more and more low-
income taxpayers in an increasingly complex tax environment. This is an 
endless work-in-progress created, of course, by Congress, albeit with 
the best of intentions, to help the very people they are confusing and 
penalizing when they fail to understand.
    The Volunteer Income Tax Assistance (VITA) and Tax Counseling for 
the Elderly (TCE) programs administered by the IRS were founded in 
1969. They generally do fine work. But most of the volunteers are 
laymen who are trained by the IRS and are limited to the types of work 
they can do to ``simple'' returns. Of course, some of the sites have 
volunteers who work with the IRS or are CPAs, lawyers or enrolled 
agents and can and do help with complex situations, but these are far 
from the majority.
    The VITA and TCE sites usually function only during tax season so 
when a taxpayer has a problem after April 15, they are on their own.
    Programs like Community Tax Aid in New York, which are located in 
large cities and have a critical mass of volunteers to provide a full 
range of tax services and are available year round, are few and far 
between.
    Enter the Low-Income Taxpayer Clinics (LITCs). Since these were 
created by the IRS Restructuring and Reform Act of 1998, they have 
helped a fortunate few taxpayers with their tax problems--from 
preparation to controversy. LITCs were created to assist exclusively 
with tax controversies, but a dearth of applications in the first two 
years led the IRS administrators--wisely, in my view--to allow 
assistance to taxpayers who spoke English as a second language (ESL), 
if at all.
    The LITC program was conceived of by lawyers so it is 
understandable that they would want the funds to go to their programs. 
But having worked with low-income taxpayers for more than 30 years, 
including many in the ESL category, I strongly believe that the cost-
benefit of funding all types of tax assistance programs from a single 
office should be preferred. To do otherwise is artificial and wastes a 
lot of scarce resources.
    More than one LITC at a law school or by a legal services program 
operates both a tax return preparation unit, often as a VITA program, 
and a controversy clinic. The director of one says that he finds ``. . 
. the separation of VITA from LITC is artificial, inefficient and 
detrimental to the very population that is being served.'' He finds 
that this separation ``. . . misconstrues what tax preparation [for] 
low-income taxpayers is all about. It is as much tax interpretation as 
controversy is. It is not bean counting.''
    If our tax system is based on self-assessment, this is the larger 
part of the problem. Even if tax clinics averaged 100 clients a year, 
fewer than 15,000 people would be helped--the fortunate few. Is it not 
wiser to fund accurate return preparation so that controversy work 
never arises? Everyone wins in this scenario, especially the government 
and the taxpayer.
    Would this be taking work away from the private sector? Of course. 
Is this justified? Again, of course. After all, Congress created the 
complex laws that compel the public to seek assistance. Is this the 
type of public works program that Congress should be fostering or 
should it work on ending or at least diminishing it? This question is, 
of course, rhetorical.
    However and why LITCs were conceived, the reasons for their 
existence should be reexamined. It would be to the public good if they 
had as broad a scope as possible without being overly burdened by 
administrative requirements. The assistance community is small enough 
so that it should be kept together and allowed to grow as a single 
entity.
    The 250%/10% limits for LITCs. LITCs can help taxpayers whose 
income is less than 250% of the federal poverty level and 10% of the 
LITC clients can be above this level. Particularly for larger families 
(e.g., $53,800 for a family of five), these limits seem designed to 
allow clinics to accept cases designed more to instruct students or 
volunteers at the cost of not helping taxpayers with much lower 
incomes. These limits should be revisited. The highest priority of who 
should get service from LITCs is people with the lowest income.

                               __________
[Letter published in Tax Notes, 3/24/03, p. 1909]
          Low-Income Taxpayers Should Get One-Stop Assistance
    Professor Janet Spragens overview and suggestions about Low-Income 
Taxpayer Clinics to the IRS Oversight Board on January 27 (see Tax 
Notes, Feb. 24, 2003, p. 1275) is an essential view of LITC 
development. But LITCs are a new and evolving program and other views 
need to be aired.
    The tax clinic, founded in 1990, that Professor Spragens heads is 
indeed one of the early controversy clinics. But Community Tax Aid, 
Inc. (CTA) in New York City, which I founded in 1969 and served as 
chairman of, began 20 years earlier. It is the oldest tax clinic on 
record. It began as a tax return preparation clinic, but from the start 
has represented clients at IRS and state tax audits and handled some 
Tax Court cases.
    Thanks to Professor Spragens and the small group of inspired 
lawyers who took the lead, Congress enacted Code section 7526 
establishing LITCs. As a result there is a national network of 
independent clinics (currently about 140) that serve a relatively small 
number of taxpayers who need help with their tax problems. LITCs are a 
needed, necessary and very valuable addition to effective and equitable 
application of our income tax system. They help level the playing field 
for low-and middle-income taxpayers who otherwise would be 
unrepresented.
    But section 7526 was enacted after consulting only the lawyers and 
law professors who proposed it. No one else, to my knowledge, was 
consulted. It is no surprise, then, that these lawyers want all of the 
LITC appropriation for their controversy programs to the exclusion of 
other types of programs. It is no surprise that, in the first year of 
LITCs, they did not approve when IRS administrators of the LITC program 
broadly interpreted the statutory language to fund a small number of 
ESL (English as a Second Language) programs that also prepared tax 
returns.
    The originators' preference would be to establish a separately 
funded program for tax preparation. This, despite the added 
administrative cost to help what essentially is the same population. In 
fact, several of the controversy LITCs run separate tax return 
preparation programs, nearly all of them as a VITA program.
    As with any new venture--the new nation of the United States is a 
prime example--initial thoughts often deserve to be revisited and 
revised. Our nation's first governing document, the Articles of 
Confederation, was soon replaced by our Constitution, which, in turn, 
was quickly amended by the Bill of Rights. The LITC program also should 
be rethought. At least for several more years, I believe that all 
taxpayer assistance program--from preparation through representation--
should be housed under the same roof.
    In terms of setting priorities, the 2002 annual report to Congress 
by the National Taxpayer Advocate, Nina Olson, listed five areas of 
access the public should have. I fully endorse all five, although I 
would move tax return preparation from last to at least number two. 
After all, if tax returns are prepared properly there would be much 
less need for the other services (access to information, the IRS, 
Taxpayer Advocate Service, and representation).
    Preparation errors would certainly be reduced, confusion caused by 
IRS Modernization would be avoided, as would the need to further 
involve the IRS or Tax Court. This would save an enormous amount of 
resources not to mention the angst, noted by Professor Spragens, that 
the taxpayers suffer.

                                 
                  Statement of the Independent Sector
    Independent Sector is a coalition of more than 700 national 
organizations and companies representing the vast diversity of the 
nonprofit sector and the field of philanthropy. Its members include 
many of the nation's most prominent nonprofit organizations, leading 
foundations, and Fortune 500 corporations with strong commitments to 
community involvement. This network represents millions of volunteers, 
donors, and people served in communities around the world. IS members 
work globally and locally in human services, education, religion, the 
arts, research, youth development, health care, advocacy, democracy, 
and many other areas. No other organization represents such a broad 
range of charitable organizations and activities.
    Independent Sector and the many organizations it represents have a 
keen interest in ensuring that charities provide public disclosure of 
key information to help ensure that they operate strictly in the public 
interest and not for private benefit. Charities depend on public trust 
to raise money and carry out their missions, and transparency is 
essential to maintaining that trust. For that reason, Independent 
Sector and over 200 charities and nonprofits submitted comments 
supporting twelve of the recommendations offered by the Joint Committee 
on Taxation in its Study on Disclosure by Tax-Exempt Organizations as 
Required by Section 3802 Of The Internal Revenue Service Restructuring 
And Reform Act Of 1998.
    In particular, Independent Sector strongly supports the JCT 
recommendation that electronic filing for exempt organizations be 
implemented as quickly as possible. IS is currently leading the 
Electronic Data Initiative for Nonprofits (EDIN) project with the 
Council on Foundations, the National Council of Nonprofit Associations, 
OMB Watch, GuideStar-Philanthropic Research Inc., and the National 
Center for Charitable Statistics. EDIN has been working closely with 
the Internal Revenue Service to prepare for implementation of e-filing 
of the Form 990 in early 2004 and to encourage strong participation in 
e-filing by the charitable nonprofit community. We believe electronic 
filing has the greatest potential of any of the current regulatory and 
legislative proposals to improve public oversight of charities and to 
ensure that they are serving public and not private purposes.

    Independent Sector also supports the following JCT recommendations:

         LConform the disclosure requirements of third party 
        communications regarding written determinations and exemption 
        applications subject to disclosure under section 6104 to the 
        disclosure requirements that apply to third-party 
        communications under section 6110.

         LRequire disclosure of the annual return (Form 1120-
        POL) filed by political organizations described in section 527.

         LRequire disclosure of the names under which tax-
        exempt organizations conduct their operations on their annual 
        information returns.

         LRequire the IRS to include notification of the public 
        availability of the Form 990 through its taxpayer publications.

         LRequire tax-exempt organizations to disclose their 
        World Wide Web addresses on their annual information returns.

         LIncrease the penalties for preparers of tax-exempt 
        organizations' annual returns if there is a willful, reckless 
        misrepresentation or disregard of relevant rules and 
        regulations for filing the Form 990 and related forms.

    Independent Sector has supported these proposals as introduced 
earlier this year by Senator Charles Grassley in the CARE Act of 2003 
(S. 256). In addition, we support the proposals introduced by Senator 
Grassley that seek to provide greater flexibility for the Internal 
Revenue Service to disclose to appropriate state charity regulators 
information related to refusal to recognize an organization as tax-
exempt or revocation of tax-exemption with the stipulation that this 
information could only be used to administer state laws regulating tax-
exempt organizations and that public disclosure of the information 
should be governed by the same penalties and restrictions as it is in 
the hands of the Internal Revenue Service.
    In its report, the Joint Committee on Taxation had also recommended 
that tax-exempt entities (other than churches) that are below the 
filing threshold of the Form 990-EZ should be required to file annually 
a brief notification of their status with the Internal Revenue Service. 
Independent Sector had raised concerns about the difficulties of 
enforcing this provision given frequent changes in volunteer leadership 
and in the address of very small charities. Legislation introduced in 
the Senate appears to strike an appropriate balance by requiring simple 
postcard verification with revocation of tax-exempt status only after 
an organization had failed to return the verification for three 
consecutive years.

Provisions Regarding Charities and Lobbying

    While Independent Sector supports a high degree to transparency for 
charities, we believe that it is extremely important to avoid reporting 
requirements that could have an undue chilling effect on charities' 
participation in the public policy process. Charities are on the front 
lines of the struggle against the most significant social problems, 
including hunger, poverty, discrimination, and disease, and are also 
the vanguard of many significant social innovations. The expertise and 
hands-on experience charities derive from their work for the public 
good can help legislators make more informed and enlightened decisions 
on the full range of issues that come before them. In passing the 
landmark 1976 legislation that clarified the lobbying rules for public 
charities, Congress clearly indicated its position that the public 
interest is served by encouraging more rather than less participation 
by charities in the public policy process--a position that Independent 
Sector strongly supports.
    As a practical matter, one of the chief barriers to such 
participation by charities is the complex set of federal and state 
rules governing lobbying by charities. Charities are subject not only 
to the federal tax laws on lobbying but also to the federal Lobbying 
Disclosure Act, the separate lobbying restrictions related to the 
receipt of federal grant funds, and to various state lobby disclosure 
statutes. The complexity of these rules has a substantial, and highly 
undesirable, chilling effect on participation in the democratic 
policymaking process, both for smaller organizations with limited staff 
and access to legal counsel and for larger organizations that must 
establish and maintain complex record-keeping systems. IS opposes 
additional reporting requirements, such as those recommended by the JCT 
for self-defense lobbying or expenses for nonpartisan analysis 
containing ``indirect'' calls to action, that could further deter 
charities from participation in the public policy process.
    Independent Sector would, however, commend to the Committee recent 
proposals approved by the Senate Finance Committee that would simplify 
lobbying requirements for nonprofit organizations by eliminating the 
current difference between the expenditure limits for direct and 
grassroots lobbying and permit charities to spend as much on grassroots 
lobbying as on direct lobbying. This proposal would allow charities to 
keep a single record of lobbying expenditures, rather than separate 
records for direct lobbying and grassroots lobbying.
    In closing, Independent Sector appreciates the opportunity to 
submit these comments on disclosure requirements and looks forward to 
working with the Subcommittee on Oversight of the Committee on Ways and 
Means as it considers specific Taxpayer Rights proposals and other 
efforts to improve tax administration.

                                 

                            National Association of Enrolled Agents
                                       Gaithersburg, Maryland 20878
                                                     March 25, 2003
Hon. Amo Houghton
Chairman
Ways & Means Oversight Subcommittee
1136 Longworth House Office Building
Washington, DC 20515

    Dear Mr. Chairman:

    On behalf of the members of the National Association of Enrolled 
Agents, I am writing to express our support and thank you for the 
opportunity to comment on pending taxpayer rights legislation. NAEA is 
the professional society of Enrolled Agents and represents 
approximately 10,000 EAs.
    As you know, Congress created Enrolled Agents in 1884 to ensure the 
ethical and professional representation of claims brought to the 
Treasury Department. Members of NAEA ascribe to a Code of Ethics and 
Rules of Professional Conduct and adhere to annual continuing 
professional education standards that exceed IRS requirements for them. 
Like attorneys and Certified Public Accountants, we are governed by 
Treasury Department Circular Number 230 in our practice before the IRS. 
We are the only tax professionals who are tested by the IRS on our 
knowledge of tax law and procedure. Each year we collectively work with 
millions of individual and small business taxpayers. Consequently, 
Enrolled Agents are uniquely positioned to observe and comment on the 
average American taxpayer's experience within our tax administration 
system.
    In this light, we would like to express our support for the section 
of the legislation that would enact the EA Credential Protection Act, 
which was sponsored by Congressmen Rob Portman and Ben Cardin in the 
last Congress. This legislation would codify the Treasury Department's 
power to license Enrolled Agents to practice before the IRS. It has 
passed the House without opposition and we are hopeful of similar 
approval in the Senate.
    I am attaching background material for your consideration. If I can 
provide you with any additional information or answer any questions, 
please let me know.

            Sincerely,
                                                 Judith A. Akin, EA
                                                          President

                                 

                        National Payroll Reporting Consortium, Inc.
                                           Fairport, New York 14450
                                                     March 25, 2003
Hon. Amo Houghton
Chairman, Subcommittee on Oversight
Committee on Ways and Means
1136 Longworth House Office Building
Washington, DC 20515-6350

Re:   Taxpayer Rights Proposals

    Dear Chairman Houghton:

    This responds to your request for written comments regarding 
taxpayer rights proposals. The members of the National Payroll 
Reporting Consortium (NPRC) strongly support your efforts to improve 
taxpayer fairness and the efficiency of IRS administration. We greatly 
appreciate your continued focus in this area and look forward to 
continuing to work with you as you promote legislation toward this end.
    The NPRC represents businesses providing payroll processing and 
employment tax services (Payroll Reporting Agents) directly to 
employers. NPRC members serve over one million employers with a 
combined total of more than 35 million employees, and process payroll 
for more than one-third of the private sector workforce. Payroll 
Reporting Agents transmit more than one quarter of all Federal 
employment taxes received by the U.S. Treasury and have long served an 
important role in our nation's tax collection system as a conduit 
between employers and the IRS.
    The following addresses proposals among those suggested by the U.S. 
Congress' Joint Committee on Taxation, the U.S. Department of the 
Treasury, and the IRS Office of Taxpayer Advocate. We have also 
addressed several provisions included in your taxpayers' rights bill 
from the 107th Congress: H.R. 3991, the Taxpayer Protection and IRS 
Accountability Act of 2002. Although there are many proposals included 
in these documents that NPRC members would generally support, we have 
addressed only those that are most relevant to tax administration 
matters faced by, and the IRS administration priorities of, NPRC 
members. These proposals and our comments are addressed in turn.

I.   The National Taxpayer Advocate's 2001 and 2002 reports to Congress


        L  1. Reduce penalty for failure to use the correct deposit 
        method from 10 percent to 2 percent (2001).

        L  NPRC supports this initiative as the current penalty 
        penalizes timely deposits at the highest penalty tier, which is 
        widely recognized as excessive. A legislative change is 
        necessary to enable the IRS to assess a penalty that would be 
        more appropriate.\1\
---------------------------------------------------------------------------
    \1\ Internal Revenue Manual Section (20) 121 (1) states that ``. . 
. penalties exist to encourage voluntary compliance by supporting the 
standards of behavior expected by the Internal Revenue Code voluntary 
compliance is the major goal of penalties . . . for most taxpayers 
voluntary compliance consists of preparing accurate returns, filing 
timely, and paying any tax due efforts made to fulfill these 
obligations constitute compliant behavior . . .'' Also IRM Section 123 
(8) ``. . . the Service has the obligation to advance fairness and 
effectiveness of the tax system. Penalties should . . . (c) be 
objectively proportioned to the offense . . .''

II.   Treasury's 2000 Proposal to reform interest and penalty 
---------------------------------------------------------------------------
        provisions of the Code


        L  1. Consider reducing present-law 2 percent penalty if 
        failure to deposit corrected within one banking day.

        L  NPRC generally supports this initiative, which would improve 
        voluntary compliance by encouraging taxpayers to correct 
        situations in a timely manner. We believe that it is important, 
        however, that the relief be carefully constructed so as not to 
        provide a permanent grace period for each deposit that could be 
        perceived as, in effect, a permanent one-day extension of all 
        tax deposit due dates. Establishing an appropriate penalty 
        amount coupled with compliance history factors (e.g., number of 
        occurrences, prior FTD penalties) could alleviate the grace 
        period concern.

        L  2. Modify penalties for failure to file tax returns (Code 
        6651(a)(1)).

        L  NPRC believes that the Treasury proposal to decrease the 
        front-loading of assessed penalties and to increase the penalty 
        for unresolved matters that extend beyond 6 months (from the 
        return due date) is a logical approach to encourage taxpayer 
        initiated resolutions. Consideration should be given to the IRS 
        notice cycles to ensure adequate taxpayer notification prior to 
        penalty escalation. In addition, to the extent practicable, the 
        time period should exclude periods during which the issue is 
        necessarily waiting for an IRS response or guidance that has 
        clearly been requested, and without which further action on the 
        part of the taxpayer would be inappropriate.

        L  3. Consider the assessment of a fee, in the nature of a 
        service charge, for late filing of ``refund due'' or ``zero 
        balance'' returns.

        L  NPRC agrees that this may be an effective measure to 
        motivate compliant behavior, but suggests that a separate 
        initiative could be utilized to foster electronic filing by 
        only assessing the fee for late filing of ``refund due'' or 
        ``zero balance'' returns filed in paper format. See also 
        comments under item IV. (1) below.

III.   The Joint Committee on Taxation's 2000 Proposal to reform 
        interest and penalty provisions of the Code


        L  1. Consider permitting penalty abatement for inadvertent 
        failures to deposit occurring when the taxpayer changes to a 
        different deposit schedule.

        L  The NPRC supports the extension of the current statute to 
        cover all affected deposits. It may be unnecessary, however, in 
        light of the current IRS procedure to waive penalties for the 
        first quarter after a taxpayer's deposit rules change, coupled 
        with the IRS' planned implementation of an ``early warning'' 
        notice, which is scheduled for January 2004.

        L  The ``early warning'' consists of a notice to a taxpayer 
        whose deposit schedule is changed from monthly to semiweekly, 
        but who makes no payments during the first month in which the 
        new deposit schedule is in effect. This notice would be 
        received three or more months before a taxpayer might otherwise 
        learn of an error, enabling corrective action, for example, in 
        February rather than in May, which would reduce any penalty 
        significantly.

        L  2. Interest may be abated if attributable to any 
        unreasonable error or delay by IRS.

        L  NPRC supports this provision, and suggests that it should 
        apply with respect to both income and employment taxes. Under 
        current law, the ministerial act provisions do not apply to 
        employment taxes. NPRC recommends that, at a minimum, 
        employment taxes be added to the ministerial act provisions, 
        and be considered when implementing additional changes. In 
        addition, abatement/reduction in interest assessments should 
        take into consideration the date funds actually transfer to the 
        taxpayer.

IV.   The President's 2004 Budget Proposal


        L  1. Extend the due date (to April 30) for electronically 
        filed 1040 returns.

        L  NPRC is neutral as to this proposed change, but in general 
        is strongly supportive of meaningful incentives related to 
        electronic filing. With respect to individual income tax 
        returns with additional tax due, NPRC suggests that a more 
        effective incentive may be to extend the due date for payment 
        of the additional tax due to April 30th, while retaining the 
        April 15th filing due date, for returns filed electronically.

        L  NPRC also notes that there are virtually no incentives for 
        electronic filing of employment tax returns, and recommends 
        that incentives be developed to encourage electronic filing of 
        employment tax and other business tax returns. Tax credits and 
        access to enhanced IRS customer services (such as IRS 
        Electronic Services) are possible options.

        L  In addition, most businesses are aware that if a mistake 
        results in an IRS penalty, the IRS evaluates evidence of past 
        compliance, diligence and prudent business practices in 
        considering any request to waive the penalty. The IRS could 
        also view the voluntary use of electronic tax payment methods 
        and/or electronic filing as contributing positively to a 
        taxpayer's history of compliance and due diligence. Businesses 
        may perceive this as sufficient incentive to justify the 
        additional costs of electronic filing and payment of federal 
        taxes. However, legislative authority may be necessary to 
        establish any taxpayer benefits related to electronic filing.

V.   H.R. 3991, 107th Congress--The Taxpayer Protection and IRS 
        Accountability Act of 2002


        L  1. Eliminate the $50,000 threshold for abatement of interest 
        on erroneous refunds (Section 103).

        L  NPRC generally supports this provision, as an example of an 
        arbitrary rule that does not contribute to equity or 
        simplification. Current law requires the abatement of interest 
        in the case of erroneous refunds attributable solely to errors 
        made by the IRS, but only if the erroneous refund amount does 
        not exceed $50,000. The $50,000 threshold should be removed.

        L  2. Permit the IRS to waive certain penalties for 
        unintentional minor errors that are committed by a taxpayer 
        with a history of tax compliance and the penalty for which 
        would be grossly disproportionate to the action.

        L  NPRC supports the concept of broad administrative authority 
        enabling the IRS to reduce penalties in those circumstances in 
        which the IRS finds that such penalties are grossly 
        disproportionate to the incident or error involved (see 
        footnote 1).

        L  3. Obligates the Treasury Inspector General for Tax 
        Administration to submit a report to Congress on technological 
        advances, such as email and faxes, that may allow alternative 
        means for the IRS to communicate with taxpayers.

        L  NPRC members support additional efforts on the part of 
        Congress, Treasury and the IRS to continuously evaluate and 
        draw attention to new electronic technologies that may improve 
        the efficiency, accuracy and security of tax administration and 
        related government services to taxpayers.

    The foregoing represents NPRC's preliminary comments with regard to 
those taxpayer rights proposals of most interest to NPRC members. As 
you work to craft taxpayer rights legislation, we will continue to keep 
you advised of any additional comments we might have. Of course, we are 
happy to provide you with any assistance that we can. For additional 
information, please contact Pete Isberg at 973-974-5779.

            Respectfully submitted,

                                 
 Statement of the National Society of Accountants, Alexandria, Virginia
    The National Society of Accountants (NSA) is pleased to submit 
comments for the hearing record on improving tax administration and 
improving taxpayer rights. The NSA and its affiliated state 
organizations represent 30,000 accountants, tax practitioners, business 
advisors and financial planners providing services to more than 19 
million individuals and small business. Most NSA members are sole 
practitioners or partners in small to medium sized firms. NSA members 
agree to adhere to a code of professional conduct. NSA represents the 
accountants for Main Street, not the accountants for Wall Street.
    NSA applauds Chairman Houghton for his initiative and leadership in 
developing legislation to improve tax administration and enhancing 
taxpayer rights in the 108th Congress. NSA welcomes the opportunity to 
work with the Subcommittee on Oversight in developing this important 
legislation.
                      IMPROVING TAX ADMINISTRATION
    The Administration's fiscal 2004 federal budget request contained a 
number of provisions to improve tax administration. NSA offers the 
following comments on several of these proposals.

ALLOW PARTIAL PAY INSTALLMENT AGREEMENTS
    We support the proposal to permit taxpayers to enter into any 
(including less than full pay) installment agreements with the IRS. 
This is a common sense provision whose implementation is long overdue. 
The IRS should not be prevented, by statute, from accepting 
installments of any amount offered by delinquent taxpayers. Enactment 
of this provision may provide another benefit by reducing the number of 
offer-in-compromise submissions and freeing up resources to improve the 
offer process.

LPROPOSALS TO CURB FRIVOLOUS SUBMISSIONS AND FILINGS TO DELAY OR IMPEDE 
        TAX ADMINISTRATION
    This proposal is designed to curb frivolous submissions and filings 
by raising penalties for filing frivolous tax returns from $500 to 
$5,000. It would impose a $5,000 penalty for repeatedly filing or 
failure to withdraw, after notice, certain other submissions. While we 
generally support this provision we caution that if the legislation is 
improperly crafted these new measures could dampen legitimate 
resubmissions and filings, such as a resubmission of an Offer-In-
Compromise based on new or updated taxpayer information.

LALLOW FOR TERMINATION OF INSTALLMENT AGREEMENTS FOR FAILURE TO FILE 
        RETURNS AND FOR FAILURE TO MAKE TAX DEPOSITS
    NSA is generally supportive of this proposal. However, to prevent 
the potential for abuse by overzealous IRS collection agents, this 
proposal should be modified to allow for circumstances beyond the 
control of the taxpayer and guarantee appeal rights.

OFFER-IN-COMPROMISE-CHIEF COUNSEL REVIEW
    NSA supports the proposal to eliminate the requirement that the IRS 
Chief Counsel provide an opinion for any accepted offer equal to or 
exceeding $50,000. In our view, the Chief Counsel's review has not 
added any value to the program. Instead, it has adversely affected the 
process by withholding approval of offers on policy grounds rather than 
on legal sufficiency.

OFFER-IN-COMPROMISE-GENERAL
    On the issue of the offer program in general, NSA maintains that 
the program remains fundamentally flawed. Ultimately, no amount of 
``process'' improvement will help. The program needs to be moved from 
compliance-oriented personnel and reassigned to settlement-oriented 
personnel who are allowed to design and administer a settlement-
oriented program. This would help the IRS work toward the goal of 
achieving what is potentially collectible at the earliest possible time 
and at the least cost to the government while providing taxpayers a 
fresh start toward future voluntary compliance.

EXTENSION OF TIME FOR E-FILED RETURNS
    To help encourage the growth of electronic filing, the 
Administration proposed to extend the April filing date from April 15 
to April 30 for individuals filing returns electronically. We sincerely 
doubt that this change will have any effect on increasing the number of 
electronic filings. The early filers do so to get their refunds sooner. 
The procrastinators file later because they have balance due returns. 
Why reward them with an extra 15 days to file and pay?
    To truly encourage electronic filing, IRS should remove barriers 
that limit or discourage the practitioner community from participating 
as electronic return originators. Devoting more funds to advertising 
benefits to tax practitioners and taxpayers would also be a major step 
forward.
                       PROTECTING TAXPAYER RIGHTS

LLACK OF ACCESS TO THE IRS MEANS AN EROSION OF TAXPAYER RIGHTS

    The National Taxpayer Advocate, in her 2002 annual report to 
Congress, stated that navigating the IRS is the number one problem 
faced by taxpayers. In the preface to the report, the NTA states that, 
``. . . effective tax administration is a two-way street--the IRS must 
be open for business for all taxpayers, available for them to 
communicate--whether in person (Taxpayer Assistance Centers), in 
writing . . . via telephones . . . or through the Internet . . .'' The 
NTA went on to say, ``The concept of ``access'' is fundamental to 
universal achievement of taxpayer rights.''
    NSA shares this concern. More and more often, NSA members are 
informed that qualified IRS personnel are not available for face-to-
face appointments. Often, callers are placed on hold for as long an 
hour and letters submitted to IRS addresses are never answered. For 
practitioners, problems in navigating the IRS boil down to the lack of 
access. It is a major source of frustration and inefficiency and 
ultimately impairs the ability of taxpayers to obtain adequate and 
affordable representation. Taxpayer rights are diminished when lack of 
access to IRS decision makers prevents problems from being solved in a 
timely and efficient manner. A long-term consequence is erosion in the 
perceived fairness of the tax system.
    This lack of access to the IRS is manifest in many ways. Physical 
access to the IRS is being diminished. The Taxpayer Assistance Centers 
are the only formal place where a taxpayer can walk in and meet with an 
IRS representative. Unfortunately, many sites are not staffed with 
individuals trained, or with the authority, to solve the taxpayer's 
problem. Telephone service, while improving, is still substandard when 
dealing with complex issues where in-depth assistance is needed to 
solve a problem and service wait times are excessive and unreasonable. 
Furthermore, the IRS has not yet published, or made available on-line, 
a working directory to guide practitioners to appropriate IRS personnel 
who can resolve problems. In short, taxpayer and practitioner 
communication with the IRS appears to be limited to reaction mode 
only--waiting and responding to IRS notices rather than proactively 
approaching the IRS to solve a problem.

IMPROVING ACCESS TO THE IRS
    At the administrative level, the IRS should adopt a policy of 
``First Contact Resolution'' to mitigate the issue of practitioners and 
taxpayers not being able to find an IRS person to resolve a problem. 
For example, the adoption of ``First Contact Resolution'' policy would 
reduce the need for practitioners to request a collection due process 
hearing, which is often requested simply to protect taxpayer rights.
    However, a more fundamental approach may be necessary. To enhance 
taxpayer rights, Congress should consider legislation that grants 
taxpayers a statutory right of access to the IRS. Such legislation, 
modeled after Internal Revenue Code Section 7521 would guarantee that 
taxpayers would: (1) have the right to appear at a local IRS office 
(other than a Taxpayer Assistance Center); (2) have the right to access 
the IRS via toll free telephone numbers that the IRS will answer in a 
timely manner; and (3) have correspondence replied to, or an 
acknowledgement by the IRS of receipt of the correspondence, within a 
reasonable period of time (such as fourteen days) and with a promised 
date of reply in no more than 30 days.

    L  Note: NSA is the recipient of a Federal grant from the Internal 
Revenue Service to administer a Low-Income Taxpayer Assistance Clinic. 
No grant funds were used or expended to prepare this statement.

                                 

 Statement of Colleen M. Kelley, National President, National Treasury 
                            Employees Union
    On behalf of the National Treasury Employees Union, which 
represents 150,000 federal employees, including all bargaining unit 
employees at the IRS, I appreciate the opportunity to share the views 
of my members on taxpayer rights issues with the Subcommittee. In 
particular I would like to comment on two provisions in the President's 
FY '04 budget proposal.
    First, the President proposes legislation that would provide for 
fairer treatment of IRS employees found to have violated section 1203 
of the IRS Restructuring and Reform Act of 1998. That Act calls for 
mandatory termination of employees found to have violated any of ten 
offenses, known as the ``ten deadly sins.'' The offenses range from 
serious infractions, such as harassment of a taxpayer, to nonsensical, 
such as filing a refund due tax return late.
    The President's budget proposal, like legislation that passed the 
House in the last Congress, would drop late filing of refund returns 
and employee vs. employee complaints from coverage under section 1203 
of IRS RRA 98. In addition, the proposal would allow for appropriate 
penalties up to and including termination for violations of section 
1203, but would drop the current mandatory termination provision. NTEU 
supports these provisions.
    The current provisions of section 1203 of IRS RRA 98 subject IRS 
employees to standards that no other federal employees in the 
executive, judicial or legislative branch are subject to. No other 
taxpayer faces a penalty of any kind for filing a tax return late if a 
refund is due. And no other federal employees in the executive, 
judicial or legislative branch face mandatory termination for a similar 
list of offenses.
    IRS employees have difficult jobs and section 1203 of IRS RRA 98 
make them even more difficult. A recent report by the General 
Accounting Office (GAO-03-394) points out that two thirds of IRS 
employees responding to its survey were fearful of a section 1203 
action. They were concerned about being in the position of having to 
prove their innocence in the face of frivolous complaints from those 
trying to avoid paying their taxes. In fact, since enactment of RRA 98 
noncompliant taxpayers, or in some cases, their unscrupulous 
representatives have filed 3,971 complaints against IRS employees for 
harassment, retaliation or threatening to audit for personal gain. 
After investigations, primarily by the Treasury Inspector General for 
Tax Administration, only 37 of those complaints were found to have 
merit. But the other 3,934 innocent employees had to live through 
investigations that can last a year or longer, all the time worrying 
that some document or other evidence proving their innocence might be 
lost and leave them subject to mandatory firing.
    There has been much talk recently about falling enforcement 
statistics at the IRS. Clearly, fear of section 1203 penalties by 
enforcement personnel has been a contributing factor and the above 
referenced GAO report confirms that.
    The President's proposal also calls for including unauthorized 
access to taxpayer information to the list of section 1203 violations. 
While NTEU would withhold opposition to this provision if the mandatory 
termination provision of 1203 is eliminated, we would adamantly oppose 
such an additional ``11th deadly sin'' if the mandatory termination 
provision is maintained.
    While we intend to address another of the President's FY 04 budget 
proposals in more detail at a later date, NTEU has deep and fundamental 
concerns about the proposal to allow private collection agencies to 
collect tax debt on a commission basis. Such a proposal flies in the 
face of the tenets of IRS RRA 98, which specifically prevents employees 
or supervisors at the IRS from being evaluated on the amount of 
collections they bring in. Even if individual contract employees were 
not to be evaluated on the basis of their individual collection 
amounts, clearly paying a contractor out of its tax collection proceeds 
sets up the exact dynamic RRA 98 sought to avoid: providing incentives 
for overly aggressive tax collection techniques.
    There are also serious questions regarding contractor access to 
confidential taxpayer information, the government's liability and 
taxpayer remedies, should such information be misused and whether the 
IRS has the needed technology to select appropriate cases. In addition, 
as even the IRS will acknowledge, if given the appropriate resources, 
IRS employees could collect outstanding tax debt at less cost and 
without subjecting taxpayers to the unknown impact of providing their 
confidential tax information to private collection companies. As stated 
earlier, NTEU looks forward to the opportunity to provide more detailed 
information to the subcommittee on this proposal at a future date.
    Thank you again for the opportunity to provide these views. NTEU 
would be happy to answer any questions the subcommittee may have with 
regard to this statement.

                                 

To: The Honorable Amo Houghton, Chair
 Subcommittee on Oversight
 Committee on Ways and Means Committee
 United States House of Representatives

From: William Josephson
 Karin Kunstler Goldman
 Assistant Attorneys General
 New York State Department of Law

Date: March 26, 2003

Re: Comments on Taxpayer Rights Proposal

          *****
    The following are the comments of the Charities Bureau of the New 
York State Department of Law in response to the March 12, 2002 Advisory 
of the Committee on Ways and Means Subcommittee on Oversight:
    In New York, as in most states, the Attorney General, as head of 
the Department of Law, supervises organizations and individuals that 
administer and/or solicit charitable funds or charitable assets within 
the State. The Attorney General works to protect donors to charity, 
charities and the beneficiaries of charities. The Attorney General's 
supervisory authority over charities is rooted in the common law of 
charitable trusts and corporations, as well as the parens patriae power 
of the State to protect the interest of the public in assets pledged to 
public purposes. In addition, the Attorney General has broad authority 
under State statutes, to regulate not-for-profit organizations and 
charitable trusts and to commence law enforcement investigations and 
legal actions to protect the public interest.
    Legal oversight of the solicitation of contributions to charity is 
also a well established as a function of the States. Thirty-six states 
now have laws governing charitable solicitation by the many various 
forms these solicitations take--mail, telephone, print, electronic 
media and door-to-door. Twenty states require soliciting charities to 
register with their Attorney General; sixteen states require 
registration with another governmental agency such as the Secretary of 
State.
    The charitable sector is growing constantly and constitutes over 
six percent of the Nation's economy. Charitable giving by individuals, 
corporations and foundations in 1999 was estimated at $190 billion 
dollars.\1\ By 1999, foundations and endowed nonprofits had accumulated 
almost $1 trillion in investment assets.\2\ An additional $2 to $3 
trillion in charitable assets is expected to be controlled by 
charitable organizations by 2020.\3\ In 1999, there were almost 1.3 
million tax-exempt organizations in the United States; nearly 700,000 
of which are publicly supported charities.\4\ By 1999, the nonprofit 
sector became the third largest contributor to the US gross domestic 
product.\5\ In 1999, nonprofit organizations employed one in every 
fifteen Americans.\6\
---------------------------------------------------------------------------
    \1\ Giving USA 2000, Indianapolis, Indiana: American Association of 
Fund-Raising Counsel Trust for Philanthropy, 2000.
    \2\ The Foundation Center, New York, New York
    \3\ John J. Havens and Paul G. Scherish, Millionaires and the 
Millennium: New Estimates of the Forthcoming Wealth Transfer and the 
Prospects for a Golden Age of Philanthropy, Boston College Social 
Welfare Research Institute, October 1999, pp. 17-19.
    \4\ Internal Revenue Service, Business Master File
    \5\ Survey of Current Business, Washington, DC, US Department of 
Commerce, Bureau of Economic Analysis, May 1999
    \6\ Ibid.
---------------------------------------------------------------------------
    We outline below several areas in which amendments to the Internal 
Revenue Code would protect charitable assets, protect the contributing 
public against fraud and enhance the ability of the Internal Revenue 
Service (IRS) and state charity regulators like ourselves to regulate 
tax-exempt charitable organizations.

1. Amendment of Internal Revenue Code Section 6103 and 6104

    The CARE Act of 2003, as reported to the floor of the other body, 
contains provisions that would amend the Internal Revenue Code of 1986, 
as amended, to authorize disclosure by the Internal Revenue Service to 
State charity regulators of information about organizations that have 
applied for, received or been denied exemption from federal income tax 
or which have been the subject of adverse action by the Internal 
Revenue Service. Such disclosure is crucial to effective state 
oversight of charities and enforcement of laws that regulate the 
solicitation and administration of charitable funds and we urge the 
Subcommittee to support the proposed amendments.
    Currently, Internal Revenue Code sections 6103 and 6104 limit the 
situations under which the IRS may disclose information to state 
authorities. The IRS does not disclose to the states any information to 
concerning pending applications for tax exemption, investigations or 
litigation. Amendment of sections 6103 and 6104 to allow such 
disclosure would have the following results:
    If the IRS were able to advise state charity regulators when 
organizations operating in their states have applied for tax exempt 
status, state charity regulators, who are typically in a better 
position to be familiar with charities operating in their states, would 
then be alerted to applications by organizations that have violated 
state law and, accordingly, could alert the IRS to issues that might 
impact its decision whether or not to grant tax exempt status.
    The IRS and state regulators could jointly investigate and/or 
prosecute exempt organizations, avoid duplicate prosecutions and 
eliminate the possibility of inconsistent results. Currently, states do 
not even receive any IRS acknowledgment of referrals to the IRS of 
matters that appear to us to involve violations by exempt organizations 
of both the Internal Revenue Code and state law or just the Internal 
Revenue Code. The IRS does not advise the referring state if it intends 
to proceed or how it intends to proceed, let alone work jointly.
    The lack of communication has a negative impact on state law 
enforcement efforts, for example, statute of limitations constraints 
may require that states proceed blindly on the state law issues even 
though the matter might be better handled by the IRS or by joint 
efforts. Sharing of information would avoid duplication of 
investigations and litigation and allow for better use of the limited 
resources of both the IRS and state charity regulators. Also, if we 
were able to cooperate, the risk might be reduced of depleting 
charitable assets in the defense of two separate proceedings.

    Treasury and the Internal Revenue Service support these proposals.

    Your Subcommittee's September 11 hearings confirmed that donors 
expect and must have a level of accountability that has not been 
provided in the past. In order for charitable organizations to maintain 
the trust of the American people, they must manage their funds more 
carefully and disclose to the public how they are fulfilling their 
fiduciary responsibilities. In order to insure that the fiduciary 
duties are fulfilled, regulatory agencies on both the state and federal 
level must be able to work efficiently together.

2. Preliminary Exemption Letters

    The General Accounting Office's April, 2002 Report GAO-02-526, 
Improvements Possible in Public, IRS and State Oversight of Charities, 
noted that between 1996 and 2001 inclusive the number of applications 
for federal income tax exemption increased nine percent and the number 
of forms 990 filed by publicly supported charities increased 25 
percent. Id. at 3. The Report seems to focus on the section 501(c)(3) 
990 filers. Id. at 2, n. 3, but we are not completely sure since the 
second paragraph under ``Background'' appears to discuss all (c) 
filers. Id. at 4.
    Similarly, J.E. Selez & J. Wolpert, New York City's Nonprofit 
Sector (May, 2002), report that the number of New York nonprofit 
charities, defined as those with annual revenues exceeding $25,000 that 
report on Internal Revenue Service Form 990 (not forms 990EZ or 990PF 
and not apparently other 501(c)'s that report on Form 990), ``grew by 
almost 57 percent during the 1990's (21 percent between 1990 and 1995, 
by 29 percent between 1995 and 2000). Expenditures grew even faster--by 
64 percent in year 2000 dollars . . . .'' Id. at 16.
    The personnel resources devoted by the Internal Revenue Service to 
reviewing applications for exempt status (again it is not clear to us 
whether the resources are only those devoted to 990 (c)(3) filers or to 
all (c) filers) seem to us out of line with the number of exemptions 
denied or rejected (which appears to be limited to the (c)(3) 990 
filers) including for failure to complete the application or for 
reasons other than substantive reasons. GAO Report at 21, table 2. 
Granted that a tax exemption determination is an important act, we 
believe that the fact that so few are denied or withdrawn implies that 
the Internal Revenue Service, rather than move ``revenue agents from 
doing examinations to processing the increased application workload,'' 
id. at 22 & 23, should (i) devote fewer resources to applications, (ii) 
routinely grant only two or three year preliminary exemptions and then 
have a 100 percent audit policy before granting further exemptions, 
(iii) then grant exemptions that expire, let's say, every ten years and 
audit again prior to renewal of exemption, and (iv) shift some of the 
burden of review at each stage to the states by requiring state input 
before the further exemptions are granted. See the second paragraph of 
the Fourth Section, infra.
    Some empirical support for these suggestions can be derived from 
New York's experience with not-for-profit corporation certificates of 
incorporation. Until 1993, they had to be approved by a Supreme Court 
Justice on notice to the Attorney General. The review burden was both 
great and unproductive. It is all too easy to draft a certificate to 
meet the organizational tests for incorporation and federal income tax 
exemption. The repeal of the review and approval requirements in 1993 
freed staff for compliance duties. However, most amendments to 
certificates of incorporation still require Supreme Court approval on 
notice to the Attorney General.
    The Charities Bureau's accounting staff of four (two vacancies) 
completes an average of 2,000 reviews annually of our over 40,000 New 
York filers or five percent. If the vacancies were filled, presumably 
we could do 3000 reviews on average. The Service would have to say how 
meaningful a review volume this would be.
    Moreover, a significant percentage of New York initial registrants 
never become operational or cease operations after a few years.
    Finally, even if this policy change merely shifts the burden of IRS 
work, it shifts it to the right place, not the wrong place.

3. LIncrease Regulation of Charities that Give Grants to Foreign 
        Individuals and Organizations
    As we are all aware, several publicly supported United States 
charities have been identified as contributors to terrorists and 
terrorist organizations abroad. This situation underscores the need for 
enactment of explicit statutory or regulatory requirements that 
publicly supported, section 501(c)(3) organizations must follow in 
making grants to foreign organizations. Internal Revenue Code section 
4945 and the regulations thereunder provide explicit guidance on this 
subject to private foundations, but responsible publicly supported 
charities have to infer the requirements, as illustrated by the 
Treasury's Office of Public Affairs having to issue the November 7, 
2002 Response to Inquiries from Arab American and American Muslim 
Commu- nities (PO-3607). This is anomalous, because overseas giving by 
publicly supported exempt organizations is far more substantial than 
overseas giving by private foundations.
    In 1999 the New York Attorney General launched an investigation of 
the Holyland Foundation. It was hampered by our failure to enlist the 
cooperation of the Internal Revenue Service (to which the proposed 
amendment of Code sections 6103 and 6104 discussed above is relevant), 
although ultimately we were able to document Holyland's transfer of 
thousands of dollars to foreign bank accounts and organizations. We 
have been unable to proceed further, since we lack any overseas 
investigative capability, and no federal authority has come to our aid, 
although we have surely asked.
    After 9/11, Holyland's assets were frozen, and we note the recent 
indictment of Infocom, a related organization, and its principals, for 
various foreign asset transaction transgressions.
    Legislation or regulations, or both, should make explicit the 
procedures all charities must follow in making foreign grants and also 
alert them by cross references to other relevant statutes and 
regulations, such as those on which the Infocom indictment is based.
    At the request of members of the staff of a counterpart committee 
of the other body, we are preparing specific proposals for regulation 
of grants for foreign individuals and organizations and will be happy 
to share that information with the Subcommittee.

4. Phase Out of Small Private Foundations
    In New York, private foundations appear to raise far more 
compliance issues than do publicly supported charities, particularly 
the smaller private foundations. Moreover, our belief is that private 
foundations are more responsible for additional substantial increases 
in Internal Revenue Service application workload than are publicly 
supported applications and think Treasury, the IRS and the Congress 
should also.
    We are particularly concerned that companies such as Fidelity 
Investments are marketing technology to make formation and management 
of private foundations simpler and cheaper and encouraging the 
formation of small foundations. B. Wolverson, @1st Century Sell, 
Chronicle of Philanthropy, February 6, 2003.
(http//philanthropy.com/premium/article/v15/i08/08000701.htm)
    At the least, all private foundations exemption determinations 
should be provisional and should not be renewed without advice from the 
relevant state charities regulators specifically as to, at the least, 
whether or not the charities are active, their registration and reports 
are current and fair on their face, have been the subject of any 
complaints or are under investigation. When e-filing arrives with 
coordination with the states' charities regulators through 
www.Guidestar.org or the National Center for Charitable Statistics or 
both, the states' inputs will quickly become much more substantial.

    We also recommend amendments to the Internal Revenue Code that 
would:

        1. Ldeny tax exemption to private foundation applicants that 
        have less than $20 million in net investment assets at 
        inception; and/or

        2. Lphase out over ten years the exempt status of private 
        foundations with less than $20 million in net assets.

    We choose $20 million because at that level a private foundation 
can afford a professional staff and/or make significant gifts. It has 
been pointed out to us that while $20 million might be appropriate for 
states like California and New York, it might not be for smaller 
states. On the other hand if our proposal is accepted, it should not be 
easily evaded by foreign incorporations.
    A result of these proposals should be an increase in donor advised 
funds at community foundations because of the availability of higher 
charitable deductions relief from excise taxes and relief from 
paperwork. See S. Strom, New Philanthropists Find Drudgery, N.Y. Times, 
National Section p. 17 (Jan. 12, 2003) (attached). We understand that 
some revision of the Treasury regulations affecting donor advised funds 
may be in order, but on balance we think that community foundations 
generally offer a professionalism and responsibility that few small 
private foundations can match.
    At the opposite end of the private foundation spectrum, we think 
that the major private foundations should have the opportunity to 
achieve, under prescribed conditions, publicly supported foundation 
status by analogy to, but without having to meet the Code section 
509(a) public support tests, section 507 of the Code. We are thinking 
of foundations (1) with net investment assets of $100 million or more, 
(2) whose substantial contributors no longer are disqualified persons 
for purposes of section 4946 of the Code other than by virtue of being 
substantial contributors, i.e. they are no longer foundation managers, 
(3) whose assets contributed by their substantial contributors comprise 
less than five percent of the total assets of, and (4) whose 
investments do not comprise more than five percent of the business 
holdings of any substantial contributor, applying the attribution rules 
of Code section 4946.

5. Reorientation of Foundation Excise Tax Burden
    The states' charities regulators' primary interest is protecting 
charitable funds. Many of the excise tax provisions of the Code are 
consistent with that interest. For example, it is right for Code 
sections 4941 (self-dealing), 4951 (Black Lung Trusts self-dealing) and 
4958 (excess benefit transactions) to impose excise taxes on the self-
dealer and foundation manager. They benefit from such transactions of 
which the charity is the victim.
    In our experience, the private foundation excise taxes on excess 
business holdings (Code section 4943) and jeopardy investments (section 
4944) almost always involve transactions that, directly or indirectly, 
benefit or inure to the benefit of disqualified persons. Therefore, 
those excise taxes should be levied exclusively on the foundation 
managers and other benefitting disqualified persons and not on the 
charity which again is the victim. To do otherwise, as the Code now 
does, fails to deter the disqualified persons from using charitable 
funds for noncharitable purposes.
    Although the excise taxes on excess expenditures to influence 
legislation (Code section 4911), disqualifying lobbying expenditures 
(section 4912) and taxable expenditures (section 4945) can fall on the 
charity (as well as on management), there is a certain logic to 
decreasing the funds available for charity by the amount spent by the 
charity for noncharitable purposes (in the case of section 4911, 
amounts above the section 501(h) permitted amount). Similarly the Code 
section 4942 excise tax on failure to distribute income arguably should 
fall on the charity, because it should not be able to keep what it 
should have distributed for charitable purposes.
    The Code section 4962 abatement provisions fail to take into 
account these important distinctions. It treats all the excise taxes 
imposed by sections 4941-45 (except for the section 4941(a) initial tax 
on self-dealing), 4951-2, 4955 and 4958 as if they were the same. We 
see no reason why self-dealers and other disqualified persons should be 
entitled to any abatement of first tier taxes on them.

6. LReduction in Charitable Deductions That in Reality Benefit 
        Profession Fund Raisers
    Abuse of the charitable deduction by charities that use 
telemarketers is rampant. Each year the New York Attorney General 
publishes Pennies for Charity (www.oag.state.ny.us/chaities/
charities.html). The 2002 edition shows that on average only 30 percent 
of the funds raised by charity telemarketers, actually reach the 
charity. This is less than half the Better Business Bureau's best 
practice standard of 65 percent.
    Worse, in many cases the amount of money that reaches the charity 
is far less or even zero. Yet, donors to telemarketing campaigns claim 
one hundred percent deductions. Since most telemarketing contributions 
are less that $250, the Code section 170(f)(8) requirement of charity 
acknowledgment to sustain the deductions is inapplicable.
    The Service unsuccessfully attempted in United Cancer Council, Inc. 
v. Commissioner, 165 F.3d 1173 (7th Cir. 1999), to uphold its and the 
Tax Court's determination that a charity was a controlled extension of 
its telemarketer and not entitled to exemption, although Judge Posner 
did suggest that the Service could proceed on the theory that the 
charity operated for the private benefit inurement of the telemarketer. 
We understand that the case was subsequently settled, but of course 
until Code sections 6103 and 6104 are amended we cannot find out on 
what terms.
    We believe that the best way to deal with these serious issues 
(which are now also before the Supreme Court as a state charities fraud 
matter in Illinois v. Telemarketing Associates, Inc., No. 01-1806 and 
in which we unsuccessfully suggested that the Service join the Federal 
Trade Commission in the excellent brief submitted by the United States 
as amicus curiae in support of Illinois's enforcement efforts) is as a 
revenue protection matter.
    We have drafted proposed amendments, attached as Exhibit A, to 
amend little known and, as far as we are aware, never enforced Code 
sections 6113 and 6710. The Treasury never seems to have promulgated 
regulations under either section. As amended, these sections would 
require disclosure of deductibility or nondeductibility in all 
fundraising solicitations conducted by professional fundraisers, would 
disallow deduction of costs allocable to the costs of such fundraising, 
would require the charity to acknowledge all resulting contributions, 
regardless of amount, and would limit the deduction to the actual 
charitable gift. This amendment is completely consistent with your 
Subcommittee's call for greater charity accountability in its 9/11 
hearing.
    Among other things the attached proposed amendments also close an 
apparent loophole in section 6113. We know of at least one fundraiser 
who forms section 501(c)(3) eligible organizations in many states, but 
never applies for income tax exemption. His organizations are arguably 
described in section 170(c), so he may evade section 6113.
    To close the loophole, the proposed amendments apply to 
organizations that are exempt under section 170(c), but exempt 
religious organizations, educational institutions and membership 
organizations. We also limited the application of the proposed 
amendments to exempt organizations that pay outside entities to conduct 
fundraising on their behalf. Typically, they incur extremely high 
fundraising costs.

7. Excess Benefit Transaction
    We believe that Code section 4958 should be applicable to private 
foundations and to the same section 501(c) organizations to which the 
proposed amendments to sections 6103 and 6104, discussed in section 1 
above, apply. Moreover, like the excise tax provision of sections 4941-
45, section 508(e) should be amended to make section 4958 part of the 
governing instruments of private foundations so that state charities 
regulators can enforce it, as they attempt to enforce sections 4941-45.
                                 ______
                                 
LExhibit A--Draft Proposed Amendments to Internal Revenue Code sections 
                             6113 and 6710

LTITLE 26. INTERNAL REVENUE CODE--SUBTITLE F. PROCEDURE AND 
        ADMINISTRATION

CHAPTER 61. INFORMATION AND RETURNS

SUBCHAPTER B. MISCELLANEOUS PROVISIONS

26 USCS section 6113 (2002)

LSec. 6113. DISCLOSURE OF DEDUCTIBILITY OR NONDEDUCTIBILITY OF 
        CONTRIBUTIONS.
    (a) GENERAL RULE.--Each fundraising solicitation by (or on behalf 
of) an organization to which this section applies shall contain an 
express statement (in a conspicuous and easily recognizable format) 
that as provided herein contributions or gifts to such organization are 
or are not deductible as charitable contributions for Federal income 
tax purposes.
    (b) ORGANIZATIONS TO WHICH SECTION APPLIES.
        (1) IN GENERAL.--Except as otherwise provided in this 
        subsection, this section shall apply either to any organization 
        which is not described in section 170(c) and which--
          (A) is described in subsection (c) (other than paragraph (1) 
        thereof) or (d) of section 501, and exempt from taxation under 
        section 501(a),
          (B) is a political organization (as defined in section 
        527(e)), or
          (C) was an organization described in subparagraph (A) or (B) 
        at any time during the 5-year period ending on the date of the 
        fundraising solicitation or is a successor to an organization 
        so described at any time during such 5-year period, or to any 
        organization which is described in section 170(c) and which--
          (D) has been determined by the Secretary to be exempt from 
        taxation pursuant to section 501(c)(3) or
          (E) is described in section 501(c)(3) but has not been so 
        determined or whose determination has been revoked.
        (2) EXEMPTION FOR SMALL ORGANIZATIONS.--
          (A) ANNUAL GROSS RECEIPTS DO NOT EXCEED $ 100,000.--This 
        section shall not apply to any organization the gross receipts 
        of which in each taxable year are normally not more than $ 
        100,000.
          (B) MULTIPLE ORGANIZATION RULE.--The Secretary may treat any 
        group of 2 or more organizations as 1 organization for purposes 
        of subparagraph (A) where necessary or appropriate to prevent 
        the avoidance of this section through the use of multiple 
        organizations.
        (3) SPECIAL RULE FOR CERTAIN FRATERNAL ORGANIZATIONS.--For 
        purposes of paragraph (1), an organization described in section 
        170(c)(4) shall be treated as described in section 170(c) only 
        with respect to solicitations for contributions or gifts which 
        are to be used exclusively for purposes referred to in section 
        170(c)(4).
    (c) FUNDRAISING SOLICITATION.--For purposes of this section--
        (1) IN GENERAL.--Except as provided in paragraph (2), the term 
        `fundraising solicitation' means any solicitation of 
        contributions or gifts which is made--
          (A) in written or printed form,
          (B) by television or radio, [or]
          (C) by telephone, [.]
          (D) by e-mail,
          (E) via an Internet web site, or
          (F) by any other form of mass communication whether existing 
        now or in the future.
        (2) EXCEPTION FOR CERTAIN LETTERS OR CALLS.--The term 
        `fundraising solicitation' shall not include any letter or 
        telephone call if such letter or call is not part of a 
        coordinated fundraising campaign soliciting more than 10 
        persons during the calendar year.
    (d) SUBSTANTIATION REQUIREMENT.--
        (1) Section 170(f)(8) shall apply to all contributions or 
        gifts, regardless of the amount of the contributions, to any 
        organization described in section 170(c) and determined to be 
        exempt from federal income tax under section 501(c)(3) to the 
        extent that such organization pays or incurs amounts for any 
        fundraising solicitation directly or indirectly carried out by 
        one or more other organizations: provided, however, that 
        religious organizations, educational institutions that confine 
        their solicitation to faculty, students, alumni and their 
        families and membership organizations that confine their 
        solicitations to members having voting rights or other powers 
        of governing body appointment or removal shall not be required 
        to comply with this subsection (d).
        (2) The contemporaneous written acknowledgment so required 
        shall state that the contribution is not deductible as a 
        charitable contribution for Federal income tax purposes if the 
        net contribution, after subtracting the allocable costs of the 
        applicable fundraising, is zero or a negative number and 
        otherwise shall state the amount of the contribution that is 
        available to the exempt organization for purposes described in 
        section 501(c)(3), after subtracting the allocable costs of the 
        fundraising solicitation, and shall state that only that amount 
        is deductible as a charitable contribution for Federal income 
        tax purposes.

TITLE 26. INTERNAL REVENUE CODE

SUBTITLE F. PROCEDURE AND ADMINISTRATION

LCHAPTER 68. ADDITIONS TO THE TAX, ADDITIONAL AMOUNTS, AND ASSESSABLE 
        PENALTIES

SUBCHAPTER B. ASSESSABLE PENALTIES

PART I. GENERAL PROVISIONS -26 USCS section 6710 (2002)

LSec. 6710. FAILURE TO DISCLOSE THAT CONTRIBUTIONS ARE NONDEDUCTIBLE.

    (a) IMPOSITION OF PENALTY.--If there is a failure to meet the 
requirement of section 6113 with respect to a fundraising solicitation 
by (or on behalf of) an organization to which section 6113 applies, 
such organization shall pay a penalty of $1,000 for each day on which 
such a failure occurred. The maximum penalty imposed under this 
subsection on failures by any organization during any calendar year 
shall not exceed $10,000.
    (b) REASONABLE CAUSE EXCEPTION.--No penalty shall be imposed under 
this section with respect to any failure if it is shown that such 
failure is due to reasonable cause.
    (c) $10,000 LIMITATION NOT TO APPLY WHERE INTENTIONAL DISREGARD.--
If any failure to which subsection (a) applies is due to intentional 
disregard of the requirement of section 6113--
        (1) the penalty under subsection (a) for [the] each day on 
        which such failure occurred shall be the greater of--
                (A) $1,000, or
                (B) 50 percent of the aggregate cost of the 
                solicitations which occurred on such day and with 
                respect to which there was such a failure,
        (2) the $10,000 limitation of subsection (a) shall not apply 
        to any penalty under subsection (a) for the day on which such 
        failure occurred, and
        (3) such penalty shall not be taken into account in applying 
        such limitation to other penalties under subsection (a).
    (d) DAY ON WHICH FAILURE OCCURS.--For purposes of this section, any 
failure to meet the requirement of section 6113 with respect to a 
solicitation--
        (1) by television or radio, shall be treated as occurring when 
        the solicitation was telecast or broadcast,
        (2) by mail, shall be treated as occurring when the 
        solicitation was mailed,
        (3) not by mail but in written or printed form, shall be 
        treated as occurring when the solicitation was distributed, 
        [or]
        (4) by telephone, shall be treated as occurring when the 
        solicitation was made,[.]
        (5) by e-mail, shall be treated as occurring when the 
        solicitation was transmitted,
        (6) by Internet web site, shall be treated as occurring each 
        twenty-four hour period or part thereof during which the 
        solicitation was posted on and/or accessible through the 
        Internet web site.
        (7) by any other form of mass communication as provided in 
        regulations to be proposed by the Secretary within 90 days 
        after the effective date of the amendments to this section and 
        thereafter from time to time as new forms of communication are 
        developed.

                                
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