[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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____________________________________________________________________________
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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\
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\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.