[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
THE 1998 TAX RETURN FILING SEASON AND THE IRS
BUDGET FOR FISCAL YEAR 1999
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
__________
MARCH 31, 1998
__________
Serial No. 105-87
__________
Printed for the use of the Committee on Ways and Means
U.S. GOVERNMENT PRINTING OFFICE
60-874 WASHINGTON : 1999
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
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, Wisconsion
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
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
------
Subcommittee on Oversight
NANCY L. JOHNSON, Connecticut, Chairman
ROB PORTMAN, Ohio WILLIAM J. COYNE, Pennsylvania
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
PHILIP S. ENGLISH, Pennsylvania JOHN S. TANNER, Tennessee
WES WATKINS, Oklahoma KAREN L. THURMAN, Florida
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
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
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Page
Advisory of March 24, 1998, announcing the hearing............... 2
WITNESSES
Internal Revenue Service, Hon. Charles O. Rossotti, Commissioner;
accompanied by John M. Dalrymple, Chief Operations Officer..... 6
U.S. General Accounting Office, Lynda D. Willis, Director, Tax
Policy and Administration Issues, General Government Division;
accompanied by James R. White, Associate Director, Tax Policy
and Administration Issues, General Government Division, and
Randolph C. Hite, Associate Director, Governmentwide and
Defense Information Systems, Accounting and Information
Management Division............................................ 62
----------
National Association of Enrolled Agents, Joseph F. Lane.......... 118
National Society of Accountants, and Padgett Business Services,
Roger Harris................................................... 133
SUBMISSION FOR THE RECORD
American Bar Association, statement.............................. 151
THE FISCAL YEAR 1999 BUDGET REQUEST FOR THE INTERNAL REVENUE SERVICE
AND THE 1998 TAX RETURN FILING SEASON
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TUESDAY, MARCH 31, 1998
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 2:07 p.m., in
room 1100, Longworth House Office Building, Hon. Nancy L.
Johnson [Chairwoman of the Subcommittee] presiding.
[The advisory announcing the hearing follows:]
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Chairwoman Johnson. The hearing will come to order. Good
afternoon, everyone. Today the subcommittee will examine the
current tax return filing season and the budget request for the
Internal Revenue Service for Fiscal Year 1999.
The IRS is caught up in a whirlwind of change I think it's
fair to say. Beyond the current filing season, the IRS still
must implement the remaining tax code changes contained in last
year's Taxpayers Relief Act. Second, Congress will soon finish
legislation to restructure and reform the IRS. The new Taxpayer
Bill of Rights 3 will include the important new taxpayer
safeguards, such as expanded relief for innocent spouses and
that will require a response from the Department. Third, the
Commissioner has proposed the most ambitious reorganization of
the IRS in 40 years for which we commend him. Fourth, the IRS
must assure that its computer system is compliant with the
century date change. And finally, the IRS must oversee a
multibillion dollar contract with the private sector to upgrade
its aging computer system into the 21st Century. The IRS looks
like a juggler trying to keep one too many plates in the air.
The administration is requesting $8.3 billion for the IRS
in Fiscal Year 1999 to support a workforce of approximately
102,000 employees. These resources should enable the IRS to
collect $1.7 trillion in revenue. The budget request represents
a $529 million increase over the current fiscal year. Part of
this increase will fund over 1,400 additional IRS employees in
Fiscal Year 1999.
This budget request marks the first real increase in
several years. The increased resources are necessary to meet a
growing workload and to improve customer service. For example,
the number of primary tax returns will increase from 203
million to 212 million in just two years. And, the number of
telephone inquiries which the IRS must answer will increase
from 104 million to 127 million over the same period.
Beyond the statistical growth in the IRS' workload, the
complexity of the subject matter is becoming more difficult to
administer. Some of this may stem from the Taxpayer Relief Act
of 1997. The changes affecting capital gains and the sale of
principal residences were effective in 1997 so they are
affecting the current filing season. Many more tax law changes
became effective in 1998 so they will affect the 1999 filing
season. This includes educational tax credits related to the
Hope Scholarship and to the Lifetime Learning Program, as well
as the new deductible Roth IRA.
In addition, the IRS must strive to make sure that its
computer system is compliant with the century date change. The
IRS will spend almost a billion over five years on this effort.
In view of the changes in the next few years, it is a
welcome relief that the current filing season appears to be
mostly trouble-free. The IRS is processing tax returns at good
pace and issuing refunds in a timely manner. There also has
been a significant increase in the number of persons filing
their tax returns electronically, as well as receiving their
refunds by direct deposit to their bank accounts. This is all
very good news. It suggests that the IRS is making good
progress towards its goal of promoting electronic filing as
well as significant progress towards better customer service.
The subcommittee wants to review the IRS' budget and its
operations in order to see if the budget meets all of the
challenges in a balanced and timely manner. I welcome today's
witnesses and I particularly welcome the new Commissioner,
Commissioner Rossotti.
At this point, I'd like to yield to my Ranking Member, Mr.
Coyne.
Mr. Coyne. Thank you, Madam Chairwoman. Today we will hold
the annual hearing to discuss the administration's proposed
Fiscal Year 1999 budget for the IRS and the status of the 1998
tax return filing season.
The issues we will discuss today are critically important
to the integrity of our tax collection system and the public's
expectations of customer service, fairness, and efficiency.
While it is easy to attack the IRS and its workforce, such an
approach does not solve any of our problems. What is needed, in
my opinion, is: No. 1, better focused IRS management; No. 2,
better IRS employee training; No. 3, better IRS tax
administration technology systems.
The President's proposed budget targets each of these areas
and does so in a very accountable fashion. The President has
proposed $8.2 billion in funding for the IRS in Fiscal Year
1999. This is a significant increase from IRS funding levels in
prior years. The President's budget would provide for a net
increase of $530 million over the IRS' Fiscal Year 1998
operating level. Almost half of this increase would be for
investment in IRS information systems and organizational
modernization.
Further, the administration's budget request calls for $323
million to fund a second year of the IRS investment technology
account. This is seed money which the IRS needs to continue its
modernization of IRS computer and technology systems.
The President's budget also calls for $143 million for EITC
activities. This Earned Income Tax Credit account was
established last year outside the budgetary caps to: number
one, expand EITC customer service and public outreach programs;
number two, to strengthen EITC enforcement activities; and
number three, to research efforts to reduce EITC overclaims and
erroneous filings. I am pleased that we are continuing to
improve administration of the EITC on a bipartisan basis.
Finally, I believe that the administrative actions that IRS
Commissioner Rossotti has taken to streamline the way the IRS
does business and to expand the availability of taxpayer
services are fundamental to development of a first-class
federal tax system. The current tax return filing season
appears to be going well and, undoubtedly, the Commissioner's
decisions to expand the IRS' hours of operation to nights and
weekends across the country and to shift IRS auditors and
collection staff to taxpayer assistance activities have
contributed to a problem-free filing season. I commend
Commissioner Rossotti for his efforts and I thank the
subcommittee Chairwoman, Mrs. Johnson, for holding this hearing
today. Thank you.
Chairwoman Johnson. Thank you.
Commissioner Rossotti.
STATEMENT OF CHARLES O. ROSSOTTI, COMMISSIONER, INTERNAL
REVENUE SERVICE
Mr. Rossotti. Thank you, Madam Chairwoman and members of
the committee. Before I begin my testimony, I would like to
make one announcement that I think will please the committee,
and that is that our electronic federal tax payment system has
made a very substantial amount of progress with existing
business users, and, therefore, it will not be necessary to
impose a penalty on July 1, 1998, as was previously planned
and----
Chairwoman Johnson. Excellent.
Mr. Rossotti [continuing]. This penalty waiver will extend
to those employers who were first required to use the EFTPS on
or after July 1, 1997, and who continue to make timely deposits
by paper coupons. So, I'm sure that will be good news for your
constituents.
Chairwoman Johnson. And just to that point, what percentage
of the small businesses required to file under the EFTPS at
this point are filing electronically?
Mr. Rossotti. Well, I believe that there is about 1.1
million that are required and there's only about 80,000, if I'm
correct, who are not filing. So, it's the majority of people
that are enrolled. But, I'll get you those precise numbers,
Madam Chairwoman.
[The following was subsequently received:]
Currently, there are about 1.4 million employers who are
required to pay using EFTPS. (There is no requirement to file
electronically). Of that number, about 1.3 million are enrolled
to pay using the electronic system. In addition to the required
taxpayers, we have more than 500,000 business taxpayers who are
voluntarily enrolled.
Chairwoman Johnson. But almost the whole group is filing
electronically?
Mr. Rossotti. Of those that were mandated to----
Chairwoman Johnson. Right. Well, that's very good news----
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing]. And I think that reflects
well on the small business community, their----
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing.] Ability to learn and
change, but it also reflects that the IRS did make quite
dramatic change in its presentation of how to do this and of
its information to the small business community after the
program kind of ran amuck----
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing]. And it was those changes
and the improvements in your materials and your outreach to the
small business community that certainly brought about this
compliance and in a way that none of us had any--heard from any
of our troubled small businesses about it. I commend you on
that and I think the fact that you did respond to the
difficulties that the program was having constructively ought
to be noted for the record.
Mr. Rossotti. Yes. Actually, Madam Chairwoman, I'm glad you
mentioned that because it's one of the first things that I
looked into when I became Commissioner, having heard about it
from a number of members, and, you know, it immediately became
apparent to me that this was an excellent program that had not
been presented, as you put it, very well--
Chairwoman Johnson. It had not been excellently described
and so it was not beloved----
Mr. Rossotti. And we're continuing now to actually do some
additional things. I mean, the decision we made to waive the
penalty anticipates the results of some additional outreach
we're going to do----
Chairwoman Johnson. Excellent.
Mr. Rossotti [continuing]. To help people use it.
I'm pleased to go on now to discuss the 1998 filing season
as well as our 1999 budget request and some other issues of
interest to the subcommittee, especially the commitment that
we've made to customer service.
Of course, one of the IRS' most important responsibilities
is to manage a successful filing season and, as you noted,
Madam Chairwoman and Mr. Coyne, we are doing that this year.
Total return receipts are about even with last year but our
electronic filing and TeleFile are up 24 and 26 percent,
respectively, over the same time period, and, as of March 20,
refunds are up 6 percent and the average refund is $1,397.
As of March 20, 4.8 million individual taxpayers have filed
by phone and, continuing this approach, this spring small
businesses nationwide will also be able to file the 941
Employers Quarterly Federal Tax Return by telephone and we
expect this year that 1.2 million 941's will be filed using
this option.
Beginning in January, as Mr. Coyne noted, we expanded our
telephone service to 16 hours a day, Monday through Saturday.
And, largely through better scheduling, the overall access, as
defined by GAO, for telephone assistance has increased from
only 30 percent in 1996 to about 91 percent so far this season.
This means that there have been 12.7 million fewer busy signals
experienced by taxpayers.
We've also just very recently begun a pilot technology
program called the ``Intelligent Call Router'' which will
enable us on a real-time basis to route calls to the next
available assister anywhere in the United States which is part
of our program to improve access even more.
We also expanded walk-in service hours during the last six
Saturdays of the filing season. Over 150 IRS walk-in offices
are open from 9:00 to 3:00. This recent Saturday was designated
as ``EITC Awareness Day'' and the last two Saturdays are
designated as ``Problem Prevention Days.'' And I will say that
this Saturday I visited one of those cites at a mall in Charles
County, Maryland and found that many taxpayers were, in fact,
very pleased at the ability to get service on a Saturday
morning in a location that was convenient to them.
A growing number of taxpayers are also getting the tax
information they need from our Internet cite, from IRS CD-ROMs
and our fax system. So far this fiscal year, our Internet site
has had over 277 million hits, which is about triple the number
for the same period last year, fax traffic is up 63 percent,
and over 530,000 successful transmissions of tax forms and
information have been made by fax. And I would like to say that
just today,--the form to claim innocent spouse relief has gone
up on our website.
Chairwoman Johnson. Excellent.
Mr. Rossotti. The IRS has also made considerable progress,
as we've noted at the beginning, in electronic payment methods.
Last Fiscal Year 1997, more than $655 billion was deposited
electronically which was an increase over $416 billion the
previous year. But, as of March 20 of 1998, deposits are
already over $520 billion through 21 million transactions.
Enrollment, as we noted, continues to grow in the EFTPS system
with 1.8 million taxpayers currently enrolled, and that
includes 500,000 small business volunteers who are not required
to use the system. That success, of course, is why we were able
to waive the penalty.
In addition, in Fiscal Year 1997, over $213 billion went
through the Lock-Box payment system which is a $4 billion
increase over the prior year and, as of February 28 of this
year, $53.6 billion was deposited. So, Lock-Box is also
growing.
Madam Chairwoman, without exception, the century date
change conversion together with the annual filing season
changes are our highest technology priorities. I stress that we
are very aggressively managing the program so as to identify
risks and be able to take timely actions when necessary to see
that our overriding goal--which, of course, is to maintain
continuous service--is realized. As part of this management
process, we do need to adjust on a regular basis deadlines and
timetables to reflect the work in progress. The program remains
not only a high priority but a high risk that will require
continued intense management focus to succeed.
As members of the subcommittee are aware, I've also
proposed a large-scale and long-term modernization program for
the IRS. Despite the short-term progress we are making, we will
only reach our goal--first quality service to each and every
taxpayer--through changes in five key areas, each complimenting
the other. And I'll just briefly describe these.
The first is revamped business practices that will focus on
understanding, solving and preventing taxpayer problems. The
second is an organization structure that each divides the IRS
into four units; each specializes in serving a particular set
of taxpayers with similar needs. Third, the creation of
management roles with more clear responsibility. Fourth,
measuring our organizational performance by balancing customer
satisfaction, business results, employee satisfaction and
productivity. And fifth, of course, new technology.
The IRS' current computer systems simply cannot support the
agency's missions and goals in the long term. We have engaged
the consulting firm of Booz, Allen, and Hamilton to validate
this concept in terms of risk, cost, and impact on customers,
both external and internal.
For Fiscal Year 1999, we have prepared a budget that
supports the beginning of the transformation of the IRS that I
have outlined above and that can be also identified into five
major priorities.
One, of course, is preparing for the century date change
which is the most critical of all elements and the funds I have
requested are essential to continuing customer service and
avoiding the potentially disastrous effects of an uncorrected
century date change problem.
Second, during Fiscal Year 1999, we will pursue a highly
focused initiative to improve customer service through improved
clarity of notices, forms, and publications, better telephone
service, more walk-in service, expanded electronic filing,
improved training of customer service representatives,
strengthened support for small businesses, increased staffing
for the taxpayer advocate's office, and creation of citizen
advocacy panels.
Third to ensure that customer service remains a top
priority, the budget request also includes some near-term
investments that are necessary in order to enable us to
maintain an acceptable level of service. This includes the Call
Router, which I mentioned earlier, deployment of computers to
field collectors who currently have no computers, and
replacement of old computers used by field agents who depend on
them to do examinations of taxpayers.
Fourth, in 1999, the process of modernization will continue
with the strengthening of the IRS' internal systems management
processes and capabilities and the award of the ``Prime
Contract.'' The Fiscal Year 1999 budget request for long-term
technology modernization comes in two parts; IRS capabilities
for managing and supporting modernization and funding for the
information technology investment account for the prime
contractor itself.
And finally, the Fiscal Year 1999 budget includes $25
million to support the organizational modernization proposal
that I've advanced. This money is not yet fully specified in
detail but it will include recruiting, relocation, and
retraining of people as well as development of detailed plans
for the reorganization.
I would only note, Madam Chairwoman, that over the last
three years, the IRS budget--when you subtract out the extra
cost of the century date change--has actually declined by 7
percent while the dollars collected have grown by about 24
percent. Returns processed have increased by 8 percent and, as
you know, the Taxpayer Relief Act of 1997 has added about 800
changes to the Tax Code.
In conclusion, I believe we can transform the IRS into an
agency that helps taxpayers meet the obligations imposed by the
tax laws while ensuring the compliance is fair. And I think we
can do this while increasing productivity and shrinking
gradually the size of the IRS in relation to the economy. It
will take time and investments to modernize technology,
business practices, and organization. But, with the support of
Congress, I'm optimistic that we will succeed. Thank you, Madam
Chairwoman.
[The prepared statements and attachments follow:]
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Chairwoman Johnson. Thank you, Commissioner. I'd like to
start with a couple of questions that emanate from preceding
hearings and from your testimony.
First of all, in your budget brief, you make the point and
you make it in italics, that the investment in technology--this
section is entitled, ``Inadequate Near-Term Technology
Investment Pending Long-Term Solutions Through Modernization
Blueprint''--and I understand the difference between the
modernization blueprint and the enormous investment in
technology that you need to make to comply with the Year 2000
challenge and also to meet some of your service goals in the
near-term.
Nonetheless, it is a startling statement. You say here, it
will--while this blueprint and the funding that goes with it
are essential for the long-term viability of the IRS, it will
provide no improvement in support of current operations for at
least three more years.
Now, I would assume that your technology investments that
you're going to make in the near term to meet the challenge of
the Year 2000 and also to meet some of your service goals and
to improve management and all the other things that you have
laid out in your testimony, I would imagine that they would
make, (a), some near-term improvement in operations and in
service, but that they are coordinated with your long-term
blueprint and, for the most part, would not have to be repeated
in 2001, except for software changes. Now----
Mr. Rossotti. Yes, Madam Chairwoman; the point that I made
about the three years is that we really are operating on two
tracks here because it's just the nature of where we are in the
technology in the IRS. The one track which you were mentioning
contains some of the things that are in the budget for this
year which have immediate impact; like the Call Router and
computers for collection agents who don't have any. Those will
be useful for some years to come.
The blueprint and the longer-term technology modernization
really won't even begin until 1999. We've recently--just within
the last week--issued the final version of the RFP. The ``Prime
Contract'' award is designed to be made right at the end of
this year in December and then the early stages of that--most
of the work will be required to put in some of the sort of
management processes--the system's lifecycle, as it's called--
that GAO, among others, has noted is necessary in order to
really have the management tools to manage a large program like
this, along with some relatively limited early releases along
the blueprint. By the time those get rolled out, that will be
into about the 2001 timeframe, which is, you know, almost three
years from now and that will be about the time that we will
start to begin to see the impact in terms of practical use of
the investment we're making in this long-term blueprint.
Chairwoman Johnson. I guess my question went to an issue
that has been an issue for the IRS for as long as I've been
Chairwoman of the subcommittee. And that is, whether or not
your short-term investments are harmonious with your long-term
blueprint and whether the investments we're making--recently,
you were telling me about the number of computers that have to
be replaced to meet the Year 2000 challenge. Now, are those
going to be useful?
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing]. In the new blueprint?
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing]. Or are we going to have to
replace them? That's the kind----
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing]. That's really----
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing]. What I'm asking.
Mr. Rossotti. For the most part, they will be useful and
that's designed--we call that in the buzzwords of technology
the phase zero of the blueprint. In other words, it's sort of
the piece that precedes the major piece. But, if you look at
these----
Chairwoman Johnson. But the technology investments that
you're making now are harmonious with your long-term blueprint.
Mr. Rossotti. Yes.
Chairwoman Johnson. Isn't a stop-gap measure that will then
have to be repurchased--different equipment purchased----
Mr. Rossotti. Yes.
Chairwoman Johnson. In two or three years?
Mr. Rossotti. Yes, that's right----
Chairwoman Johnson. I don't----
Mr. Rossotti [continuing]. Although I do have to make one
comment and that is when you buy things like personal
computers, the average life of these computers in most places
is at most maybe four or five years. So, you have a normal
cycle of replenishment of these things. The hardware portion of
this tends to have a certain defined life and you have to
provide for those replacements in the normal course.
Chairwoman Johnson. Right. I did use that example of
personal computers but in developing your centers and in
beginning the process of reducing the number of centers----
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing]. You're going to be making
some----
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing]. Very big investments----
Mr. Rossotti. Yes.
Chairwoman Johnson [continuing]. In technology.
Mr. Rossotti. Yes.
Chairwoman Johnson. Will those mainframe investments will
be compatible?
Mr. Rossotti. Absolutely.
Chairwoman Johnson. Okay.
Mr. Rossotti. The mainframe--in fact, that's one of the
places that, in the Year 2000, we do get some long-term
benefit. That's actually one of the bigger pieces of the
investment that we are making and that will absolutely be in
the direction that we want to go because we'll be boiling the
computing centers down to the two main computing centers which
is where we want to be in the long-term blueprint.
Chairwoman Johnson. Now, one of the really big problems
that came to light in recent years and resulted in various
provisions in the Taxpayers Bill of Rights and various
requirements that this committee has placed on the IRS for
reports of one kind of another was the evidence of uneven
behavior among IRS agents and some agents using a very
authoritarian and abusive technique.
You have put a good deal of money in this new budget for
training. What do you hope to accomplish? Who is going to get
trained? What kind of training are they going to get? Is this
only sort of top-level management to make your new management
program work?
Mr. Rossotti. Oh, no, actually, that's the least of it. I
mean, the basic focus of the training that we're proposing in
1999 in this budget--is for the front-line people that are
dealing with taxpayers. I've spent many, many hours talking to
front-line employees, both on video conferences and around the
country, and we recently had a session where we actually had a
process to survey front-line workers who are dealing with
taxpayers, saying what are the things that you think you need
most in order to do a better job.
And the number one thing--actually, there were two that
were tied--technology was one which we already noted. The other
one was better training and, in particular, simply better
training in some of the basics, like the tax law changes. I
mean, if there's going to be 800 tax law changes, they say we
feel very uncomfortable when taxpayers are pressing us for an
answer and we don't get enough training in what has happened in
the tax law, we don't get necessarily up-to-date materials. So,
when we're talking about this training in Fiscal Year 1999,
we're talking about very practical training for front-line
employees who are going to be working with taxpayers, either
over the phone or in person.
Chairwoman Johnson. Yes. Now, this year you've separated
out the cost of administering the Earned Income Tax Credit and
it's going to cost you, at least you're requesting $143 million
for EITC administration next year. What is that cost per
return?
Mr. Rossotti. Cost per return? That's a number that I don't
have--I'll have to get back to you on that.
[The following was subsequently received:]
Question. What is the cost per return for administering the
EITC initiative?
Answer. The IRS is currently developing an Activity Based
Costing that will provide the cost per return specifically for
administering the operational portion of the EITC Initiative.
This costing will cover the cost of processing the return,
issuing notices and/or refunds, and any compliance actions. The
EITC Initiative Plan includes direct work (processing of
return, issuing notices, and compliance actions) as well as
items such as taxpayer education and outreach efforts, research
project funding, postage and printing, and EITC systems
development that are not traditionally captured in cost per
return calculations.
Chairwoman Johnson. I hope you will get back to us----
Mr. Rossotti. I will.
Chairwoman Johnson [continuing]. I think it's very useful
to have that----
Mr. Rossotti. I will.
Chairwoman Johnson. I also will be very interested to know
what the fraud level is in this round of returns, since we've
made a number of changes----
Mr. Rossotti. Right.
Chairwoman Johnson [continuing]. So, I won't go into that
now but I do want to know the cost per return and I think the
committee wants to know promptly what your experience is as the
season closes in the area of fraud.
[The following was subsequently received:]
Question. What is the fraud level this year on EITC
returns?
Answer. The IRS undertook a study of EITC which involved a
statistically valid random sample of EITC returns filed
throughout the 1995 filing season. The study results showed
that EITC claims filed during the 1995 filing season contained
errors that required adjustments both upward and downward. The
final study results provided a baseline from which to analyze
further studies of the effectiveness of our EITC administrative
efforts. There are several programs which work with a portion
of the EITC returns to determine the correctness of those
returns. The largest programs being the math error program
which looks for systemic problems, missing or invalid SSNs, and
the examination program where questionable returns may be
audited to determine the correctness of the EITC claims. A
study on EITC for the 1998 filing season is currently in
process. A fully developed and reviewed report including an
EITC level of compliance measurement is expected to be
available in 1999.
Chairwoman Johnson. Let me turn to Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairwoman. Commissioner, over
the past few years your budget has not been as high as--the
amount of money allocated in the President's budget for the
coming year and I was just wondering if, as a result of that,
there any activities that you were unable to complete or to be
involved in as a result of a reduced budget?
Mr. Rossotti. Well, Mr. Coyne, actually one of the most
important was that, in the last two fiscal years--meaning
Fiscal Year 1998 and Fiscal Year 1997--almost all of the money
that would have gone to any investment in technology was
deferred, was eliminated. I mean, it was all spent. It was
used--it's being used for the Year 2000 conversion but, of
course, that's pretty much just something you have to do in
order to stay even. So, I think in terms of technology we had a
deficit to begin with and it got deeper as a result of this.
The training was another major area--you know, we used all
available resources to put people on phones and continue to do
the compliance programs but, as reflected in the comments of
the employees, the training was cut.
I think those are probably two of the more significant
areas. The other thing that has happened is in some of the
compliance areas--and I'm trying to do more studies of this--
while the compliance programs have been maintained, there's a
certain unevenness that's developed, especially geographically
and across different segments of the population, because of the
fact that where people came off the payroll, they came off
where, you know, attrition took place or where they would
accept buyouts which generally was in the higher-growth
economies geographically speaking. Whereas in some of the
economies that were--segments of the country that didn't have
as tight a labor market, people didn't take the buyouts, didn't
``attrit.'' So, we ended up with a sort of uneven balance of
compliance resources.
So, these are some of the things that have happened over
the last three years as a result of the constraint of the
budget. Now, I will say this was before I got here that there
were some very difficult and painful reorganizations that took
place that did cut some administrative overhead which I think
was an appropriate thing to do and which I think could be
justly characterized as an ``efficiency gain'' rather than a
loss of anything that was necessary. So, there were some hard
decisions made by my predecessor and others to do that. But,
that was not all of it; there were certainly losses--certainly,
the technology, the training, and some of the balance of where
the people are.
Mr. Coyne. Did that transfer into a not-so-ideal situation
relative to taxpayer services?
Mr. Rossotti. Well, it would have except that, of course,
one of the things we've done in the last two years is to
dramatically increase the emphasis on taxpayer service. So, I
think, you know, the balance was struck to be able to try to
improve taxpayer service, even in the face of these other
constraints.
Mr. Coyne. Could you give us some sense of what the audit
rate might be under the proposed budget that you brought before
us today?
Mr. Rossotti. I don't have that number with me but we can
get that for you.
[The following was subsequently received:]
What is the audit rate under the proposed FY 1999 budget?
The audit coverage figure is 1.17%.
Mr. Coyne. All right. Thank you very much.
Mr. Rossotti. Thank you.
Chairwoman Johnson. Mr. Portman.
Mr. Portman. Thank you, Madam Chair, and thank you for your
testimony today, Commissioner. We have little time and I have a
lot of questions so I'll try to be as brief as I can. I would
appreciate your answers being to the point, too, as they always
are.
First of all, congratulations on what seems to be a
relatively successful and smooth filing season. Following along
with Mr. Coyne's question with regard to the audit rates and so
on, I just have a general question for you which is, the degree
to which the shift to customer service, which I generally
support as you know, is enough to offset the kind of revenue
that the government is likely to lose from the audit rate
which--when you get back to Mr. Coyne--will probably be
revealed to be a lower percentage.
And, how do you deal with that? And how do you feel about
that? Do you think that there's going to be a payoff from
improved customer service that will counter that?
Mr. Rossotti. Yes, well, let me say that that is a complex
question and obviously, you know, we don't have quantitatively,
verifiable data to say what is going to happen.
I think that if you look at what was happening a few years
ago, you know, when the access rates were low and the service
was much lower than it is now, I mean you really had an
untenable situation.
As I saw it, you were sending out notices to people telling
them they owed money or that they had to do certain things to
comply and then if they had a question about it, they wouldn't
be able to get through on the phone which, to me, is something
that is really not a tolerable situation. One has to believe--
even though we can't prove it at this point quantitatively--
that that's going to hurt compliance.
I think that there have been some things that the IRS has
done to try to offset the impact of the way that resources have
been allocated. For example, the math error capability that was
added which allows certain kinds of checks to be made in the
up-front processing of tax returns--to check social security
numbers, for example--used to be done under the audit program.
It's now built in as part of processing tax returns. I think
there was something like a half a million returns that were
done under the audit program a couple of years ago that have
been built in to processing.
As when I said my original testimony to this committee the
last time, is I think if we can get the money for training and
technology, we can do what a lot of private sector companies
do--we can keep our workforce stable, we can improve the
quality of the way it works and still be able to achieve our
customer service goals and our compliance goals and, as the
Chairwoman noted, increase the volume. I really think we can do
that if we can get the investment money and if we can get the
time to make those things happen. And I think already there's
been some signs of that happening.
Mr. Portman. Let me ask you a specific compliance question.
This is one that's always troubled me and I think a lot of
members of the committee and that is that the Office of Appeals
generally rejects about two-thirds of the revenue agents' post-
audit request for additional taxes and I just wondered if you
can comment on that briefly. Does this suggest that revenue
agents are seeking unreasonable high amounts? Does this suggest
they're trying to make themselves look good in front of their
superiors? And why would there be a two-thirds rejection rate
by the Office of Appeals?
Mr. Rossotti. Well, that's a very good question and I've
asked that question. I honestly don't know that we know exactly
what the answer is but I will tell you one thing that we are
doing that has been suggested by a number of people that may
have some impact on this.
As you know, we're in the process of changing the entire
measurement system for----
Mr. Portman. The measurements of performance that there may
be some reason that----
Mr. Rossotti. It might be. I mean, no one can prove that
but--we're definitely changing--the measurement system so that
we will not be measuring it in such a way that it would
potentially give somebody encouragement to just build up
assessments and I don't know that that has actually happened--
Mr. Portman. I would just suggest, as we're talking about
compliance and how to make compliance more efficient with
limited resources, that may be one area where one could look
closely and talk about more targeted use of the resources.
Quickly, on Year 2000--you talked a lot about it today, I
know you're very concerned about it, and I guess the question I
would have and--not to be negative here--but what are your
contingency plans? What if you don't become compliant by the
Year 2000? Are you going to be able to revert back to some
equipment that is not compliant in terms of the type of
equipment or the type of application? Do you have a contingency
plan, a back-up plan if we're not there?
Mr. Rossotti. Reverting to old equipment doesn't do it
because the old equipment isn't compliant. What we are doing is
we are trying to very specifically identify our risks and
figure out those places where we need to have--and where it's
feasible to have--a contingency plan. That's where we're
putting our emphasis on contingency planning and I'll give you
an example.
One of the major programs that Madam Chairman mentioned was
the consolidation of the mainframe computers at the two sites.
In that case, that's a very, very big program, that obviously
has a lot of risk to it. The target is to get all of the 10
service centers converted to 2 computing centers before the
year 2000.
However, we do have a contingency plan. We don't need to
absolutely do that. The contingency plan would be to upgrade
some of the computers in the sites that they're already in, and
we're preparing that kind of a contingency plan. But----
Mr. Portman. At what point in time do you make that
determination?
Mr. Rossotti. Pardon me?
Mr. Portman. At what point in time do you decide that you
need to revert to the contingency plan?
Mr. Rossotti. We're deciding these--every month. I mean, I
personally have a meeting every month with a high-level group
and we go over these kinds of things on each risk-area every
month. We made this decision, for example, just this last
month, related to these mainframes.
Mr. Portman. I have additional questions on EITC and maybe
we'll have time at the end of the session. Thank you.
Chairwoman Johnson. Mr. Tanner.
Mr. Tanner. Thank you, Madam Chairman. I want to follow up
on the Year 2000, if I could, Commissioner. And thank you for
being here today.
I am not as concerned, I guess, about the fact that you all
will do, I think, what you need to do to get your computers
compliant with whatever technology is available for the purpose
intended.
At the moment, what about all of the people who communicate
with you and who may not be in the same position? That's, I
think, one of jobs facing not only the Congress in terms of
education and public awareness but also the service as well.
And so, do your contingency plans--could you briefly describe
where we are with that? Thank you.
Mr. Rossotti. Yes, that is, in fact, a very good point.
When we talk about Year 2000, it's not just converting our own
application programs. There's a whole series of areas that we
include under our management program. And one of them is the
very area you're talking about--we call it ``external trading
partners.'' These are people we exchange data with--like the
States, the people that send us information returns. We have a
whole office of people who are tracking those people,
especially the major ones. I don't have the exact number here
but I think there's about 67 or some number like that that's
the top priority ones and then we've got the next priority
ones. And we have a whole program to communicate with them and
actually to test at the appropriate time the ability to
interchange data with them.
So, I mean, it is a focus area. I will say that based on
the reports I've gotten right now for at least the top-priority
ones, that is not one of the ones that is in the most cautious
status. We seem to be doing pretty well at least for our major
trading partners.
Mr. Tanner. Thank you, Madam Chairman, I yield back.
Chairwoman Johnson. Congresswoman Thurman.
Mrs. Thurman. Thank you, Madam Chairman. First of all, I
want to take a few moments just to say that in the short period
of time that I've been on this committee, we've asked a lot of
questions of the IRS in bringing forth information, letting us
know how you do communicate with our constituents. Certainly
what I think you've brought back to us today says that you have
done a much better outreach program than I think I would have
anticipated in the two years that I've been here and been
listening to some of this. So, first of all, I want to
compliment you on that fact. And I want to compliment you
because it's an issue that I raised several months ago; and
that is the outreach you've done with your front-line people.
Those are the people that our offices are talking to, those are
the people that we have to go to to get our questions answered,
and certainly those are the people that I think are going to
need to have the information to best provide for the taxpayers
out there. So, I compliment you on recognizing that that front
line is an extremely important part of this.
In keeping with that and in the information that I've
received over the last couple of years, the EITC and small
business seem to be the two areas that we've had the hardest
time in compliance, certainly from the electronic filing,
possibility of the 16-hour telephone service, the kinds of
things that you've done to outreach.
What other kinds of things are you doing or do you
anticipate doing to try to bring--I think the number that I
heard for sole proprietors, small businesses, is about 40
percent. If you bring in some cash businesses, it might go up
as high as 60 percent. EITC, I think, was at one time 25
percent. Is it now down to about 17 percent? Is that
somewhere----
Mr. Rossotti. Well, I don't think we're----
Mrs. Thurman [continuing]. Around those numbers?
Mr. Rossotti. We don't have up-to-date numbers. We're doing
a study to find that out. But I think that, you know, it is
interesting that you put both of those together.
In these areas where there's noncompliance, I think that
the strategy that we're following right now with EITC is
generally the strategy we want to follow with all non-compliant
areas, which is to have a strong emphasis on preventing the
problem in the first place, by such things as what we did with
EITC; mailing out notices to people that have previously
claimed an EITC they weren't entitled to and tell them, look,
you really shouldn't be claiming this or, if you are, you need
to provide us with better information. Get the problem resolved
upfront. Have education, outreach kinds of activities. Educate
the practitioners.
Then, at the back end, you also need to apply your
resources to identify those people that, continue to non-comply
even after that, and that's why we have these various detection
programs, to try to detect and, where possible, prevent the
refunds from going out.
I think with all other areas, whether it be small business
or elsewhere, that most people, given the right services and
the right kinds of education, will comply if they know they're
supposed to and if they understand that really is a mandatory
requirement. I think better working with some of the small
business groups; better support for people that are starting up
small businesses--which is something I knew something about in
my previous life--those kinds of things will, I think, help.
That's one of the reasons in the long term that we need to
organize the IRS into units that are dedicated to understanding
those particular kinds of taxpayers. If we get to the point
where we have a small business unit that basically services all
the taxpayers, they can, then, get to be very, very
knowledgeable about all the specific problems--the specific
problems for each industry whether it be the construction
industry, the software industry, and all the different
industries and work with those associations; work with those
people, and figure out what do we need to do to help these
people understand their obligations; keep them in compliance,
and limit our enforcement resources where they should be to
those people who really just aren't willing to comply after
we've done that. Now, that's, the long-term strategy that we
want to go to, and we're pursuing that this year with EITC as
much as we can.
Mrs. Thurman. As you see and start to pull that information
and, particularly, as you've kind of singled because you have a
special account to work on EITC, do you potentially see
something that people complain about the most--and that is the
complexity of the forms, the kinds of things that we hear
about--do you see that as maybe an offspring of this to the
possibility that we'll see some of the paper reduction in these
kinds of filings for these particular folks?
Mr. Rossotti. Well, I hope that as we learn more----
Mrs. Thurman. Beyond what we're doing up here to add 800
pages in new tax laws.
Mr. Rossotti. I think there's potential for that in the
sense that if you have people that are working with a
particular group of taxpayers and they see problems--and this
is what we're trying to do with the Taxpayer Advocate Network--
they can come back and they can recommend not just specific
cases but how we can systematically improve the system, and one
way, of course, is to redesign the forms; to have better
education. We are going to be doing that as part of our
customer services initiative improving some of the
publications. Of course, there are limits based on what the tax
law says.
Mrs. Thurman. I acknowledge that. [Laughter.]
Mr. Rossotti. But I do think there's potential to improve
that, yes.
Mrs. Thurman. Thank you.
Chairwoman Johnson. Mr. Rossotti, I'd like to proceed with
a couple of more questions myself; I know Mr. Portman does and
if my colleagues have other questions, we'll have a short
additional round.
There are two things that I want to approach. First of all,
in your plans for customer service, you don't mention--you
don't advance any interest in reorganizing your very front line
personnel. We had a very, very interesting hearing at which the
taxpayer advocates testified, and they were very high on the
special tax days that the agency has been doing, the Saturday
days, the problem-solving days, but they made a very important
point: part of the success of those days was due to the fact
that everyone on the team was there, and they could take the
taxpayer's problems and all the people they would have to run
it through and ask questions of were there, so they could solve
it. Now, I thought--and we discussed this at some length--I
thought that was a very important bit of testimony, because--
and that kind of reorganization needs to be thought through at
the local level if you're really going to be a problem solving
agency and not one that takes in the problem; runs through a
million bureaucratic hoops, and hopes that at the end it comes
out solved in a timely fashion. That kind of front line
reorganization, I think, is extremely important and is what has
made the difference in the private sector.
Mr. Rossotti. I couldn't agree with you more, Madame
Chairman. If you look at this organization chart of the whole
IRS, by the time you get down to the front line employees,
they're divided up into these, what we call, stovepipes,
functional areas, that are then under quite of few layers of
management.
Chairwoman Johnson. Yes, I do think the idea of
reorganizing according to the subject matter expertise is very
good. This is way below that, and it's probably not something
that you can do entirely from the top. It's something that
they--each office is going to have to figure out how to do, but
just Saturday problem-solving days isn't the only time you need
the whole team at the table.
Mr. Rossotti. No, I think that the concept that I've
proposed organizing is not just strictly at the top. I think
that when we get to the next level of detail which we're
currently studying, I think we will find that--the whole point
is to deliver what the customer needs, not what is organized
according to the IRS.
Chairwoman Johnson. Well, I thought that was the most
significant comment that was made by the advocates about what
they had learned from the problem-solving days, and I'll be
interested to watch to see if that's----
Mr. Rossotti. Well, I would agree with that very, very
much, and if you diagram the way that the current IRS
organization works, it makes it very difficult to do that
except on an exceptional basis.
Chairwoman Johnson. There is one area in which I have a
significant question about how you're going to--about your
budget decisions. First of all, it is truly remarkable, the
increase in electronic filing, telefiling--electronic filing up
28 percent; telefiling up 68 percent; some other statistics
along those lines that are very impressive. From past hearings,
while we couldn't exactly agree on how much is saved, there was
general agreement that an electronically filed tax return is
far cheaper for the agency to process than a paper filed tax
return. So, clearly, this level of increase of activity does
save the agency some money. Consequently, I find it really hard
to understand why you're going to continue to function with
only 1,682 cross checkers. Now, you used to have 3,322
employees who cross checked interest and dividends reported on
individual tax returns, and you used to collect $3.5 billion
just from cross checking. Now, the agency now has 1,600 people,
so it has about half the number of employees, but it's only
collecting about one-third of the amount of revenue. It's
collecting--your prediction next year is that you will collect
$1.2 billion from this activity as opposed to $3.5 billion.
Now, first of all, half of the employees ought to be able
to collect at least half the money; that's a problem. Secondly,
this is clearly an area in which personnel matter. I don't know
how you cross check if you don't have the people to do it. It
also is clearly an area of high yield. So, there are areas in
which outside of the whole ``we need more money'' issue--and I
agree you need more money, and I'll work with you to get more
money--nonetheless, are you deploying your resources in the
most powerful way when you're clearly reducing people power
demands in some areas, and you're not pumping them up in an
area where there is an obvious big bang payoff for the
taxpayers?
Mr. Rossotti. Well, I'd like to be able to get back to you,
perhaps, in writing----
Chairwoman Johnson. Yes, I'd appreciate that.
[The following was subsequently received:]
Question: The IRS cut about half of the employees from the
document matching program but is only collecting about one
third of the revenue. Why aren't employees being moved from
areas where demand is reducing to the document matching
programs where there is a big payoff?
Answer: IRS is constantly trying to balance scarce
resources while prioritizing its program objectives. In the
area of our document matching program, we made a program
decision to shift some of the resources originally directed
towards document matching towards increasing the Service's
ability to respond to the more taxpayer telephone inquiries
during the past filing season. Although the document matching
program's resources were reduced, we believe that our shift
significantly enhanced our educational efforts through greater
contact with taxpayers and, indirectly may have had a
beneficial impact upon taxpayers to avoid future contacts
within the document matching program.
Mr. Rossotti. But let me just say that one of the issues
here is that the total staffing in the IRS, if you look over
the last 3 years, has gone down by 10,000 people. The number of
returns processed has gone up by 8 percent in total which is
more returns, by far, than--in terms of an increase--than we've
saved in terms of how many have gone up through electronic
filing, because even though our filing's gone up 25 percent,
it's 25 percent of a small base. The whole economy has grown
enough to add that many returns, so it's certainly more
efficient relatively but in terms of absolute numbers of
people, we've got to process more returns. In terms of the
specific allocation of people to that specific function in
terms of document matching, though, I don't have those numbers
in my mind, so I could get back to you in writing?
Chairwoman Johnson. Yes, I would like you to get back to
me.
Mr. Rossotti. I will.
Chairwoman Johnson. In the same sort of context, I was very
distressed by a report in the newspaper that we did verify and
your people said was accurate--this is in February of this
year; it's now March, so this is a recent report, and this Ms.
Marvel didn't name any officers but said there's been
historically a tendency on the part of some, not all, of the
revenue officers who contact taxpayers to start that dialogue
with an enormous chip on their institutional shoulder. This
creates a level of acrimony and a level of perception of
persecution that is really not what the system should convey or
intends to convey.
Now, you have mentioned that you are very interested in
training, and I know from talking with you in other instances
that you fully understand that this training has got to correct
this kind of problem, but I think this also goes to the problem
that Mr. Portman raised of the number of revenue agent
recommendations that are actually rejected on appeal. I have no
idea how many are paid that should not have been paid just
because people can't tolerate the process of or front the money
of an appeal. I think we really do have to be very aggressive
about training, and I think when we do that we're going to save
some money in some other places, and I would like you to get to
me on the cross checkers, because I think that's one area that
we need to look at as we move through this budget process.
Mr. Rossotti. On the training, I think that the whole
business that we're talking about is how do we convert the
whole agency, to an agency that says, ``Look, our job here is
to assume the taxpayers want to comply; we want to help them
comply, and then if they don't, then, and only then, do we
apply the more stringent kinds of enforcement tools.'' That is
a big change, okay, and it involves more than one thing; I've
laid out a number. One of them is, of course, the measurement
issue; another one is the training, and it is somewhat
technical training, but it's also some of the practices that
you mentioned about how you go about doing an interview. In one
of our programs that we're working on, we have one of the
people working on specifically that issue with respect to
collections about how do we retrain or restructure some of the
interviewing process for revenue officers, and it's obvious
that there are opportunities to improve in that area. It's just
that when you have that many people, it takes a little while to
get it done, but I am very encouraged by the response I've
gotten from the front line employees. I really think that
people are ready to change, and they want to make these kinds
of changes. They're asking for help in the form of training and
other kinds of tools.
Chairwoman Johnson. I appreciate that, and for those who
are listening--and there always are some that are interested
enough in what we're doing to listen--I do affirm my
congratulations to you and the people who work in the IRS and
the tremendous effort you've made in the last year to respond
to the concerns that have been raised publicly and the many,
many, many changes that have been made to make the agency more
efficient and more customer friendly and more responsive as a
customer service bureau.
There are problems and that's why I wanted to be sure that
the record did contain a recent complaint, because it's only if
people keep talking to all of us--to you as well as to us--that
we can make sure that the statistics not only represent
progress but that we are creating a different environment for
our employees; a different way of serving the public, and a
different style of collecting taxes, and I think it will take
awhile to make sure that the statistics represent reform at the
kind of human level that we all know is important and are
committed to achieving.
I'd like to yield to Mr. Portman.
Mr. Portman. I thank the Chair for the second round, and
I'd like to focus a little on the earned income tax credit, if
I could. This is something that troubles, again, a lot of us on
this committee because of the mispayments. I think this year
we're estimating they'll be, what, about $5.4 billion worth of
mispayments which is well over half of your budget request
today, and we continue to see, as Ms. Thurman mentioned, real
compliance problems there.
I guess I would have a couple of comments: one, is having
looked at the GAO statement today--I know we're going to hear
from Lynda in a moment--but on page 41, it talks about the fact
that, at least according to GAO, the IRS is not using the 1995
study the IRS undertook which showed that there was about a 26
percent error rate; about 26 percent of the dollars were being
misclaimed, and I wonder if you could respond to that first to
be sure that that's not the case; that, in fact, you are using
that as part of your baseline?
And then I want to talk a little about your compliance
efforts. You've just asked for $143 million for the second year
of a 5-year compliance effort. If you're not using that 1995
study as a baseline, that would obviously concern me, and
that's the implication from GAO's testimony today.
And then I want to talk to you a little about what you are
doing in your study.
Mr. Rossotti. Well, first of all, I wanted to bring my
colleague here, Mr. Dalrymple, who's more or less directly in
charge of this. On the matter of the baseline--and John will
elaborate on this--but I think that it's not that it's not
being used, it's just that what we're trying to do is to come
up with----a preliminary kind of an informal study that was
done by the Criminal Investigation Division and not by the
people that normally do compliance studies; research that is
more statistically sound. So, it is a useful study, but what
we're trying to do is, since we have this 5-year program, to
create a more reliable and more statistically-based kind of
baseline which we will then use every year.
Let me just ask John to talk about that and also the other
issue you talked about, about what we're doing in compliance
this year.
Mr. Portman. OK.
Mr. Dalrymple. Actually, I'll reiterate part of what----
Mr. Portman. My time is limited, John, as you know.
Mr. Dalrymple. Yes, okay. I won't reiterate too much. The
CID study that we did, which we shared with this committee last
year, actually took place prior to all of the changes that
Congress made and allowed us to implement such as math error
changes for invalid and missing social security numbers, et
cetera, which we expect would have a substantial impact on
overclaim rates.
Mr. Portman. Moving it from, what, about 26 percent to 21
percent?
Mr. Dalrymple. Well, we're really not sure, actually, I
mean, that's really the problem. So, that study, the beauty of
it was that it pointed up a significant problem that we had;
allowed us to create some additional screens in our screening
processes for overclaims and identify schemes, and we followed
that up with another study the following year, but both those
studies predate the changes in the law. So, what we're doing
this year is a very precise research study which we believe
will show exactly what the compliance rate is this year, and we
will follow that up each year of the compliance initiative, or
the EITC Initiative, with another compliance study, and we'll
be able to tell from the baseline this year what impact steps
we're taking this year have had.
Mr. Portman. So, the funds which were appropriated last
year are being used, in part, primarily for a benchmark study
that would then be used going forward to see whether your
compliance efforts are successful?
Mr. Dalrymple. Right. It's not really a huge part of the
$138 million, but it is a study that's being done this year.
It's going to affect about 2,500 tax returns.
Mr. Portman. And when is that study due?
Mr. Dalrymple. That study is being conducted right now. We
expect to have preliminary results in time for us to affect
next filing season, and I'll have to get back to you with the
exact date that we expect the study results.
Mr. Portman. Another point GAO makes--which I know you're
very well aware of--was your efforts this year with regard to
increased information, public information, and so on, probably
won't be affected because, yes, these folks tend to file
earlier because they're getting a refund, and so when you say
for next filing season, I guess that would mean sometime during
this calendar year.
Mr. Dalrymple. Yes, it would, and, actually, it's
interesting because we did quite a bit of work early this year
to try to ensure that folks knew about the credit. For example,
we sent information letters to 100 of the top employers most
likely to employ taxpayers who would be eligible. We sent 6
million EITC recipients informing them of the advanced EITC
credit. We sent a notice to approximately 2.5 million taxpayers
who did not claim the credit but we thought were eligible, and
took other measures. And our EITC filings are up dramatically
this year, and the total rate of examinations is actually down,
so we think we hit the right mark there. In addition to that,
we've put in a substantial number of new screens, and we've
done substantial work, also, in the compliance arena which I'd
be more than happy to supply you with.
Mr. Portman. Is one of your major problems social security
numbers?
Mr. Dalrymple. That is one of the major areas that we're
looking at. And the math error legislation that you helped pass
has been a significant help to us.
Mr. Portman. What does it cost you to check social security
numbers with paper returns?
Mr. Dalrymple. I have to get back to you. I don't know that
off the top of my head.
Mr. Portman. Just one point I would make--and I appreciate
the indulgence of the subcommittee--is that I've heard numbers
as high as $60, $70 to check the social security numbers. If
that's true, then there certainly would be an advantage to move
to electronic filing rather than the paper returns and I wonder
whether there are efforts being undertaken on the electronic
side to encourage electronic filing?
Mr. Dalrymple. Yes, there are, to answer that question. We
are highly encouraging that, and, of course, there's huge
advantages to us there because we check them up front and then
reject them out of the system before they ever come in, so we
encourage that highly, and, in fact----
Mr. Portman. They need to be screened.
Mr. Dalrymple [continuing]. Our trading partners----
Mr. Portman. But at no cost. Well, I guess, if you could
get back to me on the social security issue, specifically, and
any detail you could give us as to what you plan to undertake
with this money, you started to outline it in general terms--I
think we're out of time now--and then the more general question
I have is whether you're going to give us a benchmark that we
can then use for policy purposes here within the year? It would
be very helpful for us.
Mr. Dalrymple. I'll get you those dates.
[The following was subsequently received:]
Question: What does it cost to check social security
numbers with paper returns for EITC compliance?
Answer. Using 1996 data, the average cost to check social
security number per paper return claiming EITC is twenty-two
cents. This takes into account all processing and validation
costs up to the point it becomes necessary to issue a math
error notice.
Question: What does the IRS plant to do with the additional
funding requested for the EITC compliance initiative?
Answer. The IRS plans to expand on the FY 1998 EITC
inititive in FY 1999. The 1998 initiative includes plans to
expand customer service efforts with dedicated toll-free
telephone assistance, increase community based tax preparation
assistance sites, and develop a marketing and educational
campaign. The IRS will also expand compliance research efforts.
Enhanced computer capabilities will allow the IRS to identify
and select questionable EITC claims prior to refund issuance.
Funds also are included to reimburse State vital statistics
offices, through the Social Security Administration, for
expanded data associated with social security numbers. Finally,
expanded examination and criminal investigation staff in the
district office and service centers will assist our efforts to
address questionable or potential EITC fraud.
Question: Is the IRS going to provide a benchmark for EITC
compliance that Congress can use for policy purposes within the
year?
Answer. A study on EITC for the 1998 filing season is
currently in process. The goal of the study is to establish a
baseline for measuring EITC compliance. A fully developed and
reviewed report including an EITC level of compliance
measurement is expected to be available in 1999.
Mr. Portman. Thank you. Thank you, Madame Chair.
Chairwoman Johnson. In addition to that, you'll get the
figure that I asked the commissioner for earlier, the cost per
filing.
Mr. Dalrymple. Right. I have that also.
[The following information was received:]
Question: What is the cost per return for administering the
EITC initiative?
Answer. The IRS is currently developing an Activity Based
Costing that will provide the cost per return specifically for
administering the operational portion of the EITC Initiative.
This costing will cover the cost of processing the return,
issuing notices and/or refunds, and any compliance actions. The
EITC Initiative Plan includes direct work (processing of
return, issuing notices, and compliance actions) as well as
items such as taxpayer education and outreach efforts, research
project funding, postage and printing, and EITC systems
development that are not traditionally captured in cost per
return calculations.
Chairwoman Johnson. We'd like to have that report as soon
as you conclude it, that you're doing now, your oversight
report.
Mr. Dalrymple. Okay.
[The following information was received:]
Question: What is the date the study on current year EITC
returns will be available?
Answer. The Compliance Research study on EITC for the 1998
filing season is currently in process. The goal is to establish
a baseline with the data. The steps of the study include the
selection of returns, examinations of the returns, and analysis
of the information. A fully developed and reviewed report,
including an ``EITC level of compliance'' measurement, is
expected to be available in 1999.
Chairwoman Johnson. Mr. Coyne.
Mr. Coyne. Thank you, Madame Chairwoman. Commissioner, are
there any results in yet from the EITC awareness day that was
conducted this past Saturday in 150 sites across the country?
Mr. Rossotti. We are going to collect the comments from the
taxpayers, but we don't have them in yet; it was just this
Saturday.
Mr. Coyne. Nothing you could share with the committee at
this point?
Mr. Rossotti. Sure.
Mr. Coyne. The current study that's being done, the EITC
study, are you going ask that it distinguish between errors and
fraud?
Mr. Dalrymple. Well, we're actually looking at what we
consider to be overclaim rates. It is extremely difficult in
these scenarios--I mean, if we see some really abusive things
here, we will make referrals out of this process, but it is a
research study, and what we're looking for is, in general,
overclaim rates. And it's very difficult to determine
willfulness in those kind of situations. Now, it's not to say
we may not find some really abusive situations which we would
then refer to our criminal investigation units, and if we do
that, we consider that there was, potentially, some fraud
involved.
Mr. Coyne. Well, don't you think that it would be important
to go the extra mile for people who do make innocent errors
like we all do on our tax returns; to distinguish that between
fraud and innocent errors?
Mr. Dalrymple. Well, that's how we do distinguish them,
Congressman, I'm sorry. If we see badges of fraud in this
study, we will know how many--it's a statistically valid
study--and we will send those on to our criminal investigation
unit, so, to the extent that we see that, we will be pursuing
it.
Mr. Coyne. So, the answer to the question, will we be able
to distinguish between innocent errors and fraud, is yes?
Mr. Dalrymple. A qualified yes. Innocent errors--I mean,
there are all kinds of errors, and whether it reaches the
threshold for fraud and the definition for fraud is another
issue. Does that make sense?
Mr. Coyne. Yes. Thank you.
Chairwoman Johnson. If there are no further questions?
Thank you, Commissioner Rossotti. We appreciate your testimony,
and we look forward to working with you on the budget issues.
Mr. Rossotti. Thank you very much, Madame Chairwoman.
Chairwoman Johnson. I'd like to call next, Lynda Willis,
the Director of the Tax Policy and Administration Issues at
USGAO, General Accounting Office. Ms. Willis, welcome to you
and your staff.
STATEMENT OF LYNDA WILLIS, DIRECTOR, TAX POLICY ADMINISTRATION
ISSUES, UNITED STATE GENERAL ACCOUNTING OFFICE
Ms. Willis. Thank you, Madame Chairman. I'm very pleased to
be here today and with your permission, I'll ask that my
written statement be put in the record in its entirety, and
I'll just very quickly hit the highlights of what we have to
say today.
Chairwoman Johnson. Thank you. So, ordered.
Ms. Willis. I have with me, today, my associate, Jim White,
and also the Assistant Director responsible for our technology
modernization work, Randy Hite.
The most critical issue IRS faces this year and next is the
need to make its computer systems year 2000 compliant. The goal
is to implement all year 2000 efforts by January of 1999 to
allow time for testing, and with the IRS, as you are all aware,
it is very important to have enough time to test the new
systems during a filing season before we go into the year 2000.
IRS' latest cost estimates indicate that additional funds will
be needed for Fiscal Year 1998 beyond the amount already
available. IRS is also refining its budget estimates for Fiscal
Year 1999 in light of more current information.
For Fiscal Year 1999, the administration is also requesting
an additional $323 million for IRS' information technology
investments account. Combined with the $325 million
appropriated for 1998, that request would increase the
account's total to $648 million. Because we believe that $246.5
million of the request has not been justified on the basis of
analytical data or derived using a verifiable estimating
method, we believe that Congress should consider reducing the
administration's request by that amount.
The administration's request also includes $103 million to
enhance customer service. IRS plans, among other things, to
provide better telephone service; improve customer service
training, as you discussed; and strengthen the Taxpayer
Advocates Office. We believe all of these areas are critical to
good customer service and need improvement.
Each year IRS submits detailed budget estimates to support
the administration's budget request. In our opinion, several
factors limit the utility of the budget estimates for oversight
purposes. For example, the estimates do not provide the kind of
information needed to determine how much of the
administration's request is for taxpayer assistance as opposed
to enforcement. One aspect of IRS' budget estimates that has
improved over the years involves the use of performance
measures, however there is still much work to be done in that
area and many challenges to overcome. Both of these things are
very critical to IRS' successful implementation of the
Government Performance and Results Act.
Interim data on the 1998 filing season indicate that IRS is
continuing to make progress in two very important areas:
electronic filing and the ability of taxpayers to reach IRS by
telephone. In addition, although it is too soon to assess the
results of the IRS initiative to reduce earned income credit
non-compliance, we do have observations on two aspects of the
initiative. First, some of the expanded assistance will
probably be too late to help many claimants, and, second--as
Congressman Portman noted--the baseline 1995 study, according
to IRS, cannot be used as a baseline. This raises questions as
to whether decisions to develop and fund the initiative were
founded on reliable data. We also question, based on the
information we have from IRS, whether the results of the new
baseline study will be available soon enough to be of any value
to the Congress.
Madame Chairman, those are the highlights of our testimony
today. I'd be happy to answer any questions you may have.
[The prepared statement follows:]
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Chairwoman Johnson. Thank you. I'd like to enlarge on this
issue of the $243 million, was it, that you don't feel is
adequately documented.
Ms. Willis. Let me allow Mr. Hite to answer that question.
Mr. Hite. Madame Chair, the OMB has put forth guidance
directing the agencies as to what they need to do to justify
investments in capital assets. This guidance requires that
these capital assets be justified on the basis of verifiable
data; that the amounts being requested be determined using
formal estimating methods.
Now, in the case of IRS' request this year for its
investment account of $323 million, if you combine that with
the appropriation IRS received last year in the investment
account which was $325 million. That provides $648 million in
the account. Now, the justification that IRS has put forth in
terms of a business case for the first release of the first
phase of the modernization, totals $401.5 million. The
difference has not been justified on the basis of any
verifiable analysis. Therefore, in the absence of that, IRS has
not met the requirements of OMB, and that leads us to our
recommendation that about $247 million not be funded.
Chairwoman Johnson. So, $247 million of the dollars that
they already have for capital investment cannot be justified?
Mr. Hite. Two hundred and forty-six point five million of
what they are asking for this year, out of that $323 million
cannot be justified.
Chairwoman Johnson. That's a very high percentage. What are
the kinds of problems you're seeing? I mean, that seems like a
remarkable statement. What are the failures? What I hear you
saying is that $247 million of $323 million can't be justified
using the guidelines OMB has issued for capital investment.
Mr. Hite. Correct. And the rationale behind the $323
million that's being requested this year is to show a steady
state of funding from prior years. Last year, $325 million was
appropriated, and what we were told by OMB was we'll keep the
request for funding at a steady rate, therefore, it will be
somewhere around $325 million.
Chairwoman Johnson. So, your point is that they just keep
asking for the same amount of money knowing that they're going
to have technology needs, but, actually, they're not spending
it well, because they can't justify it?
Mr. Hite. That's correct. The fact that they're not
spending it well, I wouldn't necessarily agree with, but
they're asking for that steady rate of funding without the
associated justification for that amount of money.
Ms. Willis. Madame Chairman, this is not dissimilar to the
situation we had with this investment account last year when
IRS came in asking for $500 million, and we found that they did
not have good plans justifying what they were going to buy with
that money and what they were going to get in return for it.
Congress cut the $500 million request down to just over $300
million, and that's basically the same amount that they've
asked for this year, but, again, in our opinion, without having
an adequate basis for saying this is how much we need to fund
investments in the account even in the future, recognizing that
they will not be spending this money in the near term if there
are certain requirements on it. In order to know how much
you're even going to need, you need to have a better
justification for the total.
Chairwoman Johnson. Do you mean that while they know they
need to replace a lot of front line computers, they can't tell
you exactly how many nor what kind?
Ms. Willis. Well, now, the front line computers that
they're replacing are being funded under the operations part of
the budget not the investment account. That's all part of the
year 2000 investment, and so none of that money is coming out
of the investment account.
Chairwoman Johnson. Are the mainframes and the centers
coming out of this investment?
Ms. Willis. No, no, that, again, is coming out----
Chairwoman Johnson. Is this all just blueprint stuff?
Ms. Willis. This is all money designed to pay for the
investment that will be driven by the blueprint for
modernization in the future.
Chairwoman Johnson. Is this money actually being spent?
It's just being allocated so that they can build it up, and we
don't have to do it over one budget here?
Ms. Willis. Yes, it's just being placed in a multi-year
type of investment account so that when IRS is in a position--
we hope in a position--and has the disciplined processes in
place to spend the money properly, that this is where they will
go to get the money for the new modernized systems. But how
much money will be needed and when will it be justified are the
open questions.
Mr. Hite. If I could add to that? For Fiscal Year 1999,
from that investment account, IRS is planning to obligate,
roughly, $81 million.
Chairwoman Johnson. Well, since some of this money is
clearly being set aside to meet the future costs of the
blueprint, of implementing the blueprint, and since they're
just now going out for contracting the blueprint, would you
assume that they would be able to be justified--that they would
be able to justify this, all of this money precisely at this
time? It's kind of a question of the overall blueprint plus the
detail of the equipment that's going to achieve those goals.
Can you really expect at this point that they would know all of
that and, therefore, be able to attach specific justification
for equipment to these dollars at this time?
Ms. Willis. Madame Chairman, I think the issue here is that
under OMB guidelines before investment accounts are set up or
money is placed in investment accounts, you need to be far
enough along the process to have a justification for what
you're going to spend that money on. So, no, IRS is not in a
position right now to say how much they're going to need
overall to modernize and when, but before we start
appropriating or allocating money in specific amounts for that,
they do need to be farther down the road in understanding what
they're going to use it for. Right now, it's just kind of going
into a bank account that can be drawn on in the future, and we
don't know what they're going to buy with it.
Chairwoman Johnson. Interesting. Certainly, one of the
problems that we saw in the $4 billion that we've already put
into technology modernization.
Mr. Coyne. Congresswoman Thurman.
Mrs. Thurman. Thank you. Just so I understand it, in that
account that we're talking about, are there any guidelines; are
there any stipulations; is there anything that would prevent
them from spending those dollars or is this just to kind of
gather some money recognizing modernization later on? I mean,
is there anything that covers that?
Ms. Willis. Well, there are certain requirements or fences
that have been placed around the money in terms of IRS having a
systems life cycle, processes in place, and the blueprint
finished, et cetera, but once that basic framework is in place
and the money is released, as I understand it, at this point,
there are no controls around what and how that money will be
spent.
Mr. Hite. One thing I could possibly add to clarify this,
is that the modernization blueprint lays out multiple phases;
and within each phase, it specifies multiple releases of
technology. There are 16 releases in all. What IRS has
justified so far is the first of the 16 releases. Now, these
releases are going to be brought on incrementally; presumably,
they're going to be justified incrementally. Thus far, only
release one has been justified.
Mrs. Thurman. And justified and accepted with the
justification. I'm not sure that I understand all of this.
Mr. Hite. Justified in terms of OMB's requirements for
business case justification--a case where the estimates, or the
monies that you're going to spend for the technology that you
want, are arrived at using formal cost estimating techniques;
where there is a validated cost benefit analysis justifying
those amounts, and the payback--the return on investment from
those amounts are worth making that investment. These are the
type of things that OMB is requiring.
Mrs. Thurman. Okay, so they put some kind of limitation on
what can happen. And you said that's 1 out of 16? Have there
been other ones offered and they just haven't been justified at
this point or----?
Mr. Hite. No.
Mrs. Thurman. No----
Mr. Hite. I'm sorry. There have been no justifications put
forward in terms of a business case for any of the releases
beyond release one.
Mrs. Thurman. Do they have a time period in which they can
do that with that pot of money?
Mr. Hite. We asked that question and right now they have no
time frames for preparing the business cases for the subsequent
releases.
Mrs. Thurman. What did they say back to you when you asked
about that? I mean, not having the opportunity to ask them that
question because they're no longer a witness. What is their
justification to you? I mean, when you talk about this issue.
Do they give you any?
Mr. Hite. Justification in terms of why they haven't
completed?
Mrs. Thurman. Why they have that money? Why they need that
money? I mean, what have they been telling you?
Mr. Hite. We asked IRS how that amount of money was
derived, and they couldn't explain the derivation over and
above the $401.5 million that's justified in that business
case. We asked OMB and OMB's reply was the steady rate of
funding from year to year in the investment account. So, the
presumption is we'll ask for a constant amount of money over a
number of years, so you do not see a lot of peaks and valleys
in the amount of money that's being asked for in the investment
account.
Mrs. Thurman. So, does this kind of go to the issue that we
hear sometimes from Government where if you don't get the money
but when you need it to do modernization or you need to do some
other updating and that kind of stuff, because you haven't
spent that money the year before, so they don't want to give
you any more money, but there's no account for them to use
later on where something might be more expensive? I don't know
if that made a lot of sense.
Ms. Willis. As we have looked at IRS' technology programs
and modernization over the past 10 years, we have not found a
lack of money to be a problem at all. Now, there is the issue
of having money to invest as the projects come up in the
future, but there's also the issue based on history of making
sure that when the money is invested it is invested wisely and
consistent with the blueprint, with the architecture, and done
in a way that will bring the benefits that you expect to get;
and that has not historically happened.
Mrs. Thurman. Are we--and I don't know that you can answer
this--but are we seeing that same problem--I mean as I look at
this year 2000 issue that seems to be getting very close to
us--are we experiencing this in other parts of budgets in other
areas, the same kind of situation?
Ms. Willis. Around the year 2000 budget? Yes, I think
across the board in Government what you're seeing are increases
in the estimates for what it's going to cost to become year
2000 compliant as agencies become more familiar with the
inventory of their systems; what they're going to have to do;
which systems are going to have be replaced; what that's going
to cost. There's also some hypotheses out there that as we get
closer to the time and resources get tighter, that the cost of
contractors will go up. So, the expectation is that the cost
will continue to climb.
Mrs. Thurman. Okay, thank you.
Ms. Willis. And that's not unique to the Federal sector.
Mrs. Thurman. Thank you.
Mr. Coyne [presiding]. Well, I'd like to thank the
panelists, director, for your testimony and call up the next
panel.
The next panel is Joseph Lane, EA, Chair, Government
Relations Committee from the National Association of Enrolled
Agents, and Roger Harris, Federal Taxation Committee, National
Society of Accountants.
Mr. Lane.
STATEMENT OF JOSEPH LANE, NATIONAL ASSOCIATION OF ENROLLED
AGENTS
Mr. Lane. Thank you, Mr. Coyne. We appreciate the
opportunity to visit with the committee again today. If it's
all right, I'll submit our written comments for the record and
I'll just summarize and then be happy to take your questions
afterwards.
We're pleased to be before the committee again this
afternoon, and continue to appreciate the opportunity to come
in annually to review the preparation for the filing season and
the service's performance. We're surveyed our online members in
the last two weeks in preparation for this testimony. We
received scores of comments from our members who, despite the
fact they work 100 hours a week, wanted to comment and have
some input on this hearing today.
The overall impression is that the filing season is running
very smoothly. More taxpayers than ever are using paid
preparers to get their tax returns done this year because of
the confusion caused by the tax bill was passed last year. And
while we appreciate the work, we probably would recommend that
Congress revisit the whole area of tax simplification next
year, because we don't really think the intent of last year's
bill was to increase our workload. There's a lot of confusion
about the Schedule D, the various IRAs that take effect this
year, and the childtax credit.
We also want to extend some congratulations to the Service
for the way they've taken the criticisms of last year, both at
the congressional hearings and from taxpayers. We think they
have made a legitimate and concerted effort to try improve
responsiveness to taxpayer complaints and problems and to
emphasize to their employees the absolute necessity for
courtesy in all their dealings. Our members report to us a
general improvement across the board in that area.
We also think the institution of the local problem-solving
days at the district level was a masterstroke. And the decision
to continue these events into the filing season has proved very
effective and we support the Service on that.
What we would like to suggest the committee do, however, is
to schedule a hearing in the near future to have the Service
come in and present to the committee what systemic problems and
case-processing problems have been identified across the
country in these problem-solving days, and what steps they've
taken to ensure that those problems don't continue to recur. We
think we could all learn something out of this, and the Service
would benefit from having the committee's input and the input
of the practioner organizations on those issues.
Another example of improved service is the extended office
hours into nights and weekends. We think this is a trend in the
right direction, and IRS should be granted with additional
budget support. We caution the committee not to expect an
immediate payoff. Sometimes it takes a while and a number of
years of pump-priming to get people to realize IRS is not open
during the usual business hours, but has extended hours and is
available on weekends.
Several years ago IRS had a program where they used to take
fully-outfitted campers out to shopping centers. They had tax
forms and actual assisters on board to help taxpayers. A guy
would come to the shopping center not knowing IRS was going to
be there, see it there, and come back the next weekend with his
stuff. And of course they would have moved to another mall by
then. So they had some bad publicity and there was a
disconnect. It takes a while and a concerted effort to make
sure this publicity gets out. But we praise IRS for their
ability to take this these programs out to the public where the
public is, as opposed to expecting them to go downtown on a
weekday to a Federal building.
Schedule D reporting of capital gains has been a major
headache for taxpayers and practitioners and apparently for
mutual funds and brokerage houses. We are seeing a tremendous
increase in the number of corrections that are coming out late
in the year on 1099's because brokerage houses were not able to
properly account for and report the capital gains. Some of the
mutual funds gave out reports that did not break out what was
subject to the 28 percent rate versus the 20 percent rate, so
we had problems along those lines. We had many practitioners
exercised about that.
Another exasperated practitoner basically said that anybody
in Congress who voted for this bill ought to be taken out and
hung or shot or whatever, but we'll say we don't blame you
folks for designing the form.
One thing that is important, I think, is that any time you
have a late-year tax law change, it really is disruptive, not
only to the IRS, but to the publishing industry, the software
industry, practioners and everybody else. So we would like to
see the committee agree that for current year tax law changes,
legislation must be ready for a vote by July 1, and any vote on
a tax law change that comes after July 1 would have to take
effect the following year. It just makes sense to do it on a
more rational basis.
One of the other issues we looked at is the electronic
filing program. The comments we received from our members were
universally supportive of the quality and design of the e-
filing program material that the IRS made available this year.
They are very happy with that. We would note that was done by
an outside agency under IRS contract.
What our members have not noticed are any of the Public
Service Announcements on public television. It's been very,
very spotty, and so it prompted a lot of our members to be
concerned. And so like other government agencies that have
legitimate advertising program needs--for example, the
volunteer Army, which we understand is somewhere funded in the
neighborhoood of $100 million for advertising--that the IRS
ought to get some kind of reasonable budget that allows them to
go out and actually market this e-filing program appropriately
with professional management.
Of course, the caveat is that would have to be handled by
an outside advertising agency. We would not recommend that we
have IRS engage in running their own advertising campaign. The
experience we've had with them in the past has not been
entirely positive in that regard, but they certainly deserve a
much-enhanced budget to allow them to go out and actually
purchase advertising.
We are still receiving complaints from practitioners who
would be willing to convert to electronic filing, but can't
because not all the tax forms can be accepted electronically.
And one of the concerns we have is that we hope the Senate
delays in passing the IRS reform bill will not cause a
situation where IRS is granted a delay beyond December 31 of
this calendar year to have a procedure in place which allows
IRS to accept all forms electronically. And that is a major
concern of ours because, quite frankly, we think it's not
getting the proper amount of emphasis in this budget request.
If you look at that illustration in the Commissioner's
testimony you got today, of the additional $103 million that's
going for enhanced customer education and customer service,
only $3 million is earmarked to go to electronic filing. Now we
heard testimony all last year where we had an $800 million cost
to process tax returns through the pipeline, and if 50 percent
of those tax returns are from practitioners that are in digital
format already and get transferred back to paper to send to
IRS, it seems to me that there is a substantial budgetary
savings that could be derived by just increasing the number of
practioners who file electronic returns.
So it's critical, and we believe it ought to be addressed
in a specific line budget item, to make sure that that work is
done and it is done timely, even if it means going outside and
hiring an outside contractor to identify what reprogramming
needs to be done to make sure IRS could accept the all existing
tax forms. We understand the Service has lots of priorities,
and the Year 2000 problem is a major one, but this cannot be
allowed to drop through the cracks.
We've also had some complaints about the refund telephone
solicitors giving bad advice to taxpayers. All of these
examples we're putting up are mentioned to us by our members
for purposes of illustrating that the Service has still got
some improvements to make in the training area.
One of the real concerns we have is the so-called e-filing
educational monitoring visits that are part of the revenue
protection strategy. These visits are ostensibly done to assure
the practioner is complying with the record-keeping
requirements of the e-filing program and maintaining the
documentation required of return transmitters. Based on our
review of our members' depictions of these events, we can only
conclude the Service has re-defined the word ``visit''--
something akin to the Viking visits of Northern Ireland
centuries ago.
We have had incredible complaints from members about
revenue agents barging into their offices full of people,
insisting on seeing the preparer immediately, asking to see
taxpayer records immediately, not calling for appointments, not
explaining the purpose of the visit. We understand the need for
revenue protection strategies, to make sure you don't have
earned income fraud and refund fraud, but the IRS's own study
two years ago indicated that Enrolled Agents and CPA's who are
covered by Circular 230 were a miniscule percentage of the
problem e-filers. I think that these educational visits, if
they're allowed to be conducted the way they're being conducted
now, are just going to cause more ill-will.
And it's important, we think, for the Service to
communicate the criteria they use--when they identify these
problem taxpayers--that they're going to be using, that they
should share that information with responsible practitioner
organizations and the banking industry, in particular, and the
software companies, because they have the most to lose from
earned income credit fraud.
So we need to address those issues dramatically and
quickly, because one of the problems we had this year is the
earned income credit criteria that they publicized they didn't
put out until mid-March, and the peak refunding cycles had
occurred in late January and February. So all of those bad
loans had already been made before the criteria that the
Service was going to use was disclosed to the people that would
have been making the loans.
And part of the problem, as we understand it from the banks
that we've talked to and our own members who have lost a fair
amount of money so far on this, these people came in, made a
commitment to the Service to file electronically. They filed
the returns electronically. The Service has selected these tax
returns for additional review for purposes of looking at the
earned income credit.
And in the cases where the Service subsequently decides
that that is an accurately claimed return refund and an
accurately claimed earned income credit, even though they have
been designated or instructed on the original return that was
filed to do a direct deposit of the refund back out--and
generally in those cases, that means to a bank that's already
advanced the loan to the taxpayer against that refund, they are
issuing a paper refund, which means that the very people who
are supporting them in the electronic filing arena, trying to
get additional tax returns filed electronically, the banks and
the preparers that are involved in that program now, are
losing. The preparer loses his fee because it doesn't get
deducted, and the bank loses the repayment of a loan which they
had assumed was a guaranteed repayment because the Service was
going to do a direct deposit.
Now, they should be able to get that back into a direct
deposit cycle. IRS should not have to issue a paper refund on
that. In 1995 when they did that, the bankers we talked to told
us that it cost them over $200 million. This year the bankers
have told us that they had programmed a 2 percent unfunded
refund loss rate, and they're currently running 4 percent. So
they're looking at the same type or dimensional losses this
filing season. That's outrageous. That's four years that
they've been talking about changing that. They should get that
back into an automatic deposit cycle. It just creates ill-will
among everybody that they're looking to help them improve their
processing systems.
And we'd like to suggest that the committee hold hearings
on this issue alone this year and invite in the banks. There
are only three or four banks that are involved in this, and
software people, and some practitioner organizations--to
comment specifically on the cost to them to do business with
IRS just because of the way they handle these refunds.
As to budget priorities, we reviewed the budget. We think
the budget priorities in terms of the design and direction are
all getting proper emphasis. It's taxpayer service; it's
enhancing the ability of the technology to process the work
effectively. The one area we would like to spell out in detail,
and we believe you have to stay on top of it, is to make sure
that those tax forms are translatable and file able
electronically by the end of this year.
The IRS has supported this and said they had supported it
for years. The problem is, if you look at that budget request,
with $3 million allocated to enhancing electronic filing, I
don't think you're going to buy much in terms of moving the
rest of the tax forms over. We would be happy to come back and
comment at either one of those hearings, should you decide to
put those on your schedule.
In summary, we would like to comment that Commissioner
Rossotti has made a substantial effort in turning around the
morale of that organization and we commend him on that. And we
would also like to commend Deputy Commissioner Mike Dolan, who
was acting for quite a while before Mr. Rossotti was confirmed,
and the IRS employees, who really had to take some pretty
substantial hits last year in terms of their own performance
and but who took the valid stuff to heart. They have made a
legitimate change, and, I think, basically, are going to
continue to make positive changes in the way they deal with
taxpayers.
So, in general, we're happy to report a much better
functioning IRS this year than we have had in the last year or
so. So, I'd be happy to take any questions if you have any.
[The prepared statement follows:]
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Chairwoman Johnson [presiding]. Thank you very much, Mr.
Lane.
Mr. Harris.
STATEMENT OF ROGER HARRIS, VICE CHAIRMAN, FEDERAL TAXATION
COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS
Mr. Harris. Thank you, Madam Chairman. My name is Roger
Harris. I am president of Padgett Business Services and
currently the vice chairman of the National Society of
Accountants Federal Taxation Committee. We're very pleased to
have the opportunity to be here today to comment on the current
filing season, as well as the 1999 IRS budget.
I think, as you know, our organizations have been big
supporters of the restructuring legislation that the House has
passed and the Senate is considering, and certainly we've been
supportive of the goal of that legislation, which is to make
the IRS a much more customer-responsive agency. I think to be
consistent with that support, we must also be supportive of the
fact that they need money to do that, and we stand in general
support of their budget request.
Specifically, on a few points, Commissioner Rossotti's
reorganization plan, I think, is something we agree, certainly
in principle, with. I think we know very well that the small
business taxpayer is a different person than the individual
taxpayer, and when the IRS reorganizes in a business unit
format, I think it offers them the opportunity to train their
people to understand their customer better, and that what they
are dealing with is their customers. I think that this has a
tremendous opportunity to improve the customer service of the
agency.
Clearly, I think training and equipping personnel is
important at all levels of the IRS. I think we have a lot of
hardworking people at the IRS that just need to have the
training and equipment that they need to do the kind of job
that I think they want to do when they come to work every day.
And I think to the extent that we can fund that, it certainly
is money well-spent.
I don't think that we can--any of us--sit around and
question the need for funding for the Year 2000. I think all of
us shudder at the idea of what would happen if the system is
not functioning as it needs to be in the Year 2000. Perhaps of
all the budgetary processes, that maybe is the most important
area that we have to address. I think that the system has to
work and work indefinitely.
Moving into the filing season, I can agree in large part
with some of the things that Joe said, particularly as it
relates to the Schedule D and the capital gains rule. I think
we would all agree that this has been a relatively smooth
filing season, but there is no question that the Schedule D and
the capital gains law has added a complexity that many of us
didn't anticipate and has been an unintended benefit to the tax
practioners. And I know that that legislation was not intended
to help us make money, but it has done that.
But there's also been another interesting result of that--
that since most taxpayers have benefitted from these changes,
it's amazing how complexity, when it saves you taxes, is not
nearly as offensive as it is when your taxes go up. [Laughter.]
So, I don't know what the message is there, but we thank
you, and I think the taxpayers thank you at this point.
There have been some positive things, obviously, done this
year by the IRS, many of which have been mentioned here today
with regard to the expanded hours of the phone, the walk-in
Saturdays, and the problem-solving days. I don't think we can
ignore that those have been well-received and have made a major
impact on this smoother tax season. I think we should commend
the Service and certainly encourage them to continue to work in
those areas.
With regard to electronic filing, we've heard numbers and
we've heard comments today that electronic filing has
increased, and I think, in fact, it has. But, unfortunately, I
don't think it's increasing anywhere fast enough if we're going
to try to meet the 80 percent goal of the legislation that has
passed the House. There are problems in the current system that
have to be addressed if we are going to realistically meet an
80 percent goal.
There are some encouraging things going on, though. One, I
think, is Bob Barr joining the IRS--I know they are currently
working right now to put together the Electronic Tax
Administration Advisory Committee, and I think if we build that
committee properly and give Mr. Barr the funds and the people
to work with, I think we can devise the system that will help
us reach the goal.
I don't think today we know what that system looks like.
I'm not sure that we should be restricted by what's happening
today. I think we have to be, again, a little creative and give
this group the empowerment to design a system that gives
incentives both to taxpayers and practitioners so that the 80
percent goal is met very easily and leads into perhaps even
better than 80 percent, because it becomes the way everyone
wants and chooses to file their tax return.
I see the light is coming on, and in the interest of
everybody's time, I will ask you--to include written testimony
I have submitted that is in more detail. I certainly, again,
welcome the opportunity to be here today. It's also a pleasure
to come, and I certainly will look forward to any questions
that any of you may have.
[The prepared statement follows:]
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Chairwoman Johnson. Thank you very much.
Mr. Lane, your comments about the need to complete work on
making all the forms of the IRS compatible with the electronic
filing system is a very important point. The Commissioner
didn't speak to that, and certainly from last year's work we
know how important it is to get more people into that system,
both to save money, improve accuracy, service, and so on. Is
anything going on to move forward on accommodating the forms to
the electronic system?
Mr. Lane. We had a meeting yesterday afternoon with
Commissioner Rossotti to just chat with him, meet him, and talk
about what his plans were, and I brought this up with him as
well. We had given him an advance copy of our testimony. And he
obviously shared with us the concerns he has in terms of the
number of problems he's dealing with over there, and clearly
the Y2K problem is a major preoccupation of the Service right
now.
Our concern is exactly as we outlined in the testimony,
that the Service has always said that they support that
process, but we don't see the support given in the budgetary
requests. And I think if you look at the Commissioner's
exhibit, it shows, I think, $3 million out of $103 million
going for enhanced electronic filing. I can sympathize with
their situation. They have a unique problem with the Y2K issue,
given the age of their equipment. I mean, they're unlike almost
any other corporate business, because most corporate businesses
have much more current equipment to work with.
So, we can sympathize with that and recommend to the
committee that if the Service feels they cannot meet that goal
this year, then they ought to let a contract out and have an
outside group do that piece of it because that has nothing to
do with Y2K. Let an outside group of programmers come in and
get all those tax forms moved over.
Right now they have the ability to enter the data from
those forms digitally because when they keypunch the return,
they put it in. So it's not like they have to reprogram
everything. They just have to give us the ability to load that
data electronically, basically, if they are in fact keying that
information.
Chairwoman Johnson. Do you have reason to believe that this
will cost more than $3 million?
Mr. Lane. You know, I would assume that it does. I don't
have the data in my possession to determine what their cost
factors are, but $3 million is a paltry sum when you consider
that just the amount of money that would have to go into
advertising promotion alone to expand electronic filing beyond
20 percent to 25 percent of tax returns to get up to 80
percent--that's an admirable goal.
Chairwoman Johnson. Is is worth, though, putting the money
into a big marketing effort when you can't yet let everyone who
could file electronically, file electronically?
Mr. Lane. I agree with you. There's no question the
priority ought to be on getting as many of those forms moved
over.
Chairwoman Johnson. How big a job is that? How long do you
think it would take? I mean, if you really committed yourself
to getting all those forms in there, what are we talking about?
Six months, a year, three years?
Mr. Lane. You know, I don't have the expertise to respond
to that. I'm sure the Service has looked at it and could do it,
but--and I would like to see the answer to that because we've
been raising that issue, and I noticed the National Commission
on Restructuring focused on that issue intently and tried to
get an answer of what that would cost.
The key thing--and I think that the National Commission has
understood it when we got finished, and I think your staff
people here understand it from the discussions we've had with
them in the committees--the key thing to getting practitioners
to move into electronic filing is to allow them to file. They
will not set up two separate processing pipelines in their
office during tax season. They have to have one processing--and
as long as 40 or 50 or 60 percent of the tax returns can't be
filed electronically, they're going to keep 100 percent of the
volume out, and that's critical.
Chairwoman Johnson. Right, and I think that point has been
very well made, and I appreciate your calling us back to
something that is very fundamental to the whole cost structure
of the IRS and its ability to use its resources in the future
in the way that will be most effective for the taxpayers in the
long run.
Mr. Lane. Absolutely.
Chairwoman Johnson. We will look into some of these
questions about how long this project would take and what the
resources are and what they're planning, as certainly this is a
key component of customer service.
Also, I just wanted to ask you briefly--you heard the
discussion about the cross-checkers?
Mr. Lane. Yes.
Chairwoman Johnson. What is your opinion of that process
and the need for more people in that function? Will that need
decline as electronic filing increases?
Mr. Lane. It's interesting. Part of the reason you've had a
drop-off in yield from that program is because of the fact that
they have gotten so much more corrective. Initially, the reason
you got a lot of yield on that program is that people didn't
know that there was a cross-check between the 1099 data that
came in, so a lot of stuff didn't get put on tax returns or it
got put on tax returns erroneously or taxpayers didn't know
that they got it and should have put it on. So, I think what's
happened is an education level as this IRP program has
matured--taxpayers and practitioners are doing a better job of
making sure the information is on the return.
Chairwoman Johnson. Interesting. So would you interpret,
then, the fact that the personnel has been cut in half but the
collections have been cut by two-thirds, to indicate greater
compliance out there in the community and therefore may not be
a case for adding more people back and doing more of that
function?
Mr. Lane. I would say that you've had a significant
increase in compliance with the tax return data matching the
1099 data. There's no question about that compared to 5 or 10
years ago, absolutely no question about that. Roger?
Mr. Harris. Oh, I would agree completely. I think most
people now are aware of the fact that the cross-checking does
go on, and I think you're seeing a much higher compliance.
Chairwoman Johnson. So actually increasing personnel in
that function might not make any difference to the yield?
Mr. Lane. No, because the vast majority of the 1099 data
you get, what they call the IRP data--the information returns
data--comes in electronically, so those people--those
checkers--are only looking at the stuff that's dropping out of
the other system because of a mismatch, and I think what we're
saying is that a lot less stuff is mismatching.
Now, it's going to be interesting to see, because as more
requirements get ladeled-in to require 1099's--for example now,
this year, every check written to a lawyer--whether he's a
corporation or not--for $600 or more needs a 1099. So you're
going to increase dramatically the number of small paper 1099's
you get. So, I can see a need if you're going to generate a lot
of that stuff in the future to have to increase those checkers
back up again, because the paper documents don't get the degree
of verification that the electronically filed documents do.
Chairwoman Johnson. Thank you.
Mr. Lane. Sure.
Chairwoman Johnson. Mr. Coyne. Mr. Portman.
Mr. Portman. I first want to thank both of these gentlemen.
Roger and Joe, this is like deja-vu all over again. You've
testified so many times before this subcommittee and the
Commission.
I sort of agree with you that to get to the 80 percent goal
in electronic filing you almost have to have that quantum leap
that Joe talked about. And I guess one question I would have
for you is, as you look at the restructuring bill that is now
over in the Senate, and with any luck will be back for a House-
Senate conference within a month, is there anything that you
think should be changed with regard to electronic filing to
create more incentives? As you know, we took that legislation--
this subcommittee took the legislation and the
recommendations--changed them somewhat, dropped out a couple of
things, added a couple of things. Do you have any comment on
that? We have a window of opportunity here.
Mr. Lane. Yes; I would like to see--we made a
recommendation to the Restructuring Commission at some point in
our testimony--quite frankly, I don't remember which one it
was, but it's in there. I would like to see a provision that if
a person files electronically and there is an accurate match on
the IRP data with what's on the tax return--so, in other words,
the 1099 dividend and information and the W-2 data was
correct--that the statute for audit on that tax return be 24
months instead of 36 months.
Mr. Portman. Yes; I remember that recommendation.
Mr. Lane. I think what that will give you is taxpayer
motivation to file electronically, and practitioners will
always respond to client demand before they're going to respond
to anything else. And so if practitioners get a taxpayer
ground-swell that says, ``I want this filed electronically
because I want to limit my audit exposure,'' their malpractice
insurers are going to be telling them the same thing: ``You
better justify why you're not filing everything electronically
because we don't want to have another year of exposure if we
don't need it,'' I think you'll get that 80 percent number
relatively quickly, if not within a year or two.
Mr. Portman. Interesting. Roger, do you have some thoughts?
Mr. Harris. You know, I think what we've got is a lot of
things that move a small number of people. I don't think
there's any one magical change we're going to make that's going
to all of a sudden have the whole marketplace demand electronic
filing, so I think anything--what Joe suggested, what's in the
legislation, incentives we've talked about were taken out----
Mr. Portman. What about the signature?
Mr. Harris. Signature--I think all of those things are
important. I think that's why the Commission that I know the
bill had set up and now the IRS is setting up is so important
that we not be bound by what we know today, that we're able to
look, not only with what's out here today, but what can happen
over the next three or four years--not get in a hurry to hit 80
percent, but get there the right way.
Mr. Portman. Yes; therefore the advisory committee could be
very helpful. You know one thing--this is a far-fetched idea,
but I thought I'd throw it out anyway--EIC is one area where I
think you could see some increase in electronic filings, as I
mentioned earlier, and that there are some advantages to that
in terms of cost and compliance. Anybody who wants a refund,
obviously there's an incentive there now. For people who owe
taxes, there, in a sense, is a disincentive. We can knock down
all the barriers in the world, and we can create, therefore,
some more incentives, but there will be that disincentive for
somebody who files on paper, and because it processes more
slowly it is going to be a disadvantage. Can you address that?
Mr. Lane. But the taxpayer who owes money typically has the
more complex return and is the one who has the most audit
exposure. So where you do get that guy, where you incentivize
him is you say, ``Well, limit your own exposure.''
Mr. Portman. Going back to your idea.
Mr. Lane. And why it's important to make sure that the
provision has to be, not only is it filed electronically, but
all the IRP data matches, is because the delay time in IRS
getting the confirmation back from Social Security on the wage
data and getting all the IRP data processing could take
anywhere from 12 to 14 months. So, if only in cases where
that's a 100 percent match is the 24-month statute in there; if
it's not a match, they should have the additional 12 months to
pursue examination.
Mr. Harris. Well, and we mention in our testimony that
right now if you file electronically and owe this year, that it
will be debited on your account on the 15th. If you mail your
tax return, then you've got a certain float. Why not give the
people who file electronically until May 1? You know, put an
incentive in there to file electronically; your payment will be
made later.
Mr. Portman. Yes. I say it's far-fetched because it will
cost something, and we're running into that problem with this
bill already.
Mr. Harris. That's why I think we've got to be creative and
think of all of these, and see what the effect will be.
Mr. Portman. Yes.
Mr. Lane. You know, I'd like to suggest one other thing. It
seems to me every year we're having problems on this earned
income credit, and it really isn't a tax issue. I can see an
argument to say, ``Hey, give this to Social Security; give it
to Health and Human Services, but it doesn't belong on a tax
form.''
There are a lot of people who are entitled to that that
aren't getting it because they're not even filing. You know,
the guy working for minimum wage and he's making $4,000 to
$5,000 a year, and he's got a couple of kids--he's going to be
qualified, and he's not even filing a tax return. So, I think
one of the issues you might want to address is whether IRS
ought be handling this at all. And why create all of this
tension and aggravation over this issue?
Mr. Portman. I can't believe you said that, Joe.
Chairwoman Johnson. We're working up to that one.
Mr. Portman. That's exactly the question that needs to be
proposed, and the answers need to come more from us.
Thank you very much.
Mr. Lane. Thank you.
Chairwoman Johnson. Thank you. Congresswoman Thurman.
Mrs. Thurman. Mr. Harris, just very quickly, because I know
this is an issue that our chairperson and Mr. Portman and
others of us--with the electronic filing, and we were certainly
encouraged by some of the statistics, I think, that we heard
today of the more compliance on this--and I can't remember for
the life of me who said this to me, but somebody said, ``Well,
we don't do electronic filing because we don't have enough
clients to really do that.'' Help me with that statement. I
mean, in the fact that you represent accountants--and I don't
know how many accountants there are in the country--but what do
you think the percentage of accountants that are actually in
the situation or have the ability, or would, how many are doing
it electronically?
Mr. Harris. Currently, to the best estimates of our
organization, about one-third are doing it today.
Mrs. Thurman. And in that, can you tell us why they don't?
Maybe it's because of what I just said, but there are other
stumbling blocks that would prevent them from wanting to get
into the electronic filing?
Mr. Harris. We've talked about some of them today; I think
the fact that you can't file all returns electronically. You
know, there are the checks that you must go through during the
filing season that contribute to some. But as a business
person, I think it's that the demand in the marketplace is not
that great yet--again, unless you're right now in the business
of filing a lot of returns due refunds early and you can speed
that process up. If your practice is geared towards business
people who maybe don't have refunds, there's no demand,
certainly not to pay extra to file a return electronically when
you owe money. It's very hard to sell that idea to a business
person.
Mrs. Thurman. But this year would be different because
they're getting money back, right? [Laughter.]
Mr. Harris. Yes.
Mr. Lane. I'd like to add something on that, if I could. I
think, as Roger said, there are lots of issues that impact
that, particularly from a member's behavior standpoint. Some of
it's education, some of it's a perception of a lack of
technical competence, technical competence in the terms of the
technology as opposed to the technical tax stuff. And actually
it's much simpler than they really believe it is, and once you
show them how easy it is they go, ``Oh, my God; I could have
been doing this.''
Mrs. Thurman. ``Why haven't I been doing this?''
Mr. Lane. Part of it is a perception that they have to go
out and buy a whole bunch of expensive equipment to do it, and
they're very happy with the DOS machine they have in their
office and they don't want to upgrade; they don't realize you
can use that machine to do it.
So, part of it is the way the whole program has been
packaged and sold. Quite frankly, some of it is also a kind of
a hangover of the bad reputation electronic filing got early on
when it was basically viewed as a way of gouging clients by
charging them outrageous fees for doing refund anticipation
loans. They don't realize that the whole market has really
transformed, and there is a whole array of financial products
that really help taxpayers--and they're not right for every
taxpayer, but they're right for some taxpayers.
And so we're going through this whole re-education effort
in both of our memberships in terms of the benefits of that.
Quite frankly, the IRS causes themselves a lot of problems by
doing exactly what we talked about in our testimony today. They
don't share the information; they change procedures in mid-
stream, and it catches the guy unaware.
This whole paper refund issue--I mean, in 1995 they pulled
7 million returns that had EIC credits on them out of the line
that were supposed to go direct deposit and did nothing with 6
million of them and put them back 12 months later, all on paper
refunds, and cost people all of the fees on those returns and
the banks all of the loan repayments. I mean, it's just
appalling, and this is supposed to be the partner you're
working with--to give him the information. And, we would hope
they would have learned from that, but now we're back into the
same problem this year. So you look at people and say, well, if
they're going to lose that kind of money, what's the business
reason for them to do it? There isn't any.
Mrs. Thurman. But we can fix this, right? I don't know--
what kind of an answer was that? [Laughter.] Thank you.
Mr. Lane. A qualified ``yes.''
Chairwoman Johnson. Before we go to vote on this current
problem of the IRS not doing direct deposits, is that elective
or a matter of law?
Mr. Lane. We tried to get an answer on that yesterday. The
thing that's got our members so upset about this is this is a
problem that IRS has said for four years that they would
correct, and it hasn't yet been corrected. My personal view--we
were told when we inquired about this that there is a technical
problem in terms of being able to put the refunds that were now
held up back into an electronic deposit stream as opposed to a
paper check. I don't know if that's accurate or not.
My belief is that probably when you get down to the bottom
of it, that what the advice that is being given, because it's
coming out of a criminal investigation, they're looking at the
potential for fraud there. What I would be willing to hazard a
guess as to what the advice is is make it a paper refund,
because if we were right and it subsequently develops that
there was fraud there, we have a better case if we have a
taxpayer's signature on a cancelled check as opposed to a bank
deposit that went in straightforward. And so my concern is if
that is what they're looking for--to have a better paper trail
in the event one of these things gets prosecuted--I mean it is
at an extremely high cost to the people who are participating
in this program.
And what we tried to point out in our testimony is that
everybody loses with refund fraud, not just the Government. The
banks are the biggest losers, and the preparers and software
companies lose because they don't get their fees paid. If the
IRS was more forthcoming in their criteria for identifying
refund fraud, the software companies and banks would be happy
to act as the first couple of screens for that because they
don't want to make that loan.
Chairwoman Johnson. And are their new screens, even though
they came out a little later--are they helpful?
Mr. Lane. Yes, yes. But mid-March, when 95 percent of the
business is done by February 15, mid-March doesn't help them.
Chairwoman Johnson. No; I appreciate that. But as you
reflect on this--what to try to do now versus next time we go
through this, now with a better system in place. I would be
interested in hearing any thoughts on that.
Mr. Lane. What I would hope, and I think Roger could agree
with me on this, is that this new ETAAC, or advisory board for
electronics--I would hope that when that gets funded and put
together this year that the whole revenue protection strategy
is discussed at great detail with those folks and then shared
with the practitioner organizations like NSA and NAEA and
AICPA, so we can disseminate that information to our people----
Chairwoman Johnson. That's a very good suggestion.
Mr. Lane [continuing] And also to the banks and software
companies.
Chairwoman Johnson. We have three minutes left, so thank
you for your input. I appreciate your testifying today.
Mr. Lane. Thank you.
Mr. Harris. Thank you.
Chairwoman Johnson. The hearing is closed.
[Whereupon, at 4:06 p.m., the hearing was adjourned subject
to the call of the Chair.]
[A submission for the record follows:]
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