[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS TO
EXPAND ELECTRONIC FILING OF TAX RETURNS
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 9, 1997
__________
Serial 105-40
__________
Printed for the use of the Committee on Ways and Means
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, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
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
__________
Page
Advisory of September 2, 1997, announcing the hearing............ 2
WITNESSES
Internal Revenue Service, Hon. Michael P. Dolan, Acting
Commissioner, accompanied by Terry Lutes, Acting Assistant
Commissioner, Electronic Tax Administration.................... 7
U.S. Department of the Treasury, Lawrence H. Summers, Deputy
Secretary, as presented by Hon. Donald C. Lubick, Acting
Assistant Secretary, Tax Policy................................ 24
______
American Payroll Association, Carolyn Kelley..................... 113
H&R Block Tax Services, Inc., Thomas L. Zimmerman................ 60
Intuit, Inc., Larry Wolfe........................................ 66
Kachina Group, Robert J. Carver.................................. 82
National Association of Computerized Tax Processors, Joseph W.
Langer......................................................... 76
National Association of Enrolled Agents, Joseph F. Lane.......... 95
National Society of Accountants, Roger Harris.................... 86
SUBMISSIONS FOR THE RECORD
American Bankers Association, statement.......................... 134
American Society for Payroll Management, New York, NY, Clark G.
Case, letter................................................... 136
Bograd, Harriet, New York, NY, statement......................... 140
National Council of Nonprofit Associations, Ann Mitchell Sackey,
statement...................................................... 142
National Treasury Employees Union, Robert M. Tobias, statement... 144
RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS TO
EXPAND ELECTRONIC FILING OF TAX RETURNS
----------
TUESDAY, SEPTEMBER 9, 1997
House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to call, at 10 a.m. in room
1100, Longworth House Office Building, Hon. Nancy L. Johnson
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE COMMITTEE ON WAYS AND MEANS
SUBCOMMITTEE ON OVERSIGHT
FOR IMMEDIATE RELEASE CONTACT: (202) 225-7601
September 2, 1997
No. OV-7
Johnson Announces Hearing on the
Recommendations of the National Commission on
Restructuring the IRS to Expand Electronic
Filing of Tax Returns
Congresswoman Nancy L. Johnson (R-CT), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold the second in a series of hearings to examine
the June 25, 1997, report of the National Commission on Restructuring
the Internal Revenue Service (IRS). The hearing, focusing on the
Commission's recommendations to expand electronic filing of tax and
information returns, will take place on Tuesday, September 9, 1997, in
the main Committee hearing room, 1100 Longworth House Office Building,
beginning at 10:00 a.m.
Oral testimony at this hearing will be from invited witnesses only.
Witnesses will include officials from the U.S. Department of the
Treasury and the IRS, representatives from practitioner organizations,
and stakeholders who play important roles in tax and information return
filing. However, any individual or organization not scheduled for an
oral appearance may submit a written statement for consideration by the
Subcommittee and for inclusion in the printed record of the hearing.
BACKGROUND:
The IRS presently receives approximately 205 million tax returns
each year. The largest workload associated with processing these
returns involves the nearly 120 million individual tax returns that are
received during the tax filing season from January 1 to April 15. The
IRS uses 10 service centers in different regions of the country to
process income tax returns. During processing, tax data from each
return is manually entered into IRS computers by seasonal employees
hired temporarily during the filing season.
During the 1997 tax filing season, the IRS received approximately
20 million individual tax returns electronically. Of the 100 million
individual returns that were submitted in paper format, approximately
70 million exist in electronic format prior to submission to the IRS.
Tax practitioners prepare approximately 60 million returns per year,
almost all of which are prepared using tax preparation software.
Another 10 million returns are self-prepared by taxpayers using tax
preparation software on personal computers. The majority of these
electronically prepared returns are printed out and sent to the IRS in
paper format, after which they are reconverted to digital form through
the manual data capture process.
This digital-to-paper-to-digital conversion creates inefficiencies
that add to the cost of processing paper returns. For example, the
error rate for the manual data entry process is approximately 20
percent, half of which is attributable to the IRS, and half to errors
in taxpayer data. Because electronically filed returns are usually
prepared using computer software programs with built in accuracy
checks, undergo pre-screening by the IRS, and experience no key punch
errors, electronic returns have an error rate of less than one percent.
In addition, the IRS paper returns processing function still uses
outmoded equipment that experiences significant downtime and slower
operator productivity. If the returns prepared in electronic format
were transmitted directly to the IRS, these redundancies and
inefficiencies could be avoided.
The Commission concluded that to develop a successful electronic
filing program, the IRS must put into place a comprehensive plan to
remove barriers, increase benefits, and broaden the appeal of
electronic filing to all segments of the taxpayer and practitioner
population. The Commission recommended that the IRS, Congress, and the
Administration establish a goal that 80 percent of all tax returns
should be filed electronically within 10 years, and that IRS's
leadership should be held accountable for accomplishing that goal.
The Commission's recommendations are embodied in H.R. 2292, which
was introduced on July 30th by Reps. Rob Portman (R-OH) and Ben Cardin
(D-MD). The specific provisions in the bill relating to electronic
filing include: (1) a mandate for the IRS, within 180 days, to
implement a plan to eliminate barriers, provide incentives, and use
competitive market forces to increase electronic filing over the next
10 years; (2) a mandate for the IRS, within 180 days, to develop
procedures for the payment of incentives to qualified transmitters of
electronic returns; (3) extension of the filing deadline to May 15th
for taxpayers who file their returns electronically; and (4) amendments
to the Internal Revenue Code to facilitate paperless electronic filing.
In announcing the hearing, Chairman Johnson stated: ``A
comprehensive strategy to encourage electronic filing of tax returns
holds significant potential not only to make the IRS returns processing
function more efficient, but also to greatly benefit taxpayers. Errors
would be reduced, in turn, reducing the number of notices that are
triggered by errors in the manual data entry process. In addition,
taxpayers who file their returns electronically would receive
confirmation from the IRS that their return was received.''
FOCUS OF THE HEARING:
The Subcommittee will examine the Commission's recommendations for
expanding electronic filing and is seeking comment on other actions
which could be taken to help achieve the goal of receiving 80 percent
of tax returns electronically within 10 years. It will also examine the
plans that are currently being developed by the Treasury and IRS to
expand electronic filing, including the draft Request for Proposals
(RFP) on Electronic Tax Administration which will be issued by the IRS
in mid-September. This RFP will solicit proposals from practitioner
groups and other stakeholders regarding the establishment of strategic
partnerships with the IRS to facilitate the expansion of electronic
filing.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Any person or organization wishing to submit a written statement
for the printed record of the hearing should submit at least six (6)
single-space legal-size copies of their statement, along with an IBM
compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect 5.1
format only, with their name, address, and hearing date noted on a
label, by the close of business, Tuesday, September 23, 1997, to A.L.
Singleton, Chief of Staff, Committee on Ways and Means, U.S. House of
Representatives, 1102 Longworth House Office Building, Washington, D.C.
20515. If those filing written statements wish to have their statements
distributed to the press and interested public at the hearing, they may
deliver 200 additional copies for this purpose to the Subcommittee on
Oversight office, room 1136 Longworth House Office Building, at least
one hour before the hearing begins.
FORMATTING REQUIREMENTS:
Each statement presented for printing to the Committee by a
witness, any written statement or exhibit submitted for the printed
record or any written comments in response to a request for written
comments must conform to the guidelines listed below. Any statement or
exhibit not in compliance with these guidelines will not be printed,
but will be maintained in the Committee files for review and use by the
Committee.
1. All statements and any accompanying exhibits for printing must
be typed in single space on legal-size paper and may not exceed a total
of 10 pages including attachments. At the same time written statements
are submitted to the Committee, witnesses are now requested to submit
their statements on an IBM compatible 3.5-inch diskette in ASCII DOS
Text or WordPerfect 5.1 format. Witnesses are advised that the
Committee will rely on electronic submissions for printing the official
hearing record.
2. Copies of whole documents submitted as exhibit material will not
be accepted for printing. Instead, exhibit material should be
referenced and quoted or paraphrased. All exhibit material not meeting
these specifications will be maintained in the Committee files for
review and use by the Committee.
3. A witness appearing at a public hearing, or submitting a
statement for the record of a public hearing, or submitting written
comments in response to a published request for comments by the
Committee, must include on his statement or submission a list of all
clients, persons, or organizations on whose behalf the witness appears.
4. A supplemental sheet must accompany each statement listing the
name, full address, a telephone number where the witness or the
designated representative may be reached and a topical outline or
summary of the comments and recommendations in the full statement. This
supplemental sheet will not be included in the printed record.
The above restrictions and limitations apply only to material being
submitted for printing. Statements and exhibits or supplementary
material submitted solely for distribution to the Members, the press
and the public during the course of a public hearing may be submitted
in other forms.
Note: All Committee advisories and news releases are available on
the World Wide Web at `HTTP://WWW.HOUSE.GOV/WAYS__MEANS/'.
The Committee seeks to make its facilities accessible to persons
with disabilities. If you are in need of special accommodations, please
call 202-225-1721 or 202-226-3411 TTD/TTY in advance of the event (four
business days notice is requested). Questions with regard to special
accommodation needs in general (including availability of Committee
materials in alternative formats) may be directed to the Committee as
noted above.
Chairman Johnson. Good morning. This is the second in a
series of hearings to examine the recommendations of the
National Commission on Restructuring the IRS. Our focus today
will be on electronic filing of tax and information returns.
Each year during the tax filing season, the IRS faces a
monumental task. Day after day, from February through mid-
April, trucks pull into the 10 IRS Service Centers around the
country, delivering 100 million or more individual paper
returns. Thousands of temporary workers are hired to open
stacks of envelopes, sort returns and checks, and assist in the
process of manually entering the information from each return
into IRS computers--a process which is both costly and prone to
error.
Of the 100 million individual returns submitted on paper
this year, 70 million existed in electronic form before they
were printed out and mailed to the IRS. Tax practitioners
prepare about 60 million returns per year, almost all of which
are prepared on computers using tax preparation software.
Another 10 million returns are self-prepared by taxpayers on
their personal computers using tax preparation software.
Significant benefits would be derived both by taxpayers and
the IRS if we could figure out an effective strategy for
getting all the returns that are prepared each year in an
electronic form transmitted to the IRS in electronic form.
Most importantly, taxpayers would be protected from all the
problems caused by the errors made as data is entered manually
into IRS computers by temporary employees, because hundreds of
thousands of computer notices are generated each year as a
result of the 20-percent error rate in the manual data entry
process. In addition, all taxpayers who file electronic returns
would receive confirmations that their returns are received and
accepted by the IRS. Clearly, electronic filing would save big
money for the Federal Government and big problems for
taxpayers. For the IRS the benefits are obvious--lower costs
and fewer errors.
The Commission concluded that to develop a successful
electronic filing program, the IRS must put into place a
comprehensive plan to remove barriers, increase benefits, and
broaden the appeal of electronic filing to all segments of the
taxpayer and practitioner population. Among other things, the
Commission recommended that the IRS, Congress, and the
administration should establish a goal that 80 percent of all
tax returns should be filed electronically within 10 years, and
IRS' leadership should be accountable for accomplishing that
goal.
We will hear from Assistant Treasury Secretary, Donald
Lubick, and Acting IRS Commissioner, Michael Dolan, regarding
the administration's plans for Electronic Tax Administration,
and how those plans relate to the Commission's recommendations.
We will also hear from tax practitioners and other stakeholders
who play important roles in tax and information return filing.
Hopefully, by the end of the hearing we will have a better idea
of the steps that must be taken to expand the appeal of
electronic filing.
I would now like to recognize my Ranking Member, Bill
Coyne, for his opening statement.
Mr. Coyne. Thank you, Madam Chairman. We will have the
opportunity on the Subcommittee on Oversight today to review
various recommendations for improving and enhancing electronic
filing of returns.
During the 1997 tax return filing season approximately 120
million individual tax returns were filed; 20 million of those
were filed electronically and 100 million were filed on paper.
Unfortunately, electronic filing has increased only gradually
in recent years with the bulk of the increase coming from
TeleFile and PC returns.
Much more can be done and now is the time to do it.
Electronic tax return filing needs to be promoted by the IRS.
The public needs to understand the advantages of filing error-
free electronic returns directly with the IRS. Also, taxpayers
need to be assured that electronic filing does not increase the
likelihood of audit or other contact by the IRS.
The tax preparer community can also help in promoting and
facilitating electronic filing. In fact, in many ways tax
preparers have been the prime promoters of electronic filing.
For example, many tax preparation firms and accountants have
been providing electronic filing free of charge.
Importantly, the IRS' blueprint for modernization is in
progress and on track. Next week as part of the blueprint
implementation plan the IRS will issue a request for comments
on electronic tax administration to solicit from tax
practitioners ideas and joint IRS/private sector strategies for
expansion of electronic filing. We should hear about some of
their ideas at today's hearing. I am pleased that there is
strong bipartisan support for legislation to enhance electronic
tax return filing. I look forward to our review of proposals to
authorize the IRS to promote and advertise the benefits of
electronic filing, and to allow the acceptance of taxpayer
signatures and other tax documents in electronic form.
I commend the Subcommittee Chairman for holding today's
hearing and look forward to working together with her and other
Members of the Subcommittee on these issues in a bipartisan
manner. Thank you.
Chairman Johnson. The Subcommittee will recess while we
vote. We will try to keep it to 5 to 7 minutes. We will just go
over and get right back and start with Mr. Dolan.
[Recess.]
Chairman Johnson. The hearing will reconvene. Other Members
who have opening statements may submit them for the record.
[The opening statements follow:]
Statement of Hon. Rob Portman, a Representative in Congress from the
State of Ohio; and Cochairman, National Commission on Restructuring the
Internal Revenue Service
Greatly increased electronic filing is an important
component of the overall effort to revamp the IRS and improve
taxpayer service. Because it reduces costs and complications
for each, it's a classic win-win situation for IRS and the
taxpayer.
Currently, there is at least a 20 percent error rate on the
approximately 120 million paper 1040 returns. Half of that
error rate comes from the IRS--often when employees
inadvertently misinput numbers. When forms are electronically
filed with the IRS, there is less than a 1% error rate. By
reducing unnecessary errors and notices, electronic filing can
prevent downstream costs and headaches for taxpayers and the
IRS.
Increased electronic filing will also save the IRS money--
some experts (including witnesses before the Subcommittee
today) believe it costs the IRS about $7 to process a paper
return, and less than $1 to process an electronic return. It
makes returns easier for the IRS to process, speeding refunds
for taxpayers and allowing the IRS to spend less time and money
shuffling paper.
The IRS Restructuring and Reform Act requires the IRS to
develop and implement a strategic marketing plan to make
paperless filing the preferred, most convenient and cost-
efficient form of filing for 80 percent of taxpayers within the
next ten years. Our legislation provides tangible incentives--
not mandates--to make electronic filing so easy that taxpayers
will not want to file paper forms. The new management structure
created by this legislation will provide the accountability,
continuity and expertise that are needed to ensure that this
electronic filing plan is successfully implemented.
By reducing errors and speeding return processing,
electronic filing has the potential to vastly improve customer
service. In the long run, it has the potential to produce a
smaller, more efficient and less intrusive IRS. It's an
important step in substantially alleviating the frustrations so
many taxpayers experience with the current system.
Statement of Hon. Jim Ramstad, a Representative in Congress from the
State of Minnesota
Madame Chairman, thank you for holding this important
hearing on the recommendations of the National Commission on
Restructuring the IRS regarding electronic filing.
I also want to commend our colleagues Mr. Portman and Mr.
Cardin for their efforts to translate the Commission's
recommendations into legislative form by introducing H.R. 2292.
This legislation has already stimulated a healthy debate about
how we can improve efficiency and customer service at the IRS.
Clearly, more widespread use of electronic filing will
increase efficiency, decrease human errors, and save somewhere
between five and seven dollars per return. A completely
paperless system would multiply efficiency, accuracy and cost
savings.
Sometimes the greatest obstacle to progress is the fear of
the unknown, so I hope we will be able to effectively educate
taxpayers about how electronic filing will benefit them, as
well as their government.
Again, Madame Chairman, thanks for your leadership in
holding this hearing. I look forward to the continuing
examination of IRS restructuring recommendations over the
coming weeks.
Chairman Johnson. Mr. Lubick, Acting Assistant Secretary
for Tax Policy, U.S. Department of Treasury.
Mr. Lubick. Madam Chairman, I would like to ask that Mr.
Dolan testify first. I think we have coordinated our testimony
and----
Chairman Johnson. OK, thank you. I was just going in the
order on my list.
Mr. Dolan.
STATEMENT OF HON. MICHAEL P. DOLAN, ACTING COMMISSIONER,
INTERNAL REVENUE SERVICE; ACCOMPANIED BY TERRY LUTES, ACTING
ASSISTANT COMMISSIONER, ELECTRONIC TAX ADMINISTRATION
Mr. Dolan. Thank you, Madam Chairman. It is a pleasure to
be back with the Subcommittee this morning, particularly on a
topic like this. I have with me at the table, Terry Lutes, who
is making his first appearance before the Subcommittee. Terry
has been acting as our Assistant Commissioner at our newly
created Electronic Tax Administration organization, so between
the two of us we hope to be responsive to questions you might
have later.
And with your permission, Madam Chairman, I ask that my
longer statement be accepted in the record, and I will maybe
just make a few remarks.
I mentioned that it is a pleasure to be here because I
think this is one subject around which there is considerable
alignment, both with respect to the Subcommittee's interest,
the work of the Restructuring Commission, and many of the
witnesses that follow us. I think there are perhaps some
differences in pace and spectrum, but largely there is a
tremendous conversion and set of interest in moving forward in
the Electronic Tax Administration, specifically the electronic
filing arena.
What I would like to do this morning is cover a couple of
different areas. One is to, as sort of an extension of prior
conversations we have had about this, give the Subcommittee a
picture of how we are approaching the entire umbrella of
Electronic Tax Administration; talk a little bit then about
some of the products we already have online. Some of those
products are products that we have engaged the Subcommittee on
in the past, and gotten your suggestions to improve.
Third, I will talk a little bit about what we hope
taxpayers will experience next filing season as an extension of
the electronic program as we have in place; and then I will
discuss what we really are quite excited about, which is a
major new opportunity to expand the partnering and the whole
Electronic Tax Administration. Finally, I will also respond to
your question, that we comment on some of the specific
proposals made by the Restructuring Commission.
I do not think, based on both your statement, Madam
Chairman, and Mr. Coyne's, that there is much disagreement that
this is a business that government, and specifically the
Internal Revenue Service, needs to be in. The Electronic Tax
Administration process produces an outcome that is both faster
and cheaper. That is measured both by the impacts on the
customer, the taxpayer, as well as on the government at large.
Clearly, the quality of interaction, in addition to it
being faster and cheaper, the quality is vastly enhanced based
on the statistics that both of you cited in your opening
statements; and based on what we also know to be the taxpayer's
ultimate desire in this process--which is, get closure and know
that there is closure. The quality of that interaction when
done electronically is one that facilitates that much better
than the historical paper processes.
And last, we are clearly in a world today where our
customers do not differentiate their customer expectations when
dealing with a government entity versus a financial services
industry. So essentially what customers are superimposing on
us, where we can like it or not, is an expectation that we
offer a quality of interaction, a quality of products and
services that are analogous to what they have experienced in
dealing with their credit card companies, banks, insurance
companies, financial institutions.
I think what we already have on the docket are some things
that have begun to make the right advances in the right areas,
and some of these I will not regale you with all the rats and
the stats. I think, however, you are quite familiar that our
electronic filing product is one, that again this last year
made 19-percent improvement over the prior year in terms of the
people that participated in it. Somewhere between 14 and 15
million people will have filed the conventional electronic file
return this year; 366,000 of them though have done it using
their individual PCs, which is an opening that we hope to
continue to be able to exploit. In addition to the very fertile
marketplace of those 70 percent that are today done on
computers, and the high percent that are done by practitioners,
we also want the window of an individual preparer of a tax
return, based on a software package, to be able to come at us
through the electronic filing process.
I think that the TeleFile product is one that has only been
in the second year of operation. That is a product that clearly
speaks to one specific segment, the 1040-EZ filer. That is a
segment though that we found reacted quite nicely to the
product, based on its ease. It is a product that I think some
of you know. Almost 5 million people participated in TeleFile
last year. Essentially an 8-minute telephone call allows people
to totally satisfy their tax obligation. At the end of that
transaction on a telephone it allows people to know, by virtue
of a code that we give them, that their return has been
accepted. They have the closure and the certitude that they
have told us and that is so important to them.
I have a couple of attachments in my prepared testimony and
a couple of charts over here on the side, which reflect the
general progress in both the overall TeleFile and in the
overall ELF and TeleFile. I think those of you who served on
this Subcommittee over a period of time, know that the dip in
our progress is, in large part, a function of us collectively
deciding that we had to respond to what were some pretty
significant questions about some types of fraud to which the
system was at risk a couple of years ago. And so, in large
part, the dip you see in 1995 was a function of a series of
changes we made to mitigate some of those risks. We are hopeful
that the trend that is reflected in the two subsequent years is
a trend that we cannot only sustain at the incremental level,
but I think we share the interest of doing some geometric
increases there wherever possible.
Electronic business returns are something that we came to
after our initial foray and the individual return filing. To
date, we have had some reasonably good experience with bringing
the 941, the employer's quarterly tax return, into the
electronic process. This year we have piloted, again taking the
smallest businesses with the less complex kinds of
transactions, in a 10-State area with putting a TeleFile
product in front of them as well, and to date we have had
50,000 returns that have been filed using that TeleFile
process, with the customer reaction being exactly the same as
it was on the individual side. In excess of 99 percent of the
people who have used that have said to us, ``I want that
product. I like that product. It is an improvement over the way
I used to do business with you.''
Based on the experience we have had in this pilot in the
10-State area we will actually operationalize it and go
nationwide with it next year, again creating an opportunity for
the smaller businesses to do those quarterly tax transactions
on the telephone, rather than using the process of returns and
coupons as in the past.
The fifth arena that is frequently not talked about in the
same breath as electronic filing, but is equally crucial to us,
is what we have been able to produce in our Web site. We call
it our Digital Daily. It is indeed the process by which we
created an electronic window or door, or access to the
population at large. The last filing season 117 million people
came through that digital door, often in search of a technical
tax law answer. They would have otherwise wanted to call us, or
walk into an office, or do something more arduous to find the
answer.
Also notably, 6 million times during the filing season,
that Digital Daily--our home page--was the source for a copy of
a form or a copy of a publication. Somebody, presumably at
their kitchen table on a Sunday or Monday, or the night before
filing, could access the IRS Web site instead of having to
traipse off to find that form or publication.
So we think that that represents the nugget of what will
still be a considerable opportunity to leverage more fully in
this Electronic Tax Administration business.
One facet that we experimented with last year, and we again
expect to be able to expand on this experiment, is we began to
take e-mail messages back from taxpayers. Last year in a
relatively controlled environment, we invited people to ask
their technical tax questions on e-mail. And of course, that
again creates a flexibility as to when and where we respond to
those. That takes some of the contention out of the business
hours. Somebody might either be trying to get to a walk-in
counter, or get to our toll-free number. So again, the whole
ability to leverage the advance of technology on the Web is one
that we think is a considerable and important part of our
future.
Something on which this Subcommittee had an awful lot of
involvement with us, and on which many of you gave some counsel
both to me directly, and us collectively, was the whole EFTPS
process. There was, of course, a fair amount of legitimate
skepticism. As that electronic tax payment system was first
introduced there were many who were concerned about the extent
to which both the users and the custodians of that process were
ready at the time that it went in place. I am pleased to report
though that I think the early experience from that is also a
harbinger of some very good potential with respect to making
payments electronically.
As you know, we worried about the extent to which people
would--those in the mandated category--would indeed be enrolled
on time, and 96 percent of the 1.1 million people who were
``mandated,'' are indeed enrolled. In addition to the 96
percent that are enrolled there are some 500,000 people who are
voluntarily in the process because of either the sense it makes
to them, or some appeal to using the system that they have
identified in the process.
We have at this point in the year accepted a half trillion
dollars electronically through the combination of the new EFTPS
and the phaseout of the old TaxLink process. That represents
about 46 percent of all deposits that have been made this year.
The error rate that is being run right now is one-quarter of 1
percent on those transactions. So I think there are an awful
lot of people who were vigorous in their participation with us,
interested in getting this off and getting it off right. We
took an awful lot of input, not only from the Members of the
Congress but from small business. There were many, many
constituencies interested in this thing working right. And I
think as an opening volley it looks like it does work right; it
looks like it is an opportunity for us to leverage on, as I
said, other electronic payment processes.
One last area is an area also that this Subcommittee has
been quite interested in, and that is the whole business of how
do we bring greater effectiveness to telephone access to the
Internal Revenue Service. In the past the way we might have
thought about that is, you need more bodies to answer more
calls. While that is some part of the solution, the other thing
that we have been experimenting with, and have what we think
are some reasonably nice early results, is the ability to find
the kinds of questions and those kinds of inquiries that the
taxpayer can assist himself to a conclusion. They may not
require personal interaction in an office or over the
telephone. And we have put in place something that we call a
Telephone Routing Interactive System, through which people can
do such things as call the IRS and set up an installment
agreement in response to a notice or a bill that they have
gotten from us.
They can obtain, for example, most current payoff balance,
if they are interested in sending us a check or sending us a
payment that pays off their account. If they are interested in
the status of their refund, either because they are just
curious, or because there is some financial transaction that is
pending receipt of that refund, they can also get that
information.
If they desire to get a copy either of their tax return or
a transcript of their account to be used in a transaction, such
as a mortgage or student loan application, they can also get
that under that interactive system. This is something that this
year we took 2.9 million calls on, and it is not operational
across the organization yet, but we look forward to being able
to make it operational systemwide very soon. That is in
addition to 48 million of what we would have called our more
classic kinds of computer-assisted calls that come in through
our TeleTax system today.
As much as we are proud of what has happened, it is
building the pattern that reflects the kind of incremental, but
strong growth, in these products. It is clear to us, and has
been for some time, that what we really want to do is leverage
this; not incrementally but exponentially if at all possible.
And that is what inspired us a better part of a year ago to
create what we have now created in our Electronic Tax
Administration, the Assistant Commissionership. In so doing we
thought we needed to create focus within the organization that
really was responsible for leveraging the technology, but more
importantly was to be the exclusive spot for which we could
stimulate the partnering required to do this and do it right.
The key premise of how we proceed on a forward going basis
I think mirrors the Restructuring Commission's recommendation;
that is, it has to be done in partnership. There are huge
enablers created by structuring the partnerships with the
software preparers, with the practitioner community, with the
various constituencies.
What we have done in order to create a structure for that
though, is in addition to creating an organization, we have
recently had the good fortune of selecting a leader for that
organization. Some of you have met and worked with Bob Barr,
formerly with Intuit. Bob happens to be here in the audience
today and is trying to get himself relocated from San Diego.
But we have in Bob somebody who brings considerable experience
from both sides of the ledger, both experience in the business
of electronic commerce and the creation of software, and
working with the government. He also has the added benefit of
having been a tax administrator for the State of South
Carolina, and has been one of our earliest partners in making
the electronic filing project a Federal and State product.
What we will do though as a way of building on this
premise, the partnership, is this. Last week, on August 27, we
put an announcement in the Commerce Business Daily that said we
intended on September 15, as Mr. Coyne mentioned, to release a
draft RFP. Some question why we issued the draft versus the
permanent RFP. One of the things we have learned as we have
looked at the modernization blueprint life, what we realize is
when you put these things out in draft, you continue to dialog
with industry in a very positive way.
So on September 15 we will put a draft RFP out to industry,
which in large part is designed to take all comers. It is
designed to say to the constituencies that we have been
partnering with, and we know are acutely interested, as well as
every other potential player out there, these are our goals.
Our goals are to significantly expand the volumes of receipts
through the Electronic Tax Administration process. And it says
we want your ideas; your ideas of not only the technologies
associated with Electronic Tax Administration, but the
incentives, the quid pro quos, the impediments, the issues that
that constituency thinks can be addressed and overcome for the
ultimate benefit of the taxpayer/consumer's ease of filing with
us electronically.
So we are putting a considerable stock in the ability of
that request for proposal--at first the draft and then
subsequently the formal RFP--is at least the most organized and
structured way we have ever created to get what we know is a
very rich burst of feedback from those industry groups. We are
quite optimistic about the extent to which the kinds of
responses that it evokes will deal with the hard chestnuts;
will deal with the issues about signature alternatives and
authentication strategies; will deal with the capacity to truly
make these products paperless instead of today's half in/half
out world; will deal with fraud detection and prevention,
something in the past that we thought we perhaps had to own the
total laboring. I think the industries have said to us in a lot
of formal and informal ways, that they know they belong in that
business with us, and we expect that the RFP will also produce
new ideas about how to share the responsibility for mitigating
risk of fraud.
Last, one of the areas that the industries have been quite
vocal with us in the past, is how do we relate to them as a
group of players. And one of the things we are asking in the
RFP is for people to come back and talk about the ground rules
that ought to apply to the regulation, small ``r'' perhaps, of
the industries that will participate with us in electronic
commerce. So I think collectively the potential that is
resonant in the RFP to take us to the places that we all say we
want to go in this whole electronic arena, is very
considerable.
Now, in addition though to minding the results of the RFP,
there is more. My testimony makes the point.
The RFP is not designed to be some theoretical exercise
that says, tell us what we will do in the year 2000, and bump.
What the RFP is designed to do is say, our objectives are to
translate the industry's feedback into substantial return
growths in 1999, namely tax year 1998 returns filed in 1999. So
it is a very proximate set, very actionable set of
recommendations that we want from industry; all the while also
cognizant of the fact that the overall modernization blueprint
and the capacity to leverage a link to that later on, will give
us additional opportunities. But the invitation that we have
extended to the industry today is not one to come back about
theoretical things to do in the year 2000 plus, but something
to do with tax year 1998 returns that were received in calendar
year 1999.
Now, in advance of that, there are some things we can do in
the current structure, and we will do them. I made mention of a
couple of them. I will not spend a lot of time on them. I
already mentioned that we are going to expand the 941 TeleFile
in the business community. We are going to take on a couple of
additional forms in the next year in the regular ELF product
that practitioners have--one is, in order to be able to claim
the adoption credit, and the other is to claim the motor fuel
excise tax credit.
Beyond that we are looking very hard at the ability to
expand the current universe of TeleFilers. Today it is limited
to the EZ filer. We think we are going to be able to do some
things for sure next year; that we will bring in additional EZ
filers that this year might not have played, but beyond that we
are looking at ways of expanding beyond the EZ market into the
potential 1040-A market, as ways of bringing more taxpayers
into using this easiest form of transaction with us.
We are looking at the entire range of forms and schedules
that today are not included. Some of those are ones that I
think Don Lubick will at least make a reference in his
testimony that we may need congressional help to make changes
and code provisions that today might require schedules or
certifications, or things which are not readily adaptable to an
electronic submission. There are a huge number of those; there
are some of those that we will bring back no doubt to this
Subcommittee, and ask for your help and sponsorship in
implementing. But we are going to look at the whole universe of
things that today cannot be included, and look very carefully
for opportunities to even bring more in next year.
And last, with an eye toward 1999 and some of the other
opportunities we are going to have with the RFP, we are working
very closely with the FMS, the Financial Management Service,
for ways of increasing the opportunity for people who today
file balance-due returns. For the most part, the electronic
filing product, whether it is the TeleFile or the regular ELF
product is a product used by somebody who is a refund filer. In
very large part, the attractiveness is the speed of the refund;
the accuracy of the refund.
What we are very aggressively involved with right now, as I
say with FMS and Treasury, are initiatives that will create
payment options. We will, for example, do a takeoff of today's
ACH debit capacity that exists in the EFTPS system; make that
an easier process for an individual, and create opportunities
and incentives for somebody who files a balance-due return to
be equally interested in using electronic filing as a process,
and perhaps have the benefit of sending us paper 1 day, and
warehousing and triggering their ACH debit perhaps on another
date.
The last arena that I know this Subcommittee has been very
interested in, and one that is for us at the end of the day a
substantial, if not a show stopper--certainly show and center--
and that is the whole ability to get to an alternative
signature. And we are very optimistic that by the time we
confront the tax year 1998 filing season in 1999 we will have
the alternatives for signatures and the ability to capture W-2
information electronically; and, have the ability to truly
produce a paperless outcome. That, in large part is the
feedback that we have gotten both from the practitioner
community and individuals. If you call this an electronic
process it must truly be an electronic process. You cannot have
these trailing paper tentacles that we have today. And again, I
say it looks to us very optimistic that we can achieve that.
One of the things that I think--Mr. Coyne and maybe Madam
Chairman, you as well--said in your comments, and it is a place
that we got some feedback from this Subcommittee when I
appeared--I think when we talked about the filing season, and
in connection with EFTPS--you all said to us, you may know
something about tax administration. You probably do not know as
much as you should about marketing, and about advancing
products. I know in the context of the Restructuring
Commission's work, there was clearly a finding that, with
respect to some of the products that were placed online we
acted more like government bureaucrats than we did people
trying to intelligently introduce a product to our customer
base.
One of the things that we are quite excited about this
coming filing season, is we have used our communications
contractor to help us develop, not only some products, but some
approaches to introducing these electronic products in a way
more professional and more effective than we have in the past.
Just last week we brought in the practitioner groups and
other constituencies, and exposed them to what our contractors
had helped us put together. We received some pretty
enthusiastic responses from them and some good suggestions as
well. But I am hoping that with the upcoming filing season we
will also be able to put a bump on these kinds of numbers by
virtue of doing a better job of bringing the product to the
customer on the basis that the customer wants to get it. We
hope to explain its attributes in terms that are relevant to
the customer, not in terms that are relevant to perhaps a
government agency or a bureaucrat.
Let me spend just the last couple of minutes on specific
reactions to some parts of the report from the National
Commission of Restructuring. I think it is pretty self-evident
that the general thrust of that report is one that not only we
endorse, but we embrace enthusiastically with respect to the
desire to increase this entire area.
There are three or four areas though that we at a minimum
would want to be circumspect about. The first one is not really
such an area. The first one recommends that there be such a
thing called the Electronic Tax Administration Advisory Group.
On the face of it that is a good idea because it stands for the
proposition of having people in this together with you. The
only thing that I would want this Subcommittee to appreciate
is, we do not think that that statutory call is necessarily the
only answer to those kinds of partnerships.
Clearly today, we have a very active set of relationships
with what we think is the spectrum of groups. We also use the
Commission's Advisory Group and a liaison group to do that. So
the notion of making sure that we create a group that creates a
value as opposed to being a group for group's sake, is probably
where we would be somewhat careful in that provision.
The second one would be one in which there has been some
fair amount of debate, both within the confines of
restructuring and elsewhere about incentive payments. This is
something that I think is a considerably dicier proposition
than some have thought it to be. I think what we would hope to
persuade the Subcommittee is that, this is a very valid area to
explore. It is a very interesting area to explore, but it is
one that probably is best explored in the context of the
request for proposal that we have out there. So that people who
respond to us, say to us, Yes, incentives are critical in this
regard or not in some other regard. Because I think the thing
that we would not want to do is intersperse incentives in a way
that artificially affects the way that these products are
received or acted on by the marketplace.
The third area that is of some interest to us is the whole
rearrangement or potential rearrangement of the filing dates.
Again, it is clear from the work of the Restructuring
Commission that the idea was to create incentives for people to
file electronically. And while on the face of this proposal it
has the potential of doing that, it also has the potential of
creating a level of confusion or complexity that again we think
ought to be evaluated very carefully. Because among the things
that, sort of are constant in our current system is, most
people relate to April 15 as a pivotal date. Sometimes they do
not relate to it quite as pivotally as we would hope they
would, but nonetheless, April 15 is a date in large part that
is synonymous with meeting a tax obligation. And so to the
extent that we were to significantly affect that dynamic, at a
minimum our caution--my caution--would be that we do it very
carefully and very intelligently, so as to not produce a series
of unintended consequences.
I will wrap this up by saying that, clearly I have not
attempted to say the last word on any of the restructuring
proposals. I know Don will have additional comments in this
area. I personally appreciate the kind of support that we have
gotten, not only from you, Madam Chairman, but from the
Subcommittee at large, in this area. It is an area where I have
consistently felt more collegiality and support than I have any
kind of contention or antagonism. We look forward to your
continued support, and quite frankly, your ideas, and your
urgings for us, because we think collectively this is probably
one of the best metaphors the taxpayers will hold out to both
you and us with respect to treating them as customers and
meeting the needs they have. And so with that, I will be
obviously available for your questions.
[The prepared statement and attachments follow:]
Statement of Hon. Michael P. Dolan, Acting Commissioner, Internal
Revenue Service
Madame Chairman and Distinguished Members of the
Subcommittee:
I appreciate the opportunity to appear before you today to
discuss the Service's progress in and plans for Electronic Tax
Administration as well as how those relate to recommendations
made by the Commission on Restructuring the Internal Revenue
Service. For some time, Electronic Tax Administration has been
an issue of prime concern in our discussions with the IRS
Management Board. With me today is Terry Lutes, Acting
Assistant Commissioner, Electronic Tax Administration.
I. Introduction
While most of the previous dialogue, as well as the
majority of the Commission's recommendations, has focused on
our electronic filing program, I would like to talk about
electronic filing in the larger context of what we are defining
as Electronic Tax Administration. Electronic Tax Administration
(ETA) is an umbrella term we are using to describe the two-way
electronic information exchanges the IRS has with the taxpaying
public, tax practitioners, employers, and other government
organizations. Electronic transactions included in our vision
for ETA include tax returns, information returns, payments,
correspondence, and government exchange. Since the beginning of
this year, we have taken some significant strides within the
IRS to make this vision for ETA a reality.
Like many large financial services organizations, the IRS
is in the midst of fundamental change. Even though we continue
to process information, increasingly that information comes to
the IRS in electronic form instead of on paper. We, along with
the Administration, believe that the continued growth of
electronic transactions is of strategic importance to the
future of the IRS. Our efforts to provide higher quality,
faster, and more efficient services to the public depend in
large part on the exchange of information and tax return data
in electronic form. Our programs encompass more than just
electronic filing of tax returns; they are a broader effort to
provide a wide array of electronic service delivery options to
the public. At the same time we expand options and access, we
must assure that we maintain the privacy and security of
taxpayers' sensitive financial information.
Today, I would like to speak to you briefly about some of
the strategic challenges and opportunities confronting the IRS
in its Electronic Tax Administration programs. I plan to do
that by discussing our results for ETA programs from the past
year, outlining our plans for the future, and responding
directly to your questions concerning the Restructuring
Commission's recommendations in the area of Electronic Tax
Administration.
II. Recent Results
As the rest of the financial world has moved toward more
electronic transactions, the Service has been doing likewise.
IRS efforts to offer more service options to taxpayers and
practitioners that do not rely on paper have helped increase
the number of electronic transactions and decrease the volume
of paper-based transactions. Results from this most recent
filing season include the following:
Our electronic filing (ELF) system allows
individual taxpayers to file tax returns electronically through
using an IRS-approved electronic return originator (ERO). More
than 14 million taxpayers used this program in 1997, a 19%
increase over 1996. Although most of these taxpayers relied on
an ERO for the tax preparation, 366,000 of these returns were
initiated by taxpayers using tax preparation software on
personal computers. More than 4.3 million of these taxpayers
who filed electronically also took advantage of the opportunity
to simultaneously file their state tax return. Electronic
filing provides significant benefits to the taxpayer and the
IRS. The error rate for electronically filed returns this year
was less than 1 percent. This means that taxpayers
participating in electronic filing were much less likely to get
a notice from the IRS as a result of mistakes typically
associated with paper filing. The other advantage is that when
the return is accepted electronically, the taxpayer received an
acknowledgment that the return was filed and accepted.
This year more than 4.7 million taxpayers eligible
to file 1040EZ returns took advantage of the opportunity to
file their returns using a simple telephone call to our
TeleFile system. This was a 65% increase over 1996. Attachment
1 illustrates the significant growth of this program since its
nationwide roll out in 1996. Surveys of users of TeleFile show
that they are extremely satisfied; 99% like the system and
would use it again. The error rate for TeleFile returns is also
less than 1 percent and the system is one of the finalists for
the 1997 ``Innovations in American Government'' award program
sponsored by the Ford Foundation.
Attachment 2 shows the growth pattern of ELF and
TeleFile combined over the past five years. Except for the dip
which occurred in the initial year of our Revenue Protection
Strategy, our growth has been steady and one of every six
individual tax returns was filed electronically in 1997.
We are also aggressively pursuing getting more
business returns electronically. In 1997, we are on track to
receive electronically almost 500,000 Forms 941, Employer's
Quarterly Federal Tax Return, in addition to the 1.6 million we
will receive through our magnetic tape program. This spring we
began a pilot program to allow the smallest businesses to file
their Form 941s using TeleFile. The pilot has been extremely
successful with more than 50,000 taxpayers using the system
during the second quarter with an error rate of less than 1
percent and a 99% customer satisfaction rate. The IRS intends
to roll out this system nationwide in the first quarter of
1998.
Thus far this year, more than a half a trillion
dollars have been deposited electronically using our Electronic
Federal Tax Payment System (EFTPS) and the older Taxlink system
rather than using paper coupons. This represents 46% of the
total dollars collected. Of the taxpayers mandated to use
EFTPS, 1.1 million, 96% of the total, have enrolled as shown in
Attachment 3. More than 500,000 taxpayers not covered by the
mandate have also already enrolled and this number is growing.
The current error rate for these electronic transactions is
.21%. Attachment 4 shows the growth in the percentage of tax
dollars collected electronically.
The Digital Daily, our award-winning home page on
the World Wide Web experienced more than 117 million hits this
past filing season which included the downloading of more than
six million forms and publications. As you know, this service
is available 24 hours a day and taxpayers can get access to
needed information in the comfort of their home or business
upon demand. Additionally, this past filing season we began
testing the use of the Internet for E-mail customer service
inquiries and responses. The initial feedback on this service
has been extremely positive and we will offer this service
nationwide next year.
The IRS has also expanded the use of technology to increase
telephone access to services for taxpayers.
Thus far this fiscal year, we have had 2.9 million
calls completed through our Telephone Routing Interactive
System (TRIS) which provides for resolution of certain customer
inquiries without human intervention. Currently taxpayers can
use the system for services such as setting up an installment
agreement or obtaining payoff information for a balance due
account, determining the status of a refund and ordering an
account transcript or copy of their return. Additionally, 48
million taxpayers accessed our older Teletax system this year
and received information such as answers to a wide range of
basic tax law questions and refund inquiries.
III. Plans for the Future
We are extremely encouraged by our success with electronic
filing systems up to this point. But, to be frank, taxpayers'
use of the ELF and Telefile systems has not grown as rapidly as
we had hoped and the potential uses of technology have grown
far beyond our original concepts. As a result, we are
formulating a broader strategy for electronic service delivery
that builds our services through partnership with private
industry.
To provide a focus to our plans in this area, this past
year the IRS established an Electronic Tax Administration (ETA)
organization devoted solely to the operation and enhancement of
ETA. As you know, we recently announced the selection of Bob
Barr as the first permanent Assistant Commissioner to head this
organization. Bob will join us in October from his position as
a Vice President for Intuit Corporation, where he worked
extensively on Federal and State electronic filing programs.
Bob also has prior experience in tax administration as he
previously served with the South Carolina State Tax Commission
and on the IRS Commissioner's Advisory Group and the
Information Returns Program Advisory Committee (IRPAC). We are
excited about the impact Bob's extensive program knowledge,
private and public sector experience, and business savvy will
have on our ability to move the program forward.
This is consistent with our efforts to strike strategic
partnerships with the private sector outlined in the
Modernization Blueprint and the hiring of a prime integration
contractor. The IRS is also seeking private, public, and not-
for-profit sector assistance to increase electronic transaction
volumes in the next several years. We believe that we can best
address critical issues for ETA such as authentication, fraud
detection and prevention, third-party ground rules governing
participation in the electronic filing programs, and accepting
all forms and schedules by using a structured process to seek
and evaluate proposals from outside the IRS. To put these
partnerships in place, the IRS placed a notice in the Commerce
Business Daily dated August 27, 1997, announcing that the IRS
will issue a draft Request for Proposals (RFP) on September 15,
1997. This RFP is being issued in draft form at this time so
that external ETA partners can provide input into the final
procurement, resulting in maximum responses to the RFP from
outside the IRS. We are structuring this RFP in a manner that
solicits easy to implement proposals which can impact the 1999
filing season. In addition, it will solicit long term
partnerships which will help the IRS design systems and
programs in a manner which will maximize taxpayer and return
preparer use.
While we are excited about the possible results of the RFP,
we are continuing to move ahead with efforts to enhance and
expand our successful electronic programs where it clearly
makes sense.
We will expand our E-mail customer service
capacity and additional services will be provided through TRIS.
New TRIS services will include automated determination of the
status of payments. If additional funding to combat EITC fraud
is received as expected, TRIS will also provide for releases of
refunds involving invalid social security numbers.
We intend to roll out 941 Telefile nationwide in
1998 and are projecting that more than one million returns will
be filed through the system in the first year.
While significant portions of our programming
resources have been committed to Century Date Change and
implementation of tax law changes, we will be able to accept
two additional forms, those involving adoption credits and
motor fuel excise taxes, as attachments for ELF returns.
Additionally, returns where either the taxpayer or a dependent
has an Individual Taxpayer Identification Number (ITIN) or
Adoption Taxpayer Identification Number (ATIN) will be accepted
by ELF for the first time.
We are in the process of initiating a complete
analysis of all forms and schedules not currently accepted
through the ELF system to identify all of the issues related to
each to determine the steps we need to take in order to accept
them without diminishing the accuracy rate for ELF returns or
increasing refund fraud. We expect to use the results of this
analysis, along with the proposals resulting from the RFP, to
develop during fiscal year 1998 a comprehensive plan for
accepting all forms and schedules.
We are in the process of completing a thorough
analysis of the extent to which we can broaden the range of
1040 returns accepted through TeleFile without diminishing
taxpayer satisfaction due to the increased complexity of the
telephone interaction. This effort will lead to expansion of
the number of taxpayers eligible to file returns through
TeleFile for the 1999 filing season.
We are actively working with the Financial
Management Service and the private sector to develop payment
alternatives which would be cost effective for the government
and give taxpayers a choice in how to make tax payments. By
working closely with the Department and the Financial
Management Service, we are developing plans which, beginning in
1999, will allow taxpayers filing balance due electronic
returns to pay using an Automated Clearing House (ACH) debit
payment as part of the electronic return. We will be looking at
all ACH credit and debit options including home banking and
telephone payment systems, as well as working with credit card
companies under the legislation contained in the Taxpayer
Relief Act of 1997 (P.L. 105-34) to determine the potential for
payment of federal taxes by credit card.
Most significantly, plans are now under
development which we believe will lead us to an alternative
electronic signature for ELF returns in 1999. This would
eliminate the most frequent criticism of the program--that the
system has not up to this point been paperless. Feedback from
the practitioners' community has been that this alone will
significantly increase the willingness of tax preparers to file
returns electronically.
We have listened to feedback from external stakeholders and
consultants that we need to do a better job of introducing
taxpayers and tax practitioners to the benefits of electronic
transactions. Thus, for the upcoming filing season and the
longer term, the IRS is going to increase its efforts to inform
and educate taxpayers and practitioners about the benefits of
electronic filing. Despite the recent successes in increasing
electronic filing volumes, we believe that taxpayers and tax
practitioners have to better understand the benefits of filing
electronically compared to filing on paper. To that end, we are
working with an outside marketing firm to develop a strategy
for increasing public awareness and use of electronic filing
options for this upcoming filing season. Just last week, we
provided a preview of this new electronic filing marketing
strategy for tax year 1997 to practitioner and industry groups.
Preliminary responses to our efforts to promote the benefits of
electronic filing in concert with the practitioner community
have been quite positive. While we are still finalizing this
strategy, we are confident that it is going to be a substantive
improvement to our past communications efforts. At the same
time, we are conducting a comprehensive market research study
to enable us to better understand taxpayer needs and concerns
related to electronic tax administration. This will allow us to
focus our long term marketing efforts as well as to assist us
in modifying current electronic products and developing future
ones that meet taxpayer needs.
IV. IRS Perspective on Commission Recommendations
As you can see, many of the steps we have underway are
consistent with the recommendations contained in the Final
Report of the National Commission on Restructuring the IRS.
Since the Commission made a significant number of
recommendations relative to electronic tax administration, I am
not going to try to address all of them individually in this
testimony although we will be happy to address any questions
you have. However, I do want to comment on several of them
which I have not directly addressed in outlining our plans for
the future. Additionally, I want to discuss legislative
proposals relative to ETA that we have been assisting the
Department in developing.
First, the Commission recommended that an Electronic Tax
Administration Advisory Group, consisting of external
stakeholders, be formed to advise the IRS on ETA programs and
plans. We have no objection to this proposal and are developing
plans that would enable us to establish such a group under the
Federal Advisory Committee Act. However, I want to emphasize
that the electronic filing program would not be where it is
today if we did not have regular interaction with the
stakeholders and give careful consideration to their concerns.
There would be no ELF program if it were not for the software
companies, electronic return originators and transmitters. We
have almost daily informal communications, our current
Electronic Tax Administration executives have been regular
participants in meetings of the various trade organizations
and, where appropriate, we have convened forums of industry
representatives to address common issues. Additionally, the
Commissioner's Advisory Group and the Commissioner's Liaison
Group have frequently provided advice on ETA matters. In
establishing a separate advisory group for ETA, we want to make
certain that it is value added, not merely a duplication of
existing external stakeholder groups.
Second, much discussion has occurred relative to the
Commission proposal for payment of incentives to third parties
for electronic returns. We believe that this is an option well
worth considering and our RFP will provide a mechanism for
evaluating such proposals. We are, however, opposed to such
payments being legislatively required. We need to determine the
level of savings for electronically received returns compared
to paper. We need to let the market determine (though the RFP)
what level and kind of reimbursement third party service
providers require, and then determine whether using savings
from increased volumes of electronic filing to reimburse third
parties is in the best interest of the government. We believe
that the RFP process is the best tool for answering these
questions and the market research will help us better
understand the potential for payments to increase the volume of
electronic returns. One additional point that must be made is
that any requirement to make payments out of the IRS budget for
those 19 million returns currently received through ELF or
TeleFile would essentially cause us to make a commensurate
decrease in effort in customer service or compliance programs.
Our RFP process is being designed to ensure that we only pay
for the additional volume of returns received.
Next I would like to point out that we have a number of
concerns about the proposed realignment of due dates for
electronic returns. While this proposal might result in some
increase in the use of electronic filing, it would also add new
complexity in one area of taxation where there is no
confusion--the fact that tax returns are due on April 15. It
would also add complexity to the administration of the tax law
which always comes with a cost. Finally, I would like to
reinforce the Department's assessment that the cost of delayed
receipt of payments on balance due returns would be
significant.
VI. Conclusion
I have not attempted to specifically address every
recommendation the Restructuring Commission presented on ETA.
However, I believe that the progress we have made in increasing
the volume of electronic transactions as well as the range of
electronic services available for taxpayers, along with the
enhancements we have under development, show that we are in
agreement with the general direction of, and the emphasis
placed on electronic services by the Commission even if we
disagree with some of the specific proposals. The continued
growth of electronic transactions is of strategic importance to
the future of the IRS. It is our intent to work with the
Congress and the other interested groups to assure that we
provide taxpayers with electronic tax administration options
that are secure, easy to use, and that provide for levels of
accuracy that minimize the need for taxpayer interaction with
the IRS to resolve problems.
Madame Chairman, I want to thank you and the Subcommittee
for your continued support and for the insight that led you to
emphasize the important of electronic tax administration by
making this your initial hearing regarding the Final Report of
the Commission. I will be happy to answer any questions you may
have.
[GRAPHIC] [TIFF OMITTED] T1199.001
[GRAPHIC] [TIFF OMITTED] T1199.002
[GRAPHIC] [TIFF OMITTED] T1199.003
[GRAPHIC] [TIFF OMITTED] T1199.004
Chairman Johnson. Thank you, Mr. Dolan. In your testimony
and toward the end of your opening remarks, you do begin to
address the Commission proposals. First of all, let me say it
is extremely helpful to have you go through and share with us
the efforts that the Department is making and the new
initiatives, and where you are with electronic filing; that is
very useful, and it is gratifying to know that the majority of
the mandated filers have now registered, and we will watch that
process with you with great interest.
I am pleased that we did relieve the penalties, because
there are problems yet to be ironed out, as people actually
start paying through this system, and recognizing that it is
not just withholding taxes, but it is all taxes. So, we will be
interested in working with you or following with you the
progress of that program. And I appreciate the overview that
you have given us very much.
In addressing the Commission's recommendations, you discuss
the Advisory Group proposal, and the use that you have made of
advisory groups and of regular interaction with stakeholders.
Is then the bottom line that you oppose establishing in law
an advisory group?
Mr. Dolan. No, I think it was more, Madam Chairman, a
request that, any legislative attempt to codify a partnership
be one that is cognizant of both the processes that are
currently in place, and does not establish a group for the sake
of a group; one that creates the dynamic that we will have it
be. I think I personally take the position that it is probably
not necessary. To the extent that somebody codifies it in law,
my petition would be that it would be done with an eye toward
being more effective and not be a constant formality.
Chairman Johnson. In other words, with recognition of what
has worked for you and your experience in this area.
On the second recommendation that you discussed--excuse me,
I misunderstood your comments, Mr. Lubick.
I know my staff had discussed with you the order in which
people were going to testify, so we have the order down there,
but when your comments were made I thought you meant that Mr.
Dolan was going to present everybody's proposals, and then that
all of you were going to take part in the questioning.
Mr. Lubick. I will not trespass on your time very much.
Chairman Johnson. Now, you would like to comment, and would
Mr. Lutes like to comment as well?
Mr. Lubick. I wonder if I might just take a couple of
minutes----
Chairman Johnson. You certainly may.
Mr. Lubick [continuing]. And we can answer questions
jointly.
STATEMENT OF LAWRENCE H. SUMMERS, DEPUTY SECRETARY, AS
PRESENTED BY HON. DONALD C. LUBICK, ACTING ASSISTANT SECRETARY,
TAX POLICY, U.S. DEPARTMENT OF THE TREASURY
Mr. Lubick. As you know I am the pinch-hitter today for
Deputy Secretary Summers, who is chairing an international
conference out of the country, and he has prepared a written
statement, which I ask be included in the record. And I will
just spend a couple of minutes dealing primarily with the
legislative aspects that have been raised.
[The prepared statement of Secretary Summers follows:]
Statement of Hon. Lawrence H. Summers, Deputy Secretary, U.S.
Department of the Treasury
I am pleased to be able to submit testimony today on the
subject of electronic tax administration (ETA). I understand
that Deputy Commissioner, and currently Acting Commissioner, of
the Internal Revenue Service, Michael Dolan, and Acting
Assistant Secretary for Tax Policy, Donald C. Lubick, will be
appearing before you to testify in more detail on current
efforts underway at the IRS in this area.
I would like to focus my comments on three areas. First, I
would like to describe our overall strategy for increasing the
level of electronic filing and reporting. Second, I will
discuss legislation introduced yesterday by Congressman Coyne
to give us the tools we need to further improve our system of
electronic tax administration. Finally, I will comment briefly
on other legislation that has been proposed.
I. Our Strategy for Electronic Tax Administration
Since Secretary Rubin and I announced a sharp turn in our
approach to modernization of the IRS, we have dramatically
strengthened leadership and increased oversight of the IRS. Our
goal has been to promote continuity, accountability and
increased access to outside public and private sector
expertise.
As you know, we have identified a new Commissioner for the
IRS with a background in information technology. We have in
place a new Chief Information Officer, Art Gross, who has
assembled a new team to modernize the information architecture
of the Service. Next month, a new Assistant Commissioner for
Electronic Tax Administration will assume his duties. All in
all, we have put new leadership in place with knowledge about
information technology.
At the same time, we have significantly expanded our
partnership with industry. We are in the process of identifying
a new prime contractor for information technology. Next week,
we will release a draft Request for Proposals (RFP) for comment
from a variety of electronic tax administration partners. After
making necessary changes, we expect to issue the RFP in final
format by the end of the year. Our new IRS Management Board,
the successor to the Modernization Management Board (MMB), as
well as the new Advisory Board, which the President has created
by Executive Order, will bring outside expertise to the
administration of our system of taxation.
While we are committed to deep and significant structural
reform, we are not waiting for these deeper changes to take
place to improve the level and quality of electronic tax
administration.
Madame Chairman, we believe--in common with many members of
this body--that electronic transactions are an indispensable
part of building the IRS of the future. Electronic tax
administration may offer many advantages to taxpayers and the
government compared with traditional paper processing. It can
reduce costs and errors. It speeds up the process of tax
administration. It expedites refunds. For most Americans who
have access to computers, it will be generally more efficient
and economical than paper-based methods.
Over the last two years, we have begun a process to
markedly improve the quality and level of electronic service
for taxpayers. We have seen increases in the use of existing
electronic products and we are taking steps that will expand
and enhance those products while at the same planning for new
products and services. Let me go through a number of specific
examples.
II. 1998--Investing in Successful Programs
The IRS currently has two major programs that permit
electronic filing. Of the more than 118 million individual tax
returns filed this year, 14.4 million were filed through the
Electronic Filing (ELF) program, including 366,000 in which
taxpayers used a personal computer and tax preparation software
to file from home through a transmitter. An additional 4.7
million filers, eligible to file a 1040 EZ return, participated
in the TeleFile program using a touch tone phone. Both of these
programs have been expanding at a steady pace. In 1997, 19%
more taxpayers filed using the ELF program than in 1996, while
use of TeleFile was up 65%. TeleFile is a finalist for the 1997
``Innovating in American Government'' award program sponsored
by the Ford Foundation.
In 1998, we are committed to investing in and expanding
these successful programs.
TeleFile
At present, for fraud control and technical reasons,
taxpayers who have moved in the last year are unable to file
using the TeleFile program. Therefore, for 1998 we have
developed a methodology which will allow us to update our
TeleFile address directory, making approximately six million
more taxpayers eligible to use the system.
Second, based upon a pilot currently underway, we expect
that next year 25% of the businesses required to file quarterly
Form 941 returns will be able to use the TeleFile system to
file those returns with a 10 minute phone call. This group will
represent smaller businesses, a significant step in our efforts
to minimize burden for those taxpayers.
Electronic Filing (ELF)
This year almost 50% of individual taxpayers used a paid
preparer to complete their returns. Almost all returns prepared
by these paid preparers are completed using computer programs.
This makes nearly 60 million taxpayers potentially eligible for
the ELF program on this basis alone. Approximately eight
million taxpayers prepared their returns on their home
computers, many with software that could have been used to
transmit the return to the IRS electronically. However, most of
these returns are still filed on paper. A primary focus over
the next several years will be to get those returns already
being prepared on a computer program sent to the Service
electronically.
Next year we hope to launch a large educational campaign to
inform more practitioners and taxpayers about the benefits of
this program and have already awarded a contract for design and
development of this campaign.
We are also continuing with steps to assure that the ELF
system ultimately will be open to all forms and schedules.
Several new forms are being added for 1998 and the system will
also be ready to accept Adoption Taxpayer Identification
Numbers (ATINs) and Individual Taxpayer Identification Numbers
(ITINS).
III. 1999--Paperless Filing
These are important steps. But looking forward to 1999, we
have additional improvements in mind. First, we have asked the
Service to undertake all possible efforts to accept an
alternative signature for the ELF system for the 1999 filing
season. The need to send the IRS a paper signature document is
the most frequently criticized element of the ELF program.
However, the signature is a legal requirement for a tax return.
The Department believes that in the electronic age, what we
need is not a traditional paper signature per se, but rather a
system for authenticating that the return filed is that of the
taxpayer identified on the return. The Service, in common with
many other government agencies, has been using some signature
alternatives for a number of years and is testing others. We
believe it time to apply the available technology to the ELF
program.
In addition, in 1999 we hope to make it possible for those
taxpayers filing balance due returns to be able to authorize an
electronic payment as part of their electronic return. This
will eliminate the need for paper payments and will represent a
big step forward in our quest to offer taxpayers a suite of
electronic options for making tax payments. I should add at
this point that the IRS is beginning an effort to implement the
legislation provided in the Taxpayer Relief Act of 1997 to
accept credit card and debit card payments.
IV. 2000 and Beyond--Adding Value Through New Services
In the year 2000 and beyond, we will continue to enhance
the ELF and TeleFile programs and aggressively market their
advantages for taxpayers. But we also plan to add additional
value to our electronic services by incorporating features such
as an electronic Power of Attorney and, when we are comfortable
that such a system can adequately protect taxpayer privacy,
even on-line account access. I must note, however, that we will
not develop concrete plans for these additional services until
we see the results of the ETA Request for Proposals (RFP). This
process will both help us determine what additional services
taxpayers and other stakeholders value most and help the IRS
focus its resources on those investments that will receive
widespread acceptance.
V. Our Legislation
We can and will accomplish most of our goals under current
law. But to accelerate progress in electronic filing, greater
flexibility is needed. Yesterday, Representative Coyne
introduced legislation, supported by the Administration,
entitled the Internal Revenue Service Improvement Act of 1997,
to further improve our system of tax collection. In coming
weeks and months, I expect this proposed legislation to be
widely discussed. I would like to focus my comments today on
one section of the bill, section 201, entitled Promotion of
Electronic Tax Administration.
Madame Chairman, the IRS has a demonstrated need to inform
the public about its programs and activities such as electronic
filing. Yet every year, the Treasury Department appropriations
specifically bar the use of appropriated funds for promoting
departmental programs. This has forced the Service to rely
primarily on free public service advertising to promote the
advantages of electronic services. We believe, and have been
advised by stakeholders and consultants, that we need to reach
a broader audience if we are to see dramatic growth in taxpayer
use of electronic filing. Proposed subsection 6011(g) would
explicitly authorize the Secretary to use appropriated funds to
promote and encourage the use of electronic filing methods.
The legislation would also authorize the use of
appropriated funds to provide financial incentives for
electronic filing. Our RFP will open the door for such
proposals and we would like clear legislative authority to use
a portion of the savings gained through electronically filed
returns to make incentive payments, provided the proposals are
in the best interest of the government.
Currently the tax code requires that certain statements and
supporting documents, which are difficult to accept
electronically, be filed as part of the return. The legislation
would permit the Secretary to prescribe alternative ways of
receiving information necessary to ensure that the return is
accurately filed.
The legislation would also explicitly establish that the
Secretary has the authority to establish signature requirements
for electronic returns and other forms. It would also clearly
establish the legal standing of documents authenticated by
means other than the traditional paper signature. This step is
necessary if we are to truly move the maximum number of
transactions to electronic media while maintaining our ability
to address civil and criminal fraud.
Finally, the legislation would also enable the Secretary to
explicitly establish that the acknowledgment of return
acceptance, which is provided by both the ELF and TeleFile
systems, constitutes prima facie evidence of filing. This will
establish a clear legal basis for what we believe to be one of
the major advantages of electronic filing for the taxpayer:
proof that the return was, in fact, received and accepted on a
timely basis by the IRS.
We believe these provisions will give the IRS the statutory
authority it needs to dramatically increase electronic filing.
VI. Other Legislative Alternatives
We believe the approach to electronic tax administration
taken by our bill, combined with the RFP and our proposed
management structure, is the best one to prepare the IRS for
the twenty-first century. However, we realize that the
Subcommittee is also considering the legislation introduced by
Congressman Portman, based on the report of the National
Commission on Restructuring the IRS.
We share the overall goals of that legislation and the
objective of increasing electronic filing. A comparison of our
legislation with Senator Kerrey's and Congressman Portman's
bill will also demonstrate that we agree on many, but not all,
of the particulars. I believe that there are some key
principles that should be followed in negotiating this
legislation.
First, we must not force people to file electronically.
Secretary Rubin and I believe the marketplace will work better
than arbitrary targets or the equivalent of mandates. While
computer access is steadily climbing, it is important to
recognize that more than half of Americans do not have computer
access. Any requirement that taxpayers file electronically
would force those without a computer to use tax preparers or a
public computer, for example, in a library. This would unfairly
disadvantage a large segment of our population. We must
recognize that paper returns will remain important, and we must
continue to support paper submissions for the foreseeable
future. It would be wrong for example to require that some
specified percentage of forms be filed electronically by a
certain date.
Second, we need to be realistic about adding major new
burdens to the IRS. We should avoid adding major new elements
of complexity to tax administration.
Finally, as we all know, the electronic environment and the
marketplace are evolving rapidly. What works today may not work
tomorrow. For this reason, it is vital that we retain
flexibility. The Congress and the Administration should agree
on objectives and overall direction; however, like the private
sector, we as a government should not impose rigid targets or
lock ourselves into solutions that will soon be outdated.
These principles should guide us in looking at the specific
proposals included in the Restructuring Commission report and
the legislation offered by Senator Kerrey and Congressman
Portman. As I have previously testified, there is much we agree
with in this report. And we share many of the same goals. We
do, however, differ in some specific requirements regarding
electronic filing. Let me briefly discuss some of these
differences.
Portions of the proposed legislation would make major
changes in the overall filing program. In my view, these could
be disruptive and are unnecessary. Instead, we need to rely on
the judgment and abilities of taxpayers, government employees
and the continued strong oversight by Congress and Treasury,
working in partnership with the IRS, to keep us on track.
First, the bill mandates the implementation of specific
programs that have not been tested or evaluated, may expose the
system to fraud and may entail major new costs. Madame
Chairman, I do not believe that this is the best way to
implement public policies. The mandates in the bill do not meet
the criteria I described above, which I am sure we jointly
share.
Second, H.R. 2292 would extend the filing dates for
electronically filed individual, corporate and information
returns. This provision would significantly increase the
complexity of the system, making it harder for taxpayers to
understand and harder for the IRS to administer. Indeed, Madame
Chairman, it would devalue what may be one of the IRS's
greatest intangible assets, the public's knowledge that returns
are due April 15. The proposal also favors sophisticated,
balance-due taxpayers over middle and lower income filers who
are owed refunds. Changing the filing date would cost the
Federal government several hundred million dollars each year in
additional interest. We do not believe this is a wise use of
Federal resources for the purpose of encouraging electronic
filing.
The bill would also mandate a program to pay fees to
transmitters (not preparers) of electronic returns. In the
absence of clear evidence that these provisions are worth what
they would cost, we believe they are ill-advised and premature.
While government may be able to structure incentives to
encourage electronic filing, these incentives should be
carefully developed. Our RFP will clearly be open to such
proposals, and we will pursue them if they prove to be the
best, most cost-effective method of increasing electronic
filing.
Finally, the Kerrey-Portman legislation provides for new
regulation of return preparers--although we note that it does
not provide any funding and actually prohibits the IRS from
administering examinations in order to qualify as a return
preparer. While there are some clear advantages to the proposed
regulations, the administrative cost of effective regulation,
and enforcement of those regulations, covering everyone who
prepares tax returns for a fee would be significant. We do not
believe this would represent the best use of the IRS's limited
resources.
VII. Conclusion
In conclusion, we are making progress on increasing
electronic filing. But going forward, additional legislative
authority is required. I have outlined our approach as well as
the principles that I believe will best guide legislative
action in this area. As we go forth, we look forward to working
closely with members of this Subcommittee and others on our
shared goal of increasing the level of electronic filing.
Mr. Lubick. Commissioner Dolan has explained in detail the
current efforts underway at the IRS, and the advances that he
has described reflect, I believe, the first fruits of the
Treasury Department's increased concern for the revitalization
for our system of tax administration and our oversight role in
that.
We have new leadership in place at the IRS with an
increased level of knowledge of information technology. Mr.
Dolan has described the increased reliance on outside
expertise. The management board on which I sit has been made
permanent by executive order. And in all of this, nowhere has
more attention been paid than in this area of Electronic Tax
Administration, and I think it is very encouraging to see the
progress that Commissioner Dolan has described.
There are a few matters involving legislation, and I think
that, although the improvements that have been made are
significant, I believe we share the opinion of many of the
Members of this Subcommittee, that to take electronic filing to
the potential that it deserves, legislation is appropriate.
There are apparently two bills on the table. Yesterday
Congressmen Rangel, Coyne, Hoyer, Waxman, and Matsui introduced
legislation entitled the IRS Improvement Act of 1997, and of
course Congressman Portman has introduced a bill, which is the
outcome of--and Mr. Cardin, which is the outcome of the
Restructuring Commission.
The Code currently requires that certain supporting
documents be provided on paper, and the IRS Improvement Act
would give the Secretary the explicit authority to prescribe
alternative methods of verification for electronic returns, and
would allow electronic receipts to serve as prima facie
evidence of filing. We believe the tools in that act, in common
with the legislation proposed by Congressmen Cardin and
Portman, would give the IRS much needed flexibility to adapt to
the new information technologies.
We do have some differences and some concerns about aspects
of the legislation introduced by Congressmen Portman and
Cardin, and I think I can summarize them very quickly.
In particular we are concerned about mandates or their
functional equivalents through specified targets, and we are
afraid that this will introduce a rigidity in an area where
flexibility is really the order of the day. We have seen such
rapid developments in technology that what appears to be truly
useful today can indeed be a burden in a relatively short time.
It is true that more Americans are gaining access to a
computer daily, but it is unlikely that in the foreseeable
future all Americans will have that access. We think there
ought not to be any requirement that everyone file
electronically; that would be unfair to those without computers
who choose not to pay for professional assistance. And we think
that a specified target perhaps would lock us in to areas where
more flexibility would be necessary.
Another provision that is inconsistent in our view with
sound tax policy is, which the Commissioner has referred to,
the extension of the filing dates for those who file
electronically. Alternative deadlines we think may well impair
tax compliance and will certainly cost revenue in favor of
sophisticated taxpayers who have balances due. Moreover, since
sophisticated balance-due taxpayers might be more likely to
file electronically if the deadline were extended, postponing
that deadline for electronic filers would be unfair compared to
middle- and low-income working families who are frequently in a
refund position.
And again, we probably think it is unwise to mandate
incentives for transmitters of electronic returns. We agree,
however, that we do not want to dismiss the notion of
incentives, and therefore we think it is much sounder to go the
route of giving authority to develop incentives.
So in sum, while we, I think, share qualitatively most of
the provisions of the bills in common, we think in a few areas
that there should be no mandates, rather authorization, more
flexibility, no dual filing dates, and no specific percentages.
This is not to say that we do not think that the work of this
Subcommittee in monitoring the progress of the IRS in achieving
these objectives is not necessary; indeed we welcome it and we
would like to work closely with you, and report to you, so that
you can constantly see what progress is being made. And we
think that we can work as partners more effectively on that
basis.
We thank you for your interest in this, and I will attempt
to join Commissioner Dolan in answering any questions which you
have.
Chairman Johnson. Mr. Lutes, do you have a statement also?
Mr. Lutes. No.
Chairman Johnson. Thank you. In your testimony you
mentioned that you need to determine the level of savings for
electronically received returns compared to the cost of paper
returns.
Does the IRS have an estimate of the average cost of
processing a paper tax return, and do you accept the $7 as the
average cost of processing a paper return? And if not, how far
are you from knowing these facts?
Mr. Dolan. I like the last question better than I do the
first two, because it is one I can answer easier.
Chairman Johnson. Actually, it is sort of interesting that
the IRS does not want to deal with numbers.
Mr. Dolan. It is really more a question of having too many
numbers. And part of what has been at work here--and frankly I
am embarrassed that we did not have a way to differentiate
these numbers better, even for the Restructuring Commission.
We can tell you what the front-end processing, what the
difference is between keystroking something, and what the
difference is between getting a data stream. A part that has
never been done very effectively is that is clearly not the
only benefit of getting an electronic stream because there are
many, many things that happen in perfecting that return, and
subsequently providing taxpayer customer service. And so our
deficiency has been in really giving a number that is anything
more than this sort of simplistic up front number.
We are in the process--have been for some time, stimulated
in large part by the interaction we have with the Restructuring
Commission, of doing a cost assessment, which I believe in late
September, is supposed to serve up for us at least a far better
ability to compare than we have today.
Most of the folks who look at it, strictly with respect to
the comparisons we made on the front end, think that the 6 to 1
or $6, $7 savings, is a far exaggerated rate of savings. But I
do not want to sit here before you today and try to tell you it
should be something else to 1 until I get the benefit of this
work in September.
Chairman Johnson. Thank you. We certainly do need to refine
those numbers; that is terribly important----
Mr. Dolan. Absolutely.
Chairman Johnson [continuing]. And the contrast between
manually entering and transmitting is just so stark that the
dollar difference has got to be very significant just on the
front end. And if 70 million of the 120 million individual
filings exist on electronic record, at some point in the
process we ought to be able to take advantage of that, and when
we do, it ought to have a very significant cost component.
So, it is imperative that we move forward because that is
money we can use on technology and so on. This is an issue that
bears a lot of analysis, scrutiny, and it is just something
that we must know.
I am going to yield to my Ranking Member to question. I am
very interested in the issue of signatures, but I think that
that will come up amongst the other Members. And so that
everyone gets a chance, I am going to yield. I am going to tell
Members that we will not break for this vote. If you will go
serially so that some toward the end can go now and come back,
then we can go through the question period and keep our bearing
on our time schedule.
So thank you, Mr. Dolan and Mr. Lubick, and Mr. Lutes.
Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairman, and thank you, Mr.
Dolan and Mr. Lubick, for your testimony.
You indicated that you are going to encourage people to
file electronically, and you pointed out that one method might
be the personal computer. I wonder if you could outline for us
what would be available to the taxpayer--how they would file
their return if they did not have a personal computer but
wanted to file electronically.
Mr. Dolan. Today the principle alternative is obviously the
use of a practitioner, but there are a series of other
alternatives, which are, for example, are VITA sites----
Mr. Coyne. What sites?
Mr. Dolan. I am sorry, voluntary assistance sites.
Frequently they also make available an electronic filing
capacity. But that is sort of a hit and miss proposition today.
So short of somebody having and utilizing their own computer
access or utilizing the services of a prepared tax preparer,
there are not many systematic alternatives for somebody to go
and use either somebody else's computer or some other
electronic form of access to the system today.
Mr. Coyne. You mentioned people who use the electronic
system to file. You are still having to ask for paperwork from
them, and you want to totally eliminate that.
I wonder if you could outline for us what are the more
prevalent requests for paper that you make of electronic
filers? In other words, what are the necessary paper files?
Mr. Dolan. The principle information items that we today
receive in paper are a signature and wage information. And I
think it is pretty clear to us that we can resolve the question
of whether you need to supply W-2 information by paper, and I
think we can solve that problem on our own.
The one that has been a little dicier and the one that the
Chairman alluded to, is the extent to which we can provide an
alternative to the signature, and that comes packaged a couple
of different ways.
One, we want to be very clear that we have a process to
authenticate the return. We do not want people violating the
returns on your behalf or my behalf, and us not being able to
authenticate who the actual initiator of the return is. We also
have, in a more narrow sense, sort of an open playingfield here
with respect to our ability in subsequent kind of enforcement
actions to satisfy the judicial standards, that yes indeed,
this is a return that was filed by the person who we assert
filed it.
As Mr. Lubick indicated, the administration would like to
see us pin down with certitude that there are some of these
alternatives to the written paper signature that will have the
same legal force and effect that today's written signature
does. Today, the Secretary and the Commissioner have some
discretions about authorizing alternatives, but I think what
any bill passed could do is make that unequivocal; there are
alternatives that are legally defensible and sustainable.
Mr. Coyne. On the telephone filing system, how many
taxpayers did the IRS contact to authorize them to do it that
way this year?
Mr. Dolan. Twenty-six million then, Mr. Coyne.
Mr. Coyne. And how many took advantage of it?
Mr. Dolan. 4.7 million.
Mr. Coyne. How many?
Mr. Dolan. 4.7 million.
Mr. Coyne. And what are your plans for the new tax year
coming up?
Mr. Dolan. As I mentioned before, by every matrix we have
looked at, it is one of our best received products with a 99-
percent satisfaction rate.
Two things are going to be crucial for us. One, when a
person gets an invitation or a package from us to do TeleFile,
it is unique. It does not look like the other tax packages. It
has a set of unique characteristics. So one of the things that
our communications contractor has told us is, that we really
ought to leverage even better our equivalent of a direct mail
ability to sort out that 26--and we think it is probably going
to be more than 26 million. So we are going to try to increase
the effectiveness of the product that is first received to
alert people that they have something that is different. And we
have a couple of different schemes that we are in the final
stages of testing that may help people anticipate this package,
and may remind them that they have gotten the package, and we
hope then would get a bigger response rate.
Second, there were a number of people last year that
because they moved between the point of their last return and
their next return, were made ineligible by the criteria that we
were using to select and invite people. We think we have some
ways this year to not lose that part of the universe, but
indeed to invite many of them into the process of using the
TeleFile product as well.
So those would be the two things: First, the increased
effectiveness on the message or the marketing; and, second, the
expansion of this part of the universe, that those who moved
would have been eligible last year, and hopefully would have
participated by at least the same rate that the 25 million did.
Mr. Coyne. Thank you.
Mr. Portman. Thank you, Mr. Coyne, and thank you, Mr.
Dolan, for your work with the Commission with Mr. Coyne and
myself, and a year's worth of work on this topic, electronic
filing, and for coming here today--Mr. Lubick, thank you also
for being here.
What I thought I would do is, rather than talk more
generally about some of the issues you have discussed, many of
which we agree on, is get into some of the specifics of the
legislation. The charge today really is that this Subcommittee
is to put together a report on the legislation, H.R. 2292, and
you have addressed some of the issues.
I wanted to clarify the record, if I could, to start with
what is one of the issues apparently where there may be some
disagreement. Incidentally, I find myself alone again with
Treasury and the IRS. This will be, I am sure, a much more
amiable discussion than the last time I found myself here. I am
outnumbered today among other things.
Mr. Lubick, you said you do not like H.R. 2292 because you
should not mandate that everyone file electronically. That is
the quote I wrote down here. Of course H.R. 2292 does not
mandate that, and I think the record needs to be clarified.
This is something we talked about for a year; Mike Dolan knows
this. We went back and forth on various iterations with the
IRS, with Treasury. We made a very deliberate decision not to
mandate electronic filing. So, if it is going to be
mischaracterized, I think we are going to have a hard time
getting to points of agreement, even on these few issues where
we tend to disagree.
You say also in your testimony--at least your oral
testimony--that you are happy to have us monitor your progress,
but we should not set any guidelines. And you also say that
there should not be mandates to transmitters. There are no
mandates to transmitters in this legislation. So let us just
make that clear. What we do provide is some incentives to
transmitters that you apparently disagree with, and that is
fine, we can talk about that. But at least we need to clarify
what the legislation does.
Just briefly on the reason we came up with this--and then I
want to get some feedback, if I could, from the IRS and
Treasury--is an 80-percent goal by 10 years. Now, despite
efforts over the years to get the IRS to come up with a plan to
more aggressively pursue electronic filing, we do not have such
a plan from the IRS still. And the Commission set about its
task seriously, and put together a plan with the IRS' help that
we think is a very practical plan that makes it quite easy to
get 80 percent within 10 years. My personal view is it will
happen long before 10 years. We have seen the changes in
technology already in the last year since we have been working
on this, and we will see more changes, I am convinced. But the
notion is to set a goal, because if you do not set a goal you
are less likely to get there. And certainly the experience of
the last decade would lead us down that track, but there is no
mandate on individual taxpayers; no mandate on transmitters.
There is a goal set out very firmly to the IRS to meet that 80-
percent deadline, 80 percent of individual taxpayers filing
electronically.
I guess what I would ask, Mr. Dolan, is if you would give
us your response to that from the IRS point of view, number
one, whether you think that is an obtainable goal; and number
two, if you would give us some alternatives to that. In your
RFP you say you are going to ask that significant expansion of
electronic filing be sort of the underlying goal. Well, that is
fine. What is significant expansion?
In your strategic plan of January of this year in 1997 we
did not get a goal on electronic filing. Again, August 15, this
year, your strategic plan for the IRS is very vague about
electronic filing; the strategic plan encourages electronic
filing, and I think we agree on that, but how do you feel about
the goal and what are your alternatives to it if you do not
think it is appropriate.
Mr. Dolan. Thanks for the question. I happen, as you know,
to have the benefit of attending I think what was the last
session of the Restructuring Commission, where the group was
wrestling with how to state this, and I know there is dialog
that I missed about that. But the tension that I saw that day
is the right tension. Eighty percent, as it expresses what you
and I might believe is sort of the intuitive right place to be.
The fact that it was set against 2007, I believe, on the
surface you would look at that and say, I mean what is not to
believe about the reasonableness of that.
Now, to the extent that people are satisfied with that
level of analysis, then 80 percent may work. I think the part
that I would urge, Congressman, is that one of our problems in
the past in thinking about this in some other areas was to kind
of set an aspirational goal. Now to some extent that works, if
the aspirational goal is the kind of thing that keeps you
vigorous about trying new things. But what I guess I hoped
would happen was that the RFP process would give us an
opportunity to maybe place, through what we heard in the RFP,
maybe place the building blocks where you and I could sit
across the table and say, Hey, this is not about aspiration;
this is not about hope for good work and luck. This is a series
of building blocks that the industry has said 80 percent is too
modest or 2007 is too far off.
Mr. Portman. Mr. Dolan, I am going to have to run over and
vote. I am going to actually pass along to my colleagues. But
it sounds like you and I largely agree, and the question is
whether the legislation should establish that goal. I think we
have already heard from the industry, and we have already heard
from you, we have already heard from Treasury. We know where we
are. We have reams of testimony; we are going to hear more
today.
I personally believe that it is not only attainable in 10
years, but probably in 5 years, but I think certainly 10 years
is a reasonable goal.
With that I would like to move to Ms. Dunn, and then I will
be back after voting.
Ms. Dunn. Thank you very much, Mr. Portman. And welcome,
gentlemen. It has been very interesting, this whole process.
And Mr. Dolan, we have appreciated your involvement in it.
Mr. Lubick, I have a concern about your comments. I agree
with what Mr. Portman said. I do not see the goals and
objectives that are measurable, that we have set through this
proposal of 80 percent by the year 2007 as a mandate on the
taxpayer. I see it as a mandate on the agency, and the agency
apparently, according to Mr. Dolan, is happy to accept this
objective. And I do not think you do not get work done unless
you do have a guideline that tells you what needed to be done
and what time.
But I really hope from Treasury that we are going to see
some coordination with what we are all trying to do to make the
IRS more efficient, and more effective and more helpful to the
taxpayer. I know that you lose power for Treasury because of
the Control Board and other areas, but I would like to think
that you are going to look at this objectively, and what can we
do better for the taxpayer. I certainly give the administration
credit for doing that many areas, and I hope we can count on
that hereto.
I have a couple of questions. I would like, Mr. Dolan, have
you analyzed how many jobs, how many dollars can be--jobs done
away with dollars saved, paperwork done away with, through this
particular objective?
Mr. Dolan. Ms. Dunn, the analysis that I talked about--and
I am not sure whether you were in the room when the Chairman
asked me about this--is it 6 to 1, is it 7 to 1.
I think the analysis that we will produce as a result of
this product that we should have at the end of September will
put us in a better place today than what we have had in the
past. Historically what we have had, and what has actually been
harvested from our budget, as electronic receipts have gone up,
we have had the commensurate withdrawal from our budget of the
dollars and staff years that would have been associated with
key entry. But beyond that, I think if you put yourself in a
world that Congressman Portman projected of 80 million filers
by a date certain, and payments made electronically, we do not
have a satisfactory picture of what the staffing and production
impact would be. It would obviously be considerable. And then
the discussion we want to have is the one the Chairman talked
about, which is, so what are the choices around those? Are they
choices about just recouping the dollars totally, or are they
choices about placing them in some other aspect of customer
service or compliance?
Ms. Dunn. Thank you, Mr. Dolan. I see as a primary goal of
what we are trying to do here in making the IRS more effective,
of downsizing the IRS. Are you still at 102,000 employees at
the IRS?
Mr. Dolan. Yes, we are, Ma'am.
Ms. Dunn. And certainly making it more of an effective
partner to the taxpayer.
Let me ask you a question about the incentives to the
preparers of tax returns. I would like to know, if you are
thinking about paying H&R Block and other preparers, $3 per tax
return for filing electronically. It seems to me it is a huge
benefit to the taxpayer, and that these folks, these preparers,
are already out there charging taxpayers $20, $30, $40, $50,
sometimes more dollars, to prepare an electronic return.
What is the thinking? I mean why would you not take this $3
per return, for example, and use it for educating the public to
get to our goal of 80 percent more quickly than we projected?
Mr. Dolan. I think Mr. Lubick may have an answer. Let me
just say, you and I would probably get to the same page in the
hymnal pretty quickly. I do think it is something we have to
look at very carefully, as to whether we would use $3 in the
way that some have urged. And particularly I would be
concerned, if I were to go back now and pay $3 for the $20
million that I received last year. That would be $60 million
out of my budget that would have to come at the direct expense
of doing work in customer service, or doing other activities
that those $60 million would have bought. So I do think that
either that dollar amount or any other dollar amount being
applied as an incentive, is something that has to be looked at
very carefully. And Mr. Lubick, I think, may want to comment as
well.
Mr. Lubick. Incidentally, Congresswoman Dunn, I did not
mean to imply that the legislation did mandate that taxpayers
file electronically. I was simply stating that if we mandate,
as you said, the agency, that it has to reach 80 percent. It
seems to me that is unwise to put in legislation. I think it is
perfectly satisfactory to say, and announce, and have this
Subcommittee monitor an aspirational goal of achieving 80
percent, but circumstances change, and I think you ought to
retain the flexibility to adapt your position to the
circumstances. You may want to change that goal to more or
less.
And the same applies to the question of incentives. I think
we would favor the authorization of a program of incentives if
it can be demonstrated that it would be cost beneficial; not
only taking into account the cost to the Internal Revenue
Service, but the cost to taxpayers and the cost to preparers.
There are costs of complying with the tax system that go beyond
tax administration. They fall on private citizens, and those
have to be taken into account.
So, if we mandate the furnishing of incentives to
transmitters, I am not sure that that is the right expenditure,
for reasons that have been discussed by Mr. Dolan and suggested
by you. It may be that you would want to give incentives to the
taxpayers themselves. It may be that the preparers should be
given incentives. I think we have to keep open in this, and we
have to work together as this proceeds, to be flexible and to
go in the most efficient way to accomplish our mutual and
exactly congruent objectives. So I think it is flexibility that
we are urging here, and the avoidance of rigidity. I did not
mean to suggest that the legislation intended ever--and I do
not think it could--to require every taxpayer to file
electronically.
Ms. Dunn. Good, and I appreciate your comments, Mr. Lubick.
I certainly think, if anything, that Congress has proved itself
very resilient in changing goals and objectives. I do not worry
that we will find ourselves locked into something, and I would
hope, as Mr. Portman suggested, that we might reach these goals
much, much more quickly. I would certainly hope so; 10 years is
a lot.
Madam Chairman, may I just have one more brief question?
Chairman Johnson. OK.
Ms. Dunn. I am very interested in the signature portion of
the program, and I understand California has a program where
they have tested, or are in the process of testing filings that
do not include the signatures, which are going to be such an
expensive part of our program if we are not able to eliminate
the personal signature.
Do we know how the California program is doing? Is there
fraud involved or is it at a point where we can evaluate it?
Mr. Dolan. I think the short answer is we do not know much,
Ms. Dunn. I would be happy to try to find some of that. And
Terry may want to spend a minute on the relative comparisons
between the States and our experience, but the direct answer is
that we do not have much information on California's experience
at this point.
Ms. Dunn. Well, it would be a great interest to me, and I
am sure the Subcommittee. Thank you, Madam Chairman.
Chairman Johnson. Thank you. Mr. Cardin.
Mr. Cardin. Thank you, Madam Chairman, and let me thank you
for your testimony. It is clear that we all share the same
objective to increase the amount of electronic filing, and the
legislation that we have introduced moves us rapidly to achieve
that objective.
It is interesting. Whenever you have change, people will
look back later and say, why did we ever do it the other way.
And I understand that we need to educate the taxpayer, and we
need to deal with the obstacles that are currently involved to
make it available for us to do more electronic filing.
The Commission's recommendation offers a major incentive
for taxpayers to use electronic filing, by giving them an
additional 30 days to file their tax returns. I understand the
administration's bill allows the IRS to come up with financial
incentives for electronic filing. So, in one instance we are
trying to be specific to offer an incentive for taxpayers to
take advantage of electronic filing. The administration desires
to use incentives, but wants to study and come back, and give
us some recommendations or implement some changes.
I would hope that you could be more specific as to what
type of financial incentives you believe should be considered
in order to encourage more electronic filing. Because once we
get our numbers up we will never go back, and people will start
to understand the advantages, and the financial advantages to a
taxpayer filing electronically.
What type of incentives would you consider?
Mr. Dolan. I think, Mr. Cardin, we will know a lot more
about this within a couple of months when we have the responses
to the RFPs, because we will have input from a number of people
in the private sector who will presumably educate us
considerably on that. We will have a better handle on what are
the costs involved, and what are the benefits and how we might
target incentives.
I think some sort of a payment would be something that we
would consider, but to whom it would be paid--whether it would
be the transmitter or the preparer, or the taxpayer--I do not
know. I think at this stage my feeling would be that the
fairest of all might be an incentive that went to taxpayers.
Mr. Cardin. Might you also consider a different filing
deadline as an incentive?
Mr. Dolan. Consider----
Mr. Cardin. A different deadline for filing. Is that not
one that is on your list?
Mr. Dolan. I would be dubious about that right now. I think
it would be somewhat disruptive of the tax administration not
to have a uniform filing date.
Mr. Cardin. If I could just interrupt on that, because that
seems to me a little bit unusual to say, because we seem to be
spreading different deadlines in governmental agencies in order
to manage the workload more effectively. And different
deadlines, it seems to me, could give you some advantages in
addition to more electronic filing.
Mr. Dolan. I would fear that different deadlines might,
rather than spread the work, might make the work of the IRS
more difficult. For example, if many returns are filed a month
later, that is going to cause further delays in processing and
audit.
Mr. Cardin. Of course you have an automatic delay now that
you could get in filing your returns if you paid your taxes.
You already have that built into the system. I am not sure I
quite understand the concerns with a 30-day delay, when you can
get a longer delay in filing tax returns under current rules.
Let me just caution you. It would be shortsighted to fail
to quickly move to accept electronic filing because of the
transition cost. Ultimately, I think we all understand
electronic filing is going to be less costly, not more costly;
that ultimately when the system is more efficient it is going
to be easier for the taxpayer, for the tax preparer, and for
the government. And I would hope that as we develop financial
incentives for electronic filing that we do not build into the
system additional costs that are going to be difficult to back
out of.
As we try to spread the workload or look at other issues, I
think you raise good points. Having a different date is
something that needs to be considered in addition to just the
impact it will have on electronic filing, and I agree with your
concerns there. But to just dismiss it because it sets up a
different date I think is also wrong.
What we try to do in the bill that we filed is be specific
on a financial incentive, to encourage more electronic filing.
And I would hope that you would be a little bit bolder, and
come forward with recommendations that will make it easier for
the taxpayer to take advantage of electronic filing. I have not
heard enough ideas yet, and I would hope that you would be
forthcoming with additional suggestions. Thank you, Madam
Chairman.
Chairman Johnson. Mr. Ramstad.
Mr. Ramstad. Madam Chairman. As you know, Mr. Dolan, a few
months ago this Subcommittee examined the Electronic Federal
Tax Payment System, and particularly the disastrous
communication effort by the IRS that I dare say really
frightened many in the small business community, and I
appreciate your testimony about the lessons learned by the IRS
from the EFTPS debacle.
In looking at that experience, which many reported to me as
being heavy handed, I would ask you if there is a specific
marketing plan that is more taxpayer friendly; if you have
specific steps in mind in marketing electronic filing to
taxpayers.
Mr. Dolan. Congressman, we do, and what I would maybe ask
for is the opportunity, a couple weeks hence, to brief the
Subcommittee. As I mentioned in the earlier part of one of my
questions, we exposed just last week the work that our
communications contractor had done with us, to some of the
outside groups that will partner with us in this marketing
approach. We are in the process of taking some of their
feedback and finalizing our plans, but we have some very
specific ideas--with respect to the way media would be used,
and the way we would use, as I mentioned in the TeleFile.
TeleFile is sort of a direct mail opportunity for us of a
unique sort, and there are some changes that we are going to
make in that arena as well. And so, within a couple of weeks I
would be happy to make available to you or the Subcommittee,
more broadly what those marketing approaches will look like in
the next year.
[The following was subsequently received:]
1998 Filing Season Campaign
Background
In developing our national promotion strategy for the 1998
filing season, the Internal Revenue Service (IRS) and Treasury
consulted with Emmerling-Post, our advertising agency. We
reviewed the results of our TeleFile promotion in 1997 and
looked at the areas for greatest potential to help the Service
meet its overall electronic filing goals.
This year's filing season campaign will promote the use of
electronic filing options, with primary emphasis on
practitioner electronic filing. We hope to build on last year's
successes. During the past filing season, there was an increase
in the number of returns filed using electronic filing options.
Not only did the number of TeleFile returns increase, returns
filed through third party providers also increased. This growth
provides a good platform for our 1998 electronic filing
program.
Overall Approach
This year's campaign will introduce a new name and logo for
electronic filing options. In their presentation to the
Service, Emmerling-Post recommended use of the term IRS e-file
to refer to our electronic filing options. E-file is a commonly
used phrase on the Internet and is also used by Revenue Canada
to describe their electronic filing program.
Key Messages
IRS e-file is the quickest way to get refunds. You
receive refunds in half the time over paper returns--even
faster with Direct Deposit.
IRS e-file returns are more accurate and reduce
the chance of getting an error letter from the IRS.
IRS e-file options provide acknowledgment your
return has been accepted.
IRS e-file is a proven commodity. Over 19 million
people like you chose an IRS e-file option last year.
National IRS e-file Campaign Strategy
Develop a unified public service campaign and
supporting materials with the IRS e-file logo to increase
public awareness of IRS e-file options.
Use tax practitioners and practitioner groups as
IRS e-file champions.
Provide a promotional kit to IRS e-file third
party providers. The kit will provide third parties with
materials they can use to promote their IRS e-file service to
their clients and customers.
Reinforce messages from the public service
campaign in the 1040 packages.
TeleFile Strategy
Use the TeleFile booklet as a direct mail
marketing tool to emphasize the benefits of filing by phone.
Redesign the TeleFile booklet covers and logo to
be more effective.
Test the impact of supplemental post card mailings
to some TeleFile booklet recipients.
IRS e-file via a Personal Computer Strategy
Make taxpayers aware, through the tax package,
magazine ads and articles and in the software packages, that
the benefits of IRS e-file are available to individuals who
prepare their tax return using a personal computer, tax
preparation software and a modem.
Partner with software providers to promote IRS e-
file options.
External Stakeholders
A major feature of the promotion effort is building
partnerships with third party providers and associations to
enlist their active participation and promotion of IRS e-file
with their customers and members. On September 4, IRS
executives met with members of national tax practitioner
organizations and industry representatives from the Council for
Economic Revenue Communication Advancement (CERCA). At that
meeting Emmerling-Post presented an overview of the
practitioner IRS e-file campaign and the kit for third party
providers. The kit includes an IRS e-file logo and stickers, a
letter to clients, posters, and a decal to read ``Authorized
IRS e-file provider.'' The kit will also include copies of the
public service campaign. Electronic versions of the kit will be
available to IRS field offices and practitioner associations in
October. Hard copies will be sent to Electronic Return
Originators (ERO) in December.
The Public Service Campaign
A second aspect of Emmerling-Post's recommendations is a
public service campaign in radio, television and print focusing
primarily on third party IRS e-file. The messages in the
materials stress fast refunds through electronic filing. These
materials will be distributed to print, radio and television
outlets in December to begin appearing the last week of
December.
In January, a video news release will be distributed to
support the IRS e-file messages. Interviews in the media will
keep the message prominent throughout the filing season.
Follow-up
This year's campaign includes an evaluation component. In
May, we plan to survey third party preparers, conduct an
attitude and awareness survey among taxpayers and do an
analysis of paid media tests. The IRS will also be conducting a
survey of taxpayers to provide the quantitative market research
data for use in developing enhancements to our ETA products.
The results of each of these evaluations will be used to
enhance the campaign for the 1999 filing season.
Mr. Ramstad. I think a collaborative effort would be
helpful. You refer to the communications contractor. I trust it
is a different communications contractor. You fired the first
one.
Mr. Dolan. Well, actually, the first one was kind of an in-
house job, Congressman, so we did not have a contractor to
fire. That is really the dialog that we had with this group
before. We were trying to be marketeers.
Although, I might not use quite the language you did in
terms of debacles and other things; part of what we learned
from that lesson was, we also had a number of cooks in that
broth. We had agents of the government; we had various
components of the private sector. I think what we are trying to
do differently on electronic filing is get everybody's vote so
that we understand our respective roles, and understand the
convergence of our objectives.
Mr. Ramstad. Well, I appreciate that approach and that
recognition of the problem. The term debacle is not mine. It
came from my constituents, members of my Small Business
Advisory Committee and others, and that is one of the most
polite reactions that I heard. So I think it is important--and
I think you have recognized that this was not a successful
effort, to put it lightly, and by hiring a communications
contractor, and by doing it a different way, and by offering to
be forthcoming with the Subcommittee, and working in a
collaborative way on the approach the second time around in
marketing electronic filing, that is very, very encouraging to
this Member, and I am sure to my colleagues here, and most
importantly to our bosses, the American taxpayers.
Thank you, Madam Chairman.
Chairman Johnson. Thank you, Mr. Ramstad.
Mr. Kleczka.
Mr. Kleczka. Thank you, Madam Chair. I think I will pass at
this time.
Chairman Johnson. Ms. Thurman.
Ms. Thurman. Thank you, Madam Chairman. In the information
you gave us--we break it down in some ways, but I am
interested--who is filing electronically? Are these people that
are nonitemizers, itemizers, young, old? Can you tell me who
this group is out there that is actually doing this.
Mr. Lutes. Yes. Let me try to answer that. We are currently
undertaking effort to give us more robust information. We are
going through our master file and trying to do a complete
profiling of the people who actually do file electronically
versus those who do not, which will give us better information.
But generally--and I think the external stakeholders will
reinforce this--the biggest population that we have tracked is
the refund audience who is looking for the fast refund. That
has been the major appeal the program has had. In fact our
marketing strategy is going to try to emphasize that point. I
do not have the percentage with me, we can get you that, but
the vast majority of the electronic returns are refund filers.
[The following was subsequently received:]
Percent of Balance Due Returns Filed Electronically
Total 1997 ELF (Practitioner/On-Line) Returns
14,450,000
Balance Due Returns 345,000
% Balance Due Returns 2%
Total 1997 TeleFile Returns 4,694,000
Balance Due Returns 310,000
% Balance Due Returns 7%
Total 1997 Electronic Returns 19,144,000
Balance Due Returns 655,000
% Balance Due Returns 3%
Mr. Dolan. Which would mean also that they are largely the
taxpayer who has all or the majority of their wages in some
kind of withholding environment. That is typically the fact
pattern that produces the highest likelihood of having a
refund, which in turn is the appeal of the quicker electronic
product.
Now the TeleFile product is a little different, because the
TeleFile product is one that we are clearly aiming at entrance
to the work force, because of its nature.
It is a 1040-EZ, which means that by definition your
financial life is pretty uncomplicated, your sources of income.
And so what we are trying to do there is target what we would
understand would be the profile of a lot of entrants, which
would be people who are recently out of school; people who are
genuinely entering the labor force for the first time. We are
attempting, both in our marketing and in the customization of
that product, the accountance that that is the profile that
will likely be the eligible population for the TeleFile
product. And as Terry said, what we would like to be able to do
is to better differentiate the demography, so that we know that
this feature of ELF is more appealing to this particular set of
demographics than some other.
Ms. Thurman. The other question that I am kind of curious
about--and I know it was part of the recommendations, and it
seems to be in some of the testimony that we are going to hear
later on, is on the signature issue.
What safeguards does the taxpayer have, if there is this
nonsignature, if it is being done electronically?
Particularly--not that I would think that anybody would do that
meaningfully or whatever, but just this idea that you send
something. Is there some kind of protection for them if they
were sent up and they did not have the signature or did not
know what had been sent to IRS? I would think there would be a
concern.
Mr. Dolan. Clearly there is, and I am going to ask Terry to
supplement my answer, but as I mentioned earlier,
authentication is really our crucial interest here, both for
the sake of the taxpayer and for the system. And that is not
just so we can recognize the signature, it is because of the
very point you make. We want to be certain that when this
transmission comes to us labeled as a filing, or a payment, or
a request, from a specific taxpayer, that it indeed is what it
purports to be.
Now there are a variety of combinations today of technology
that are being used. Some are being used in less volatile and
confidential arenas than ours, and others being used on the
other end of the spectrum, where it is highly confidential. And
I think what we expect to be able to produce is some
combination of things like personal identification numbers, and
combinations of data that might possibly relate to a prior
return, or might possibly relate to some component that would
be known to only the individual. So you combine those things in
a way that you have a reasonably high level of certitude; that
this really is an authentic verification. And as I say, we do
not have the answer today but we are virtually certain that the
work that is out there, both done by others and the work done
by us, will put us in that position with respect to the tax
returns that we file, tax year 1998 returns.
Mr. Lutes. One thing I would add is, is that we probably
will not have one solution, one replacement for the paper
signature, because the level of risk depends upon the type
transaction. The level of risk in a 1040 refund return is very
different than the risk in submitting information returns,
which is simply providing information to us. So what our
process is--and we are working with other government agencies
who are also tackling the same problem--is to associate the
level of authentication with the level of risk, associated with
the particular submission to the service. And what the
administration's bill has asked for is maximum flexibility for
the service and the Department. As technology changes, as we
move down this road, to be able to implement those technologies
that authenticate at the appropriate level of risk, while at
the same time obviously enabling us to make certain that the
information on the return is correct.
Chairman Johnson. Thank you, Ms. Thurman. Mr. English.
Mr. English. Thank you, Madam Chair. I have a couple of
questions, but having listened to the testimony from this
panel, I would like to make a comment that I hope you will take
back to the Treasury.
In the IRS strategic plan through fiscal year 2002, which
came out in the middle of last month, little was said about
electronic filing and no quantitative goals have been set. I
realize in the past the IRS has set quantitative goals, like in
1993, and has not been able to achieve them. But what troubles
me is the idea of establishing a goal of 80-percent electronic
filing in 10 years. This is something that from the perspective
of people out in the real world, like in my district, is a
glacial pace.
Now they have had to respond to a scale of change that is
much quicker, and I think, given the dollars involved, and that
we can save literally hundreds of million dollars every year if
people move into electronic filing, then it seems somehow
fundamental that we should find a way of getting done and do it
very promptly. Lay some specifics out, and debate them if you
want. Consider incentives, consider sanctions if necessary, but
we need to move people into electronic filing at a time when we
are moving toward a balanced budget, and hundreds of millions
of dollars could be much better used, than by pursuing the
paper trail in the IRS.
Let me move to my specific questions. Has the IRS Chief
Counsel expressed an opinion on whether the IRS has an
authority to go paperless? That is, accept returns without a
signature document as has been discussed in the Commission
recommendation. And would you need additional statutory
authority to waive the signature requirement, Mr. Dolan?
Mr. Dolan. Thank you for the question. I made a brief
reference to this earlier. I do believe that the Chief
Counsel's opinion is, that there is today discretion--and I
believe it is both in the hands of the Commissioner and the
Secretary. The Secretary is delegated, so the Commissioner has
the ability to accept alternative forms.
The question that is more equivocal is whether or not it
would not be more helpful to have a explicit provision that
would make certain that when such a reality found its way into
the courts or found its way into challenges that herefore have
not been made----
Mr. English. But has he issued an opinion indicating that a
statutory change is not necessary?
Mr. Dolan. No, I think the opinion that we have--and I
would like to get back to you make sure that I tell you this
correctly. I think the opinion that we have is one that
suggests that the Commissioner currently has the authority to
authorize various forms of a signature alternative. And what I
think the legislation would seek, or what we might have a
mutual interest in, is----
Mr. English. Would you be able to provide the Subcommittee
with that opinion?
Mr. Dolan. I certainly will.
Mr. English. Thank you.
[The following was subsequently received:]
Electronic Signatures
This responds to your request for our views on whether
current law permits the Service to accept electronic
signatures. This memorandum also addresses certain additional
issues that will be present if the Service accepts electronic
signatures. The Service wants to use electronic signatures,
instead of traditional pen-to-paper signatures, to authenticate
and verify electronically filed returns and supporting
documents. The Commissioner is considering the need for
legislation.\1\
---------------------------------------------------------------------------
\1\ See proposal two in the Commissioner's January 10, 1995,
legislative package, ``IRS Legislative Initiatives for Administration's
Budget.''
---------------------------------------------------------------------------
Issues
1. Does the Commissioner have authority to accept
electronic signatures to authenticate and verify returns and
supporting documents under sections 6061, 6062, 6063, 6064, and
6065 of the Internal Revenue Code of 1986?
2. Will the electronic signature technologies satisfy the
``subscription'' and ``written declaration'' requirements of
section 7206(1) or the ``written'' or ``writing'' requirements
of section 6103?
3. Will courts accept electronic signatures as evidence to
identify, authenticate, and verify returns and supporting
documents?
Conclusions
1. The Commissioner has authority to accept electronic
signatures on electronically filed tax returns and supporting
documents. The Commissioner may promulgate regulations that
authorize electronic signatures sufficient to authenticate and
verify electronically filed returns and supporting documents.
The Commissioner should accept only signatures that reliably
authenticate and verify a return as that of the filer and do
not place an unreasonable burden on taxpayers.
2. Existing signature technologies likely satisfy the
``subscription'' and ``written declaration'' requirements of
section 7206(1), although new technologies that use oral
statements may not satisfy the written declaration requirement.
However, even if the written declaration requirement is not
met, persons who willfully file incorrect returns could be
prosecuted under other statutes that do not require written
declarations. The Commissioner has authority to prescribe
regulations that provide for alternatives to the traditional
pen-to-paper writing media subject to one caveat--an oral
statement cannot be used to satisfy the writing requirement.
3. Courts will accept technologically reliable electronic
signatures as evidence to identify, authenticate, and verify
returns and supporting documents.
Discussion
I. Electronic Signatures
A. Authentication and Verification
Section 6001 requires that taxpayers adequately document
tax liability. The Service prescribes returns and supporting
documents to verify tax claims. Reflecting the state of
``writing'' through most of the twentieth century, returns and
supporting documents were paper. Taxpayers used traditional
pen-to-paper signatures to authenticate and verify these
documents.
A goal of the Tax Systems Modernization (TSM) initiative is
to convert paper filings to more efficient, electronic
filings.\2\ To date, the Service has required separate paper
signatures and declarations to authenticate and verify returns
and supporting documents filed under the electronic filing
(ELF) programs. The Service retained the traditional pen-to-
paper signature and declaration, in part, because of
uncertainty about whether existing statutes permit
``alternative'' electronic signatures and declarations. As
discussed below, we conclude that under existing statutory
authority, the Commissioner may prescribe regulations under
which electronic signatures can be used to authenticate and
verify electronically filed returns and supporting documents.
---------------------------------------------------------------------------
\2\ Current Section 6011(e)(1) prohibits the Service from requiring
any income tax return of an individual, estate, or trust to be other
than on a paper form furnished by the Service. Despite the Service's
broad authority to prescribe the verification or define what
constitutes a signature, legislation would be required to mandate
electronic filing for individuals, estates or trusts.
---------------------------------------------------------------------------
B. Statutes
Section 6061 states that, except as otherwise provided by
sections 6062 and 6063, relating to corporation and partnership
returns respectively, any return, statement or other document
required under the internal revenue laws or regulations shall
be signed in accordance with forms or regulations prescribed by
the Secretary.
Section 6062 provides that the return of a corporation with
respect to income shall be signed by the president, vice
president, etc., or other officer duly authorized so to act.
Additionally, section 6062 provides that the fact that an
individual's name is signed on the return shall be prima facie
evidence that such individual is authorized to sign the return
on behalf of the corporation.
Section 6063 provides that the return of a partnership
shall be signed by any one of the partners. Additionally,
section 6063 provides that the fact that an individual's name
is signed on the return shall be prima facie evidence that such
individual is authorized to sign the return on behalf of the
partnership.
Section 6064 provides that the fact that an individual's
name is signed to a return, statement, or other document shall
be prima facie evidence for all purposes that the return,
statement, or other document was actually signed by such
individual.
Section 6065 provides that, except as otherwise provided by
the Secretary, any return, declaration, statement, or other
document required to be made by the Code or regulations shall
contain or be verified by a written declaration that it is made
under penalties of perjury.
C. Legislative History
The current authentication and verification requirements in
the Code originated in the first modern tax statutes. The
Revenue Act of 1909 imposed an income tax on corporations,
joint stock companies or associations organized for profit.
Section 38 of the Revenue Act of 1909, ch. 6, 36 Stat. 112, 114
(1909), required that ``a true and accurate return under oath
or affirmation ... shall be made'' by the taxpayer. The
subsequent Revenue Acts imposed a similar oath or affirmation
requirement for attestation on other filers.
The Internal Revenue Code of 1939, ch. 2, 53 Stat. 1
(1939), continued to impose the oath or affirmation requirement
for all filers. Section 51(a) of the 1939 Code required
individuals to ``make under oath a return''; section 52(a)
required that ``the [corporation's] return shall be sworn to''
by two of the corporation's officers; section 187 stated that
``the [partnership's] return shall be sworn to by any one of
the partners''; section 821(a) stated that executors of
domestic estates ``shall make a return under oath''; section
864(a) stated that executors of foreign estates ``shall make a
return under oath''; and section 1006(a) required that gift
donors ``make a return under oath.''
Section 136(a) of the Revenue Act of 1942, ch. 619, 56
Stat. 798, 836 (1942), amended section 51 of the 1939 Code by
deleting the requirement that returns of individuals be made
under oath and substituting the requirement that individuals
attest by written declaration that the return is made under the
penalties of perjury. The Senate Committee Report indicates
that the change was made because the oath requirement ``causes
considerable annoyance and inconvenience to taxpayers in that
their returns must be sworn to before a notary public or other
similar officer.'' See S. Rep. No. 1631, 77th Cong., 2d Sess. 5
(1942), 1942-2 C.B. 507. The 1939 Code retained the requirement
that a return be made under oath by corporations, partnerships,
fiduciaries, executors of estates, and donors of gifts. By
1954, Congress had largely replaced verification by oath with
verification by signed declaration.
The 1954 Code made a number of changes. Section 6062
changed the corporate filing requirements (a) to allow one of
the described corporate officers to sign a corporate tax return
(instead of requiring two officers to sign), (b) to allow the
corporation to designate an officer not specified by statute to
sign a tax return, and (c) to provide that a person's signed
name is prima facie evidence that the person is authorized to
sign. Section 6063 changed the partnership filing requirements
to provide that a partner's signature on a return is prima
facie evidence that the partner is authorized to sign for the
partnership. Section 6064 contained no material change from
preceding law. The predecessor of section 6065 required all
returns (except those made by individuals) to be made under
oath but permitted the Secretary to allow by regulation a
return to be made by a declaration under penalty of perjury
instead of by oath. Section 6065 reversed the regulatory
presumption to favor declarations over oaths. Current section
6065 requires all returns to be made under penalties of
perjury, except the Secretary may by regulation permit a return
to be made without such declaration or the Secretary may
exercise his or her authority to require verification by oath.
Section 6065 gives the Secretary very broad interpretative
authority to prescribe the form of verification. The
legislative history indicates that Congress intended to allow
the Secretary to accept less than a written perjury declaration
as a form of verification. ``Under section 6065, all returns,
etc., are to be made under penalties of perjury, except that
the Secretary may permit them to be made without such
declaration ...'' H.R. Rep. No. 1337, 83rd Cong., 2d Sess.,
A400 (1954); S. Rep. No. 1622, 83rd Cong., 2d Sess., 567
(1954).
Administratively, the Service has required a signature to
authenticate a return since the first revenue acts. The
original verification, by oath or swearing, included a
signature. The signature requirement is now codified in section
6061.\3\
---------------------------------------------------------------------------
\3\ The Code and Treasury regulations require that a tax return be
signed for two purposes. The purpose in section 6061 and section
1.6061-1 of the Treasury regulations is the authentication of the
return as that made by the signer. See Receipt of Tax Data in Machine
Useable Form, GCM 33879 (Supp.), I-3149 (Aug. 8, 1968) at 2, stating
that the objective in requiring signatures on returns is to identify a
return as the return of the taxpayer. Under section 1.6065-1 of the
Treasury regulations, the purpose of the signature is to verify the
truth, correctness, and completeness of the return.
There is a sufficient body of case law with respect to section 6061
holding that a tax return must be signed to be a valid tax return and
thus an unsigned tax return is not a ``return'' for purposes of the
Code. See Dixon v. Commissioner, 28 T.C. 338 (1957); Reaves v.
Commissioner, 295 F.2d 336 (5th Cir. 1961); and Vaira v. Commissioner,
444 F.2d 770 (3d Cir. 1971).
---------------------------------------------------------------------------
Neither the Code nor the legislative history defines
signature. 1 U.S.C. section 1 provides that ``in determining
the meaning of any Act of Congress, unless the context
indicates otherwise, signature includes a mark when the person
making the same intended it as such.'' Further, the generally
accepted legal definition of signature is very broad: ``[t]he
act of putting one's name at the end of an instrument to attest
its validity; the name thus written. A signature may be written
by hand, printed, stamped, typewritten, engraved, photographed,
or cut from one instrument and attached to another, and a
signature lithographed on an instrument by a party is
sufficient for the purpose of signing it; it being immaterial
with what kind of instrument a signature is made.'' (Emphasis
added.) See Black's Law Dictionary, 1381-82 (6th ed. 1990).
Nothing in the Code or regulations suggests a narrower
definition. The common law definition is broad enough to
encompass electronic signatures.
D. Regulatory Authority
In determining the Commissioner's authority to accept
electronic signatures to authenticate and verify returns and
supporting documents, it is necessary to review the standards
for review of such authority. Treasury regulations issued
pursuant to the Secretary's general authority to prescribe
``all needful rules and regulations for the enforcement'' of
the internal revenue laws are considered interpretive
regulations. Section 7805(a). The Supreme Court has established
the standard of review for interpretive regulations. The basic
rule is that if the intent of Congress is clear, the agency
must give effect to the unambiguously expressed intent of
Congress. Where Congress has implicitly left a statutory gap
(to be filled with an interpretive regulation), the standard of
review is whether the regulation is a ``reasonable
interpretation'' of the statute. See Chevron U.S.A., Inc. v.
National Resources Defense Council, Inc., 467 U.S. 837 (1984).
In describing the standard to be used in reviewing an
Executive department's construction of a statutory scheme, the
Court in Chevron stated:
If this choice represents a reasonable accommodation of
conflicting policies that were committed to the agency's care
by the statute, we should not disturb it unless it appears from
the statute or its legislative history that the accommodation
is not one that Congress could have sanctioned.
Chevron, 467 U.S. at 844, citing United States v. Shimer,
367 U.S. 374, 382-383 (1961). While Chevron undoubtedly stands
for the principle that deference is to be paid to an
administrative agency's construction of a statute that it is
authorized to administer, the opinion stands equally for the
proposition that such deference is not unlimited. First, there
must be statutory silence or ambiguity on the point in question
to trigger such deference. Second, a court will defer to only
statutory interpretations that are reasonable in light of
Congressional intent.
When sections 6061 through 6065 were enacted, there existed
no technology for signing a return other than a person manually
signing his or her name or placing an authorized mark on a
paper. The Service has required pen-to-paper signatures with
attestations since 1909. The statutory provisions have remained
substantially unchanged since 1954, but Congress has not
explicitly defined what constitutes a signature for these
purposes.
Sections 6061, 6062, 6063, 6064, and 6065 do not prohibit
the Commissioner from defining what constitutes an acceptable
signature. In light of the statutory framework and legislative
history, a regulation may prescribe the form of signature for
electronically filed returns.\4\
---------------------------------------------------------------------------
\4\ In fact, the Service currently accepts alternative (facsimile)
signatures where specific authenticating safeguards are present. See,
e.g., Rev. Rul. 68-500, 1968-2 C.B. 575; Rev. Rul. 82-29, 1982-1 C.B.
200; section 1.6695-1(b)(4)(iii) of the Income Tax Regulations.
Additionally, Temporary Regulation section 1.6061-2T authorized signing
of returns by voice signatures for certain taxpayers filing 1992 and
1993 calendar year returns.
---------------------------------------------------------------------------
If the validity of regulations authorizing electronic
signatures were challenged, a court would closely scrutinize
the circumstances surrounding the adoption of the regulations.
The fact that the regulations were promulgated long after
enactment of the controlling statutes would heighten the degree
of scrutiny. In light of the legislative history, a court might
find that an alternative form of signature is unreasonable or
arbitrary if the technology is not reliable or if the
regulation imposes an unreasonable burden on taxpayers due to
increased cost or difficulty of use. For example, a court would
be more likely to invalidate a regulation mandating a
particular form of signature, as opposed to providing an
optional form of signature, because a mandated form imposes a
definite burden. However, provided that the Commissioner
promulgates regulations prescribing only signatures that
reliably authenticate and verify the return as that of the
filer and do not place an unreasonable burden on taxpayers, we
believe that regulations that authorize electronic signatures
for authentication and verification purposes would be upheld as
a valid exercise of the Commissioner's authority to prescribe
regulations.
II. Definition of ``written'' under sections 7206(1) and 6103
A. Section 7206(1)
Most of the criminal tax provisions in the Code (except
section 7206(1)) do not focus specifically on the requirement
of a signature or a written declaration. However, it is often
necessary in criminal tax cases to ``tie'' a tax return to the
taxpayer under investigation. In situations where an electronic
tax return would consist of an electronic transmission and a
signature, ``tying'' the computer-based transmission to a
taxpayer may require additional evidence not necessary with
paper returns.
Section 7206 of the Code makes it a felony for any person
to ``willfully make and subscribe any return, statement, or
other document, which contains or is verified by a written
declaration that it is made under the penalties of perjury, and
which he does not believe to be true and correct as to every
material matter.'' (Emphasis added.)
In our view, the ``subscribe'' requirement can be satisfied
by the traditional signature made by ink on paper, or by any of
the new signature alternative technologies.
With regard to the section 7206 ``written declaration''
requirement, an issue exists as to whether the numerous new
technologies will meet the ``written declaration'' requirement.
The term ``written'' has acquired a broader definition than
traditional pen and ink. See 1 U.S.C. section 1, Fed R. Evid.
1001. In our view, existing electronic signature technologies
should be sufficient to satisfy the written declaration
requirement. However, as other technologies are developed and
implemented--such as technologies that use oral declarations
that are transcribed to writing--there is a point at which the
written declaration requirement no longer will be satisfied.
Nevertheless, even if such technologies are insufficient to
satisfy the written declaration requirement, other criminal
statutes that address false statements or false claims--and
which do not require a written declarations--could be used to
prosecute taxpayers who willfully file incorrect returns. See,
e.g., 18 U.S.C. section 287, 1001.
B. Section 6103
The terms ``written,'' ``written request,'' and ``writing''
are used numerous times throughout section 6103.\5\ There is no
definition of writing in section 6103. Similarly, there is no
legislative history to the 1976 Tax Reform Act, which
substantially revised section 6103, explaining the meaning of
the terms ``written'' or ``writing.''
---------------------------------------------------------------------------
\5\ The Regulations have required that certain applications for the
inspection of tax information be made in writing since 1914.
---------------------------------------------------------------------------
The legislative history to the 1976 Tax Reform Act
indicates that, to the extent practical, all disclosures of tax
information are to be made in documentary form in order to
protect the privacy of the taxpayer and to protect IRS
personnel making the disclosure from subsequent charges that
information was improperly disclosed. S. Rep. No. 938, 94th
Cong. 2d Sess. 343 (1976), 1976-3 C.B. (Vol. 3) 381. The
purpose of the written request requirement appears to be the
same. The initial written request helps maintain accountability
in the IRS and agencies that are the recipients of tax
information.
The only court to address the ``writing'' issue in the
section 6103 context held that an oral consent was clearly not
a ``written request for or consent to ... disclosure'' as that
term is used in section 6103(c). Huckaby v. Internal Revenue
Service, 794 F.2d 1041 (5th Cir. 1986). The Fifth Circuit noted
that the purpose of the written form was to assure the
taxpayer's clear assent before return information is disclosed.
The court also noted that oral requests like the one at issue
in that case were subject to misinterpretation.
The Service has not, for disclosure purposes, interpreted
the requirement for a written consent to limit written requests
to traditional writing media, i.e., pen-to-paper. For example,
the Service currently accepts photocopies and facsimile copies
of section 6103(c) disclosure consents.
Under section 6103(q), there is authority to prescribe
regulations as are necessary to carry out the provisions of
section 6103. Section 6103(p)(1) provides that requests for the
inspection or disclosure of tax information shall be made in
such manner and at such time and place as shall be prescribed
by the Service. Section 6103(c) also provides for implementing
regulations to prescribe requirements and conditions to the
disclosure of tax information pursuant to a written consent.
We believe that the crux of section 6103's writing
requirement is to ensure that disclosures are fully documented,
as opposed to purely oral. As such, given the regulatory
authority under section 6103 and the purposes which the writing
requirements in the statute appear to serve, there is authority
to administratively develop alternatives to the traditional
pen-to-paper writing media subject to one caveat--an oral
statement cannot be used to satisfy the writing requirement.
Having said that broad authority exists to administratively
define writing in section 6103, it is equally clear that, in
evaluating alternative forms of writing, the Service should
carefully consider the ultimate issues of identification,
reliability, and retrievability (for evidentiary purposes) of
electronically transmitted requests or consents. For example,
technologies that utilize transcription may blur the oral/
written distinction. Also, coding and identification number
technology raise potential custody and security issues. Counsel
will address such issues as the Service makes business
decisions on specific technologies.
III. Evidentiary Use of Electronic Signatures
Electronic signatures are subject to the same evidentiary
standards that generally govern computer generated, stored, and
retrieved data. The Service has an established history with its
computer system. Courts have consistently taken testimony about
the information that the system contains (or does not contain)
in evaluating the weight of computer evidence.
A. Admissibility
Alternative signatures will be created, transmitted, and
stored electronically. For litigation purposes, the evidence
will typically be a printout of the electronically stored
signature. The admissibility into evidence of alternative
signature printouts will be determined by the same evidentiary
standards that generally govern the admissibility of computer
printouts. Computer-generated evidence has been accepted by the
courts for many years. Transport Indemnity Co. v. Seib, 178
Neb. 253, 132 N.W. 253 (1965). In general, under Fed. R. Evid.
901(a), ``authentication or identification as a precedent to
admissibility is satisfied by evidence sufficient to support a
finding that the matter in question is what its proponent
claims.'' This can be satisfied by a variety of means.
Authentication of alternative signatures is likely to involve
Fed. R. Evid. 901(b)(9) evidence regarding the ``process or
system used to produce a result and showing that the process or
system produces an accurate result.'' Courts customarily take
testimony as to the information that the IRS computer system
contains (or does not contain) as proof of filing or nonfiling.
United States v. Faris, 517 F.2d 226 (7th Cir. 1975); Fed. R.
Evid. 901(a)(7). Most common objections could be easily
overcome in today's jurisprudence.
Section 6064 provides that an individual's name signed to a
document is prima facie evidence that the document was signed
by that person, but additional evidence is necessary to
establish the validity of the signature. In the final analysis,
the conclusion of validity will turn upon the weight of all the
evidence.
Additional supporting evidence may come from a variety of
sources. Occasionally, the taxpayer will admit the validity of
the signature if called to testify under oath. More often, the
taxpayer will admit the validity of the signature at the time
the examination was initiated (``Is this your return and
signature?''). The admission of a party opponent would be
admissible and persuasive. Fed. R. Evid. 801(d)(2).
Circumstantial evidence from the Service's records may also
be very persuasive. Fed. R. Evid. 401, 406. Evidence of other
signatures of the taxpayer may be admitted and utilized. Fed.
R. Evid. 901(b)(2). In some cases, it may be necessary to
secure the testimony of an expert witness to assist the trier
of fact in reaching a conclusion.
B. ``Best Evidence'' Rule and Other Objections
Challenges under Fed. R. Evid. 1002, the ``best evidence
rule,'' are typically satisfied by reference to Fed. R. Evid.
1001(3), which defines computer printouts as originals, and to
section 6103(p)(2) of the Code, which specifically allows the
Service to use reproductions of returns. Hearsay objections may
be raised to the extent the underlying computer data was input,
analyzed, or rearranged by Service personnel. Most such
objections are overcome, under Fed. R. Evid. 803(6), by the
hearsay exception for business records. The party opposing the
introduction of public records has the burden of establishing
that the records are not reliable. Ellis v. International
Playtex, Inc., 745 F.2d 292, 302 (4th Cir. 1984). Generally,
resort to the hearsay exception will not be necessary since the
typical evidentiary use of a tax return is a nonhearsay use,
i.e., the return constitutes a statement of the opponent and is
admitted not for the truth of matters asserted therein.
C. Probative Value--Scientific Evidence
Even though it is nearly certain that the printout of an
alternative signature will be admissible under the Federal
Rules of Evidence, the key issue is whether the court will
accept that printout as the signature of a particular taxpayer.
That is, can the Service establish a link between the admitted
data and the person to prove that the particular person
prepared and filed the particular document? To some extent,
this question is part of the preliminary inquiry of
admissibility. Fed. R. Evid. 901. However, since authentication
is a preliminary question with a low threshold (see Fed. R.
Evid. 104), a court might admit the signature but reserve the
ultimate issue of whether that signature is the signature of
the particular person. This latter question is one of
identification.
Section 6064 provides that an individual's name signed to a
document is prima facie evidence that the document was signed
by that person. See also Fed. R. Evid. 902(10) concerning self-
authentication. Regulations under section 6064 could apply the
same presumption to alternative signatures. Even so, expert
testimony may be necessary to establish an alternative
signature as that of a particular person. The Federal Rules of
Evidence do not provide for lay testimony about these
alternative methods. Scientific or technological evidence about
signature evidence would be governed by Fed. R. Evid. 702. Fed.
R. Evid. 702 allows for expert testimony, including opinions on
the ultimate fact question when that evidence would be helpful
to the fact-finder. The test for acceptance of this testimony
is established by the recent case of Daubert v. Merrell Dow
Pharmaceuticals, Inc., 509 U.S.----, 125 L. Ed. 2d 469 (1993),
where the Court set forth a rather low threshold for acceptance
of scientific expert testimony. The Court held that scientific
evidence need not have ``general acceptability'' in the
scientific community to be presented to a jury. The Court held
that the trial judge must preliminarily assess the threshold
question of admissibility of the evidence. However, the Court
held that the federal rules were intended to be applied
liberally in order to encourage further development of
scientific evidence.
In setting forth the inquiries that the judge should
consider in allowing evidence, the Daubert Court cited four
factors for determining the ultimate acceptability of the
evidence: (1) whether the scientific technique can be (and has
been) tested, (2) whether the theory has been subjected to peer
review and publication, (3) the known or potential rate of
error in the technique, and (4) general acceptance in the
scientific community. Expert testimony and opinion should
certainly satisfy the Daubert standard.
The Service should consider the Daubert factors in
evaluating potential forms of alternative signatures. In sum,
technologically reliable signature alternatives could be used
in court to identify the person who signed the document.
Judith C. Dunn
Eliot D. Fielding
Mr. Dolan. If you do not mind, Mr. English, can I double
back on your principle point?
Mr. English. I would prefer to go on because I have limited
time.
Mr. Dolan. Very good.
Mr. English. It is my understanding that about 30 percent
of all return filers have a balance due. How do you intend to
attract balance-due filers to file electronically, given that
under the current filing system--I am not sure what the
motivation for a taxpayer with a balance-due return would be to
file electronically.
Mr. Dolan. Well, I think the motivations overlap to a
considerable extent. Obviously, a quick refund is not one of
the motivations, but the same sense of closure, clarity,
accuracy of the transaction may be. The same benefit of a
minuscule error rate or a balance due, for a refund filer is
there. And secondarily, as we mentioned earlier, and I believe
Mr. Lutes elaborated on, when we create this ACH debit capacity
for somebody, he or she does not have to worry about writing us
a check that catches up with the electronic return. When you
have the ability to both send the return electronically and
initiate a payment, potentially a payment suspended for a later
date, if he or she decides to file before April 15, the
additional motivation may be there. There will be the
incentives of an accurate return, a high quality transaction,
and knowing that there is closure will help motivate.
Mr. English. Thank you, Mr. Dolan. Mr. Lubick, it is always
a pleasure to see you here, and we appreciate your testimony.
Again, I want to reemphasize, I think it is very difficult
for us to go back to the real world, to the districts we
represent, and tell them that it is very difficult somehow for
the Treasury and the IRS over 10 years to move to a system
which saves hundreds of million dollars a year that could be
better allocated to other things or could simply shrink the
deficit, and I thank you.
Chairman Johnson. Thank you, Mr. English.
Mr. Kleczka.
Mr. Kleczka. Thank you, Madam Chairman.
Commissioner Dolan, a couple of quick questions. One of the
problems that we have to find a resolution for is the
electronic signature question. However, I note that the
TeleFilers have grown to about 5 million per year, and I assume
that the bulk of the people who use that method are in a refund
situation. Now, there is no signature accompanying the TeleFile
filing. Why has that not been a problem up to now, and why do
we foresee such a grave problem in the regular electronic
filing with no signature?
Mr. Dolan. It goes back a little bit to the answer that
Terry gave a moment ago. There is an authentication process
used in TeleFile.
Mr. Kleczka. The number that is given to the tax filer.
Mr. Dolan. First of all, you start with a very defined
parameter. Unlike the ELF world in general, we initially invite
a group of people into the TeleFile relationship with us based
on the attributes of their financial life. And so there are
some parameters that clearly on the front end defines that
population in a way that mitigates risk on the front end.
Secondarily, we use a process of authentication; while it is
not the written signature, that additionally takes that risk
and mitigates it further.
Mr. Kleczka. I missed the last point.
Mr. Dolan. By virtue of using the PIN interaction with
other data, we take the risk that has already been limited by
having a define and confine universe, and limit it still
further, which is a slightly different technique than you would
have if you said, any member of the 120 million filers can
choose to file electronically. In those cases there will be
different standards for wanting to be certain that we can
authenticate that this person is the person they purport to be.
Mr. Kleczka. Well, that is something we are going to have
to discuss further. But I think the system can be expanded. It
just makes no sense to electronically file and follow up with a
piece of paper.
Mr. Dolan. It clearly can be expanded, and we want to do
that.
Mr. Kleczka. The other question is, how many filers use the
form 1040-PC? Is that a growing area that is getting a lot of
interest?
Mr. Lutes. A little over 8 million taxpayers this past year
filed paper returns using the 1040-PC, so that is growing also
as a method of filing one's tax returns.
Mr. Kleczka. Yes, it is growing somewhat. Has any thought
been given by the service to provide an option to filers to
submit a floppy disk to the service. That would be an area
where you could probably utilize, for example, with an amount-
due check attached.
Has there been any thought to giving filers the option of
providing a floppy?
Mr. Lutes. We have not done a detailed analysis on that.
Mr. Kleczka. How about in your thought?
Mr. Dolan. There clearly has been thought and there has
actually been a couple of experiments done in our Philadelphia
Service Center. One of the difficulties is, if you can jump
that step--if you can avoid the need to manage the receipt of
disks and inventories----
Mr. Kleczka. Another thing to handle, so electronic would
still be the preferred option.
Mr. Dolan. Yes, absolutely. It is absolutely a step to be
jumped if you can do it.
Mr. Lutes. At one point you emphasized the 1040 PC filers--
that use software. They do have the ability to use that same
software to transmit this return electronically.
Mr. Kleczka. OK, thank you.
Chairman Johnson. Thank you very much.
Mr. Watkins.
Mr. Watkins. Mr. Dolan and Mr. Lutes, and Mr. Lubick, I am
glad to see you back. And I reflect. I just returned from
traveling 21 counties in my district for townhall meetings, and
a lot of people came up to me and said, You know, we sure would
not have your job. And I reflect a little bit about your job,
and I sure would not want your job, because even biblically it
talks about tax collectors, and I do not know if you are in a
win situation out there.
But there is a great alarm out there with a lot of people.
I know Mr. English talks about electronic filing and some of
the technology moving in that direction. There are a lot of mom
and pop businesses which are concerned about being forced into
electronic filing, because they are not equipped with high
technology. And they are concerned about how they are going to
handle it, and many of them are probably doing their own taxes,
or trying to do their own taxes, without having CPAs. Some of
them would be using public accountants or CPAs.
So I think one of the big things in my area is trying to
provide some kind of information out there so they feel like
they are not forced into something.
Do you have anything planned, such as an educational
program, to inform some of these people?
Mr. Dolan. Mr. Watkins, I think the point you make kind of
dovetails to an earlier part of the conversation.
Mr. Watkins. And I apologize, I am redundant.
Mr. Dolan. Oh, that is fine. Congressman Portman said, and
said accurately, there is no such thing on the table right now
as a mandate. But one of the things I think you heard maybe
from Mr. Lubick and I both is that, I think we all expect that
the optimism expressed here, and the comment made by Mr.
English about letting us get on with this. That is where the
world is going. I think most of us in this room can sit here
and intellectually accept that is where this thing is headed.
At the end of the day I think the test for us and for us
cumulatively is, can we put this product in front of the
taxpayer, the customer, in a way that they say, hey, this works
for me. This is a logical way to do my business with the
government, versus saying, the government tells you, you have
to do this.
We had a little discussion about EFTPS before and lessons
learned. One of the things that we collectively take away from
that is that the people do not like it much when somebody says,
you do it this different way. And so one of my hopes would be--
I mean people today, we would say are maybe not technologically
adept. I think the world is going to move them more and more,
whether it is through their television sets, or interaction
with their banks. And there will be a point in which some will
still say, I do not want to play that world, and for those
people we ought to still have it as easy a process as possible.
Mr. Watkins. I hope you recognize there are some in the
economically depressed areas which are not worried about
participating in the technology world. I stop at the businesses
and have a cup of coffee with them; some are the greatest
people in the world.
In addition, I know the Association of Enrolled Agents had
some testimony earlier, and they proposed a new incentive to
encourage the individual taxpayers to file electronically,
modifying the statutory period for examination of an individual
income tax from 36 months to 24 months if the return is filed
electronically, by the due date. There is no mismatch with the
other information return programs, data that has been received
by the IRS.
Do you have any immediate reaction to that suggestion?
Mr. Dolan. First of all, I just read it shortly before the
hearing, and my reaction is, it is an interesting proposal. It
is of exactly the stripe that we would expect we would hear
more of when we put this RFP out. And it also makes the point,
I think, that maybe Mr. Lubick was making earlier. I suspect at
the end of the day there are going to be lots of incentives
that people tell us exist that are not necessarily paying
somebody $3 or paying somebody $4. Part of what we deal with,
and it may be exactly the concern you raised earlier, that is,
a lot of people today say, one of my reasons that I do not want
to file electronically is that I fear that my susceptibility to
audit is greater. And so maybe there is some connection between
agreeing that somebody who files electronically will have his
business or her business finished with us, by an earlier date
certain. And that might actually be a more appealing way to
think about it than the discussion we were having earlier about
moving filing dates around. Maybe there is a promise of earlier
certainty if you come to us electronically. But those are
exactly the kinds of proposals we hope to see in the RFP.
Mr. Lubick. I would worry about that change. I think this
reflects my conversation earlier with Mr. Cardin. I think the
rules of the game ought to be the same for all taxpayers, what
their obligations are, when they have to satisfy them, what the
period is for reviewing it. I think electronic filing should
prevail based on market-based incentives; it is a better way to
do it; it is more efficient; it is easier; it is going to be
error reduced greatly. And so I would be very reluctant to
change the statutory rules that favor one taxpayer over
another. I would be reluctant to see a shortening of the
statute of limitations, which is basically what that proposal
is.
Mr. Watkins. Thank you, Madam Chair. I do have another one,
but maybe I better ask it privately after awhile.
Chairman Johnson. Thank you, Mr. Watkins. I would like to
follow Mr. Watkins' question with another issue that will be
raised in follow-on testimony.
The National Association of Accountants indicates that the
electronic filing compliance visitation is a significant
deterrent to the electronic filing program.
Could you explain to us how this compliance visitation
works? How the IRS handles compliance visitations for big
electronic preparer filing corporations, like H&R Block? How
does the IRS handle visitations for a small accounting business
that files its clients' returns electronically through a third-
party transmitter? And do you believe that the number of
visitation checks will increase as the growth in the number of
practitioners filing electronic returns increases? I think this
is a very important issue.
Mr. Lutes. Let me address that if I could, Madam Chairman.
We initiated these visitations back a couple years ago when we
were dealing with the refund fraud issue that we worked with
the Congress on, and I think those steps were necessary and I
think they made a point at that time. Since that initial year
1995 filing season we have been gradually decreasing the number
of those visits. I do not have the 1995 number, but the number
of visits between 1996 and 1997 dropped by about 40 percent,
and the majority of the visits that were made this year were
for cause. We received complaints from taxpayers. We saw
patterns in the filings from particular offices. However, we do
still conduct random educational assistance visits to attempt
to spot patterns in the industry during those visits. But
again, the majority of visits that we are doing now are for
cause. And when we do the monitoring visits, we make them more
educational assistance visits; looking for questions we can
answer, trying to make them supportive of the ERO and
practitioner community.
Chairman Johnson. Well, thank you. I also wanted to get
your reaction to the National Association of Enrolled Agents
testimony in regard to their recommendation; their belief that
there are four incentives that could ensure greater electronic
filing participation by enrolled agents.
First, permit electronic communications between the IRS
offices and practitioners on client account issues; permit
alternative forms of tax payments; permit the online submission
of installment agreement requests and collection information
statements; and permit the electronic submission of powers of
attorney and transcript requests.
Mr. Dolan. Madam Chairman, those are all good ideas. The
only question is, in what sequence is that a part of what total
set of initiatives. There is not a one of those that is a bad
idea. They are ones that we have had dialog with the enrolled
agents. I know they have been frustrated that we have not been
able to prioritize some of those quicker than we have. The
ideas are all sound ones, and I think we will ultimately want
to look at them, as those and other ideas come back in response
to the RFP. There will have to be some prioritization of both
investment and use of our intellectual capital to get them
done, but not a one of those is a bad idea.
Chairman Johnson. Mr. Dolan, in terms of timeframes, I
think your RFP, being flexible, was a very good idea. On the
other hand, clearly none of the ideas you are going to get back
are ideas that we are hearing today or ideas that you have
already heard.
Do you have any idea how long it will take you to evaluate
those things, and particularly in the light of Mr. Lubick's
comments, whether or not you are really going to be able to
move ahead with flexibility as I think some of us conceive it?
Mr. Dolan. Well, I tried--perhaps not effectively--earlier
to make that the point that the target that will be in the RFP
is, tell us what you can do, and what you think we need to do,
to have a substantial impact on the returns that are filed in
1999. So it means, not the most immediate next filing season,
but for the filing season thereafter. So the trust we hope of
both the ideas we get and the nature of our responses will be
targeted for----
Chairman Johnson. What is the response deadline?
Mr. Lutes. Well, the initial RFP that will be issued next
week is a draft. This was at the request of the industry. They
wanted the opportunity to help us craft the final product.
Chairman Johnson. I appreciate that.
Mr. Lutes. We anticipate, based upon all the procurement
processes, it would be some time in the spring, probably late
spring.
Chairman Johnson. So you expect it will take you 6 months.
Mr. Lutes. Yes.
Chairman Johnson. You will wait 6 months for the responses
to the September 15 proposal. You will allow 6 months for
responses?
Mr. Lutes. No, the draft will be out there for 30 days. The
industry will provide us with feedback. We will take that
feedback, and build it into a final request for proposals, that
will then go out on the street for input in the form of final
proposals, which we will then have a regular structured process
to evaluate, and make the determination to----
Chairman Johnson. And your spring estimate gives you about
7 months to evaluate ideas that are coming back.
Mr. Lutes. Yes. Let me expand on something Mr. Dolan said a
moment ago. We are looking for impact on the 1999 filing
season. Obviously for the 1999 filing season at that point in
time I think your concern is, we are not going to be able to
build any major new systems over that 7-month period. So what
we are looking for is ideas, and again some of the incentives
that are mentioned are things that could clearly be done; if we
were to pay an incentive for returns, that clearly could be
done in that short of time.
But at the same time we are open and asking folks for
longer term proposals that, as Mike mentioned earlier, would
enable us to maybe even modify the modernization blueprint to
build systems that would involve for example some of the ideas
that the NAEA has raised around powers of attorney and so
forth. But with the limited funds we have, we have to choose
which ones of those systems to spend those funds on.
Chairman Johnson. By what date would you have to make a
decision for something to affect the 1998 filing?
Mr. Lutes. The 1998 filing season? In terms of any changes
to our systems we are well past that point. That software is in
final testing now. The software companies remember, need our
final products so they can develop their products also. So 1998
is essentially in the bag at this point.
Chairman Johnson. And 1999?
Mr. Lutes. For 1999, we would be looking at spring, early
summer, so that we can then make the programming changes to our
existing systems to effect them for 1998.
Chairman Johnson. Well, I certainly would want to work with
you for you to report to us on changes that are going to be
made for the 1999 filing season early enough so that we can
have input and understand what your plans are. And I think that
might help focus your process in a timeframe that we get some
real good work done for the 1999 season.
Mr. Dolan. Madam Chairman, the other points you highlight
here, is that this is not for us--this is not like going and
buying a piece of furniture or a piece of gear. This is for us
a unique RFP arrangement. Because we are basically using the
sort of classic commercial products, it is necessary to go to
people and say, not only give us your ideas, but give us some
financially binding commitments. We structured this
relationship with you, and a lot has been said about how many
of these returns are prepared in software, and how many are
prepared by practitioners.
What we expect to see back are some fairly imaginative
proposals that say, OK, I have the capability of giving you a
stream of these kinds of returns. And in return these are the
kinds of interactions I would want to have, or these are kinds
of cross-commitments I would like. So it is an adaptation of
something that is used typically more at the commodity level,
and so it is going to be a very interesting and exciting
process I think to see what people tell us in the context of
that kind of request.
Chairman Johnson. I think it is interesting, and I think it
is an exciting process. I do not want it to bog down so that it
is the year 2000 or 2001, before we get any benefit from it.
Mr. Dolan. Agreed.
Chairman Johnson. It clearly is going to have enormous
economic costs and implications, as well as benefit
implications for taxpayers. I think it is really beholden upon
us to move rapidly enough, so the decisions are made in a
timeframe that the changes can be marketed well, and we get
real advances by the 1999 filing season.
Now, since I did raise a couple of additional questions
myself, if there are other questions from Members of the
Subcommittee before we let our experts go, I would be happy to
recognize you.
Mr. Cardin.
Mr. Cardin. If I could just quickly--I notice that in the
bill that the administration filed that you seek explicit
authority to use appropriated funds to promote and encourage
the use of electronic filing. And the explanation, as I
understand it, is that there annually are prohibitions in the
appropriation process to promote programs explicitly approved
by Congress.
Could you just for the record tell us how important that
authority is to be granted, or whether you have sufficient
authority now to promote electronic filing.
Mr. Lubick. Well, as I understand it we have been promoting
electronic authority through donations of time, and not using
appropriated funds, relying upon public interest. As I
understand it, we now feel we can undertake legally a
promotional effort, using funds out of our appropriation, and
therefore if we are to do that type of marketing that is
indicated that will be very appropriate to the success of the
transition, we need this authority.
Mr. Cardin. Well, I would like to work with you with some
language, because I think obviously we do not want to restrict
our ability to carry out policy for more electronic filings.
One other quick point. The legislation that was filed on
behalf of the Commission's recommendation, spells out a goal,
as you pointed out, of 80-percent filings by the next 10 years;
and it spells it as a goal. It seems to me that it is
appropriate for Congress to spell out what it hopes will be
achieved. And I am just curious as to whether you think that is
a reasonable expectation--that in 10 years that we should be
able to achieve 80 percent filing electronically; or whether
you have a different percentage that you would think should be
expected if the rest of the authority is given to you,
including changing some of the obstacles that are in current
law.
Mr. Lubick. Well, our record on achieving goals is such
that I am very wary of stating what I think the appropriate one
should be. Maybe Mike would like to do that. And I do not have
any objection to there being a goal and to having----
Mr. Cardin. I want to stop you. I think the record of this
administration on trying to change the IRS has been good. So I
would not downplay your success.
Mr. Lubick. I would be glad to be recognized for having
outdistanced our targets, but from time to time we have been
chastised for the opposite result, and maybe we are just being
gun shy.
Mr. Dolan. If I could rise to the bait a little bit here,
Mr. Cardin, I think particularly in the light of Mr. English's
comment, the last thing I want to do is to leave this table,
conveying an impression that we are trying to play safe here. I
mean I personally think that trying to move this reality to the
80-percent world makes a heck of a lot of sense, and over a 10-
year period, all that we know around us, seems like that is not
an extraordinary or a reckless kind of goal. And certainly for
the Congress to say to the IRS, that is our vision, that is
what we would like you guys to add, and we like your commitment
to get there--all those seem like the right sorts of
conversations to have.
Now typically though, most of us when we go back and set a
goal, we expect, we are going to deploy this goal. I am going
to take this percent of the goal, and this year certain, and I
want to see how this maps out. I just do not want to light
candles and say prayers; I want to have some idea of, a
followed by b, followed by c. And what you are hearing from me
is more the reservation about thinking that when we get back
some of what we are going to get from the RFP, and we get a
little better understanding of some of the research that is
being done now, I think I will be able to map to that goal with
a lot more precision than I can today. But I do not shrink
from--as I call it--the aspirational or the notional objective
that that is the right place to be in that 10th year or the 9th
year.
Mr. Cardin. I appreciate that. I think that is a good
point. And remember, this is just one part of the restructuring
act, and it depends upon the entire program, I think, being
implemented, and the support that you need in order to carry
out these goals, and that obviously is hard to predict for the
next 10 years. But I am glad to see that we all can agree that
80-percent filing in 10 years is a reasonable goal for us to
set as a Nation. I think that is what it is about. It is not
just what you can accomplish; it is what we can accomplish
together. If you do not have the cooperation of Congress you
are not going to be able to achieve this, and I cannot tell you
what this Congress is going to do, let alone the next Congress.
So hopefully we can set a mutual goal of at least 80-percent
filing in 10 years, and then we can make sure that we do
everything we can to see that that goal is carried out. Thank
you.
Chairman Johnson. I would like to say that I think the
point that Mr. Cardin raises is a very, very important one, and
one we will discuss with you thoroughly. I am very pleased at
the aggressive efforts you are making. I think the work that is
going on is truly commendable, but it is also true that in
1993, 4 years ago, the IRS established an electronic filing
goal of 80 million returns by 2001, and that program never got
clearly implemented, no clear strategy, and no clear
achievements.
And in your plan released August 15, 1997, you certainly do
talk about electronic filing, but it is a matter of encouraging
it through product development and market improvements. There
are not quantitative goals or strategic plans laid out. There
are going to be successive people out there implementing this
plan, like there will be successive Congresses in backing it
up. And I think you really ought to think about it being in
your interest as well as ours, to be a little bit more specific
than simply encouraging something we know is important to do,
and is a good thing, both for the government and the taxpayers.
I think we do have a challenge before us in this regard,
and being somewhat more specific, because it has in the past
focused at least the Congress' attention, and I think it tends
to focus the executive branch's attention as well. So we will
look forward to discussing those matters with you.
Mr. Portman.
Mr. Portman. Thank you, Madam Chair. I just have a few
followups and maybe some clarifications. Again, we have talked
about the 80-percent goal. I think that is not only doable, but
probably can be done sooner given your new expertise with Mr.
Barr. And I want to commend you for bringing in someone of his
experience and knowledge. I think that will be a tremendous
benefit to the service.
With regard to the transmitting fee, we have gone over that
quite a bit. I think Mr. Lubick preferred that incentives for
electronic filing should be market based, and we should not
have additional monetary incentives. Let us just keep in mind
what we are talking about here. We have a much more expensive
system now, which is paper returns. Others have talked about
it, and we have talked about it, perhaps ad nauseam, over the
last year. We want to provide these incentives because it is
good for the IRS and good for the taxpayer.
If the paper return now costs $7, and the electronic return
costs $1, it is worth it, Mr. Lubick to have the government
engage in providing incentives. Let us say it is $2.68--what
you think it is--it is still worth it. So if we are going to
talk about markets, I think we need to talk about the taxpayer
and the cost to you and to the service.
I will also say, just to clarify what is in the
legislation, we do not say it should be $1, $2 or $3; we say
fair market cost to the transmitters. I would love not to get
into it now, because we have a lot of things I would like to
get into, but I would like to comment on Mr. Lubick's
suggestion that the incentive be paid to individuals. I think
that would be a big mistake. And if the IRS could get back to
us very soon on that, as in the next week, that would be great.
In H.R. 2292 the incentive is paid to transmitters, which I
think is where we all come out, and not to 120 million
individual taxpayers.
Let's just quickly discuss signature requirements. We all
know there is Form 8453 that must be signed and submitted. It
does not make any sense. Those of us who visited service
centers have seen it. Most of the cost of electronic filing is
associated with this signature requirement.
Mr. Lutes has said there is no one way to deal with it.
Well, H.R. 2292 has one very specific way to deal with it. And
I still have not heard the Treasury Department's opinion as to
that, nor the IRS opinion. What we say is very simple. H.R.
2292 only requires that the taxpayer retain the signature on
file. And I think it makes a lot of sense. Seventeen States do.
We talked about California earlier, and the IRS did not have
any thoughts as to what the California experience is, good or
bad. We have 17 States that do it. Now Australia does it,
Canada does it. The SEC does it. If the SEC can do it maybe the
IRS can consider it.
I just think it makes so much sense for you all, when you
go to those service centers and you see the hassle that the
current signature requires, to have it at least on an interim
basis, so you can perfect some kind of electronic signature. It
seems to make a lot of sense. That is the specific proposal
before us today. You need to tell us specifically how you feel
about that.
Finally, with regard to the extension of the filing
deadline, Mr. Lubick said it would be unfair to middle- and
low-income working families and taxpayers. I hope Treasury is
not trying to inject class warfare into electronic filing; God
forbid, we have had enough of that in the last couple of
months.
Because you raised it, let us get into the fairness issue a
little bit. Is it fair if you are a refund taxpayer--which I
guess is what you are referring to when you say low- and
middle-income working families. If you are a refund taxpayer,
you are able to file electronically and get your refund
therefore in 2 weeks, rather than 6 weeks, but there is no
comparable shift for balance-due taxpayers. If you are going to
talk about fairness, this is certainly a fairness issue that
would mitigate toward extending the filing deadline for
balance-due taxpayers, so that they could have some of that
same benefit. I mean, if we are going to talk about fairness, I
think your argument is exactly contrary to where we ought to
move.
I would just say one more thing about the extension. Mr.
Lutes, in his response earlier to the questions regarding why
people file electronically, said it is because they get a
refund sooner. What are you going to do for 30 percent of the
taxpayers who are balance-due filers? How are we going to meet
our 80-percent goal, Mr. Dolan, if we do not do something for
the 30 percent of taxpayers who are balance-due taxpayers. We
have to do something for them. I have heard no good ideas today
except extending that deadline for 30 days. And I understand
that April 15 is sacrosanct, and it is an important date and so
on. It will remain an important date for all but those who are
willing to file electronically.
If you look at the data it shows quite clearly that this is
going to have an impact--and probably the only thing we can do,
in terms incentive for the balance-due--If we do not get to the
balance-due folks, we would not have solved the problem here,
because there will still be those 30 percent taxpayers
outstanding. They do tend to be the most complex returns.
Therefore, guess what? They are the highest cost to the IRS. Is
that correct, Mr. Dolan?
Mr. Dolan. Sure it is, but at this point you said that you
heard no good ideas.
Mr. Portman. For the balance-due taxpayer.
Mr. Dolan. Yes, we talked about the balance-due taxpayers,
and perhaps it was when you were out. I think, creating the ACH
debit capacity will help motivate them. One of the other
feedbacks for us is, Why should I send you electronic--since I
have to send you this paper check.
Mr. Portman. You have an indication that that will move a
lot of balance-due taxpayers into electronic filing?
Mr. Dolan. I do not have a way of comparing that to the
sliding filing dates. But all I would want to stipulate is,
that I agree with you. Not only for the goal, but for good tax
administration, we have to find ways to bring that balance-due
taxpayer in. I think some combination of the ACH debit, and
continuing to perfect the things we know are good about this
system. It is still a cleaner, less error-prone, more
certainty-packed transaction to do that, whether you are
balance due or refund, electronically.
Mr. Portman. Is it less than one-quarter of 1 percent error
rate that you are experiencing in the EFTPS for electronic
filing?
Mr. Dolan. I would like to point out that the refund
taxpayer is getting back money which the IRS has been holding
all year; that was really his. And the balance-due taxpayer--we
are after all theoretically on a pay-as-you-go system--has been
holding money from the IRS.
Mr. Portman. This is a longer discussion, but what is the
unfairness of allowing anyone who wants to, to have this
extension if they file electronically? Again, the benefits of
electronic filing, Mr. Lutes has said very clearly, goes to
those who are refund taxpayers. It is true. If you talk to
people and if you look at surveys that is the answer. So, if we
all have the same goal we need to address the balance-due
taxpayer.
Mr. Dolan. Well, I want to address the balance-due
taxpayer. I share your goal on that; we should do it. But
nevertheless if there is an accounting date when we settle
accounts between taxpayers and IRS, it seems to me that that
fairness dictates that that be uniform, whether you are refund
or balance due.
Mr. Portman. If you file electronically, it is for either
type.
Mr. Dolan. But it seems to me, why do you want to give a
slow-pay person an incentive to be slower pay?
Mr. Portman. Well, if you are talking about the revenue
impact to the government we can get into that discussion.
Mr. Dolan. That is a different question.
Mr. Portman. I think strongly that the revenue impact will
be positive in the end because of the cost savings the IRS will
have because of electronic filing. So if that is your argument,
not the fairness argument, we can get into that.
Mr. Dolan. Well, I was not getting to that, but I am not
sure that is true. I think we will have to see. But it seems to
me that the same rules of when you have to pay and what time
you have to be audited--all of those questions that have been
raised ought to be uniform for all taxpayers.
Mr. Portman. They will be uniform. The differentiation will
be electronic versus nonelectronic, which is in the interest of
the Federal Government, but certainly of Treasury and the IRS.
Mr. Dolan. That is turning on something different from
whether you are a taxpayer or not. It turns on how you file
your return. I just do not see that as a criterion for
differentiating between your obligations.
Mr. Portman. I thank the witnesses. I look forward to
ongoing dialog and for responses to some of those specific
questions, because we do have a requirement at the Subcommittee
to provide this report to the Full Committee on the
legislation.
Chairman Johnson. Thank you, Mr. Portman, and I urge you in
the strongest terms possible that you do provide specific
responses to the specific recommendations. I thought frankly
that you would do that today. You chose to give a background,
an update, and responses to a couple of the major ones, but it
is very important that we get your written response to the
individual recommendations of the Commission in a timely
fashion. We would appreciate that.
I want to announce that we are going to combine the last
two panels, so that Members returning from this vote will have
the opportunity to hear the testimony of everyone. And then if
they cannot all stay for questioning, that is unfortunate, but
I am anxious that they at least get a chance to hear the
testimony of the seven remaining invited guests. And so we will
combine the last two panels and resume in about 10 minutes.
Thank you.
[Recess.]
Chairman Johnson. If the two concluding panels will both
join us at the table, Mr. Zimmerman, Mr. Wolfe, Mr. Langer, Mr.
Carver, Mr. Harris, Mr. Lane, and Ms. Kelley.
We will start with Mr. Zimmerman, president of H&R Block
Tax Services. Welcome, and thank you for being with us.
STATEMENT OF THOMAS L. ZIMMERMAN, PRESIDENT, H&R BLOCK TAX
SERVICES, INC., KANSAS CITY, MISSOURI
Mr. Zimmerman. Chairman Johnson, Ranking Member Coyne, and
Members of the Subcommittee.
Thank you for inviting us to testify. With your permission
I would like to submit my statement for the record and
summarize it briefly.
Chairman Johnson. All of the testimony----
Mr. Zimmerman. What is that?
Chairman Johnson. All of the testimony will be included in
the record, and you each will have the opportunity to make the
points that you think most important to us. Thank you.
Mr. Zimmerman. Thank you.
I am Tom Zimmerman, president of H&R Block Tax Services
Inc., the tax services subsidiary of H&R Block. Among our other
subsidiaries is Block Financial, which distributes Kiplinger
Tax Cut, tax preparation software.
To highlight our views, I would like to make four points.
First, we strongly support electronic filing. We provide
the majority of the 15 million electronic returns the IRS now
receives, and are working to expand that number.
Second, the government and the private sector must work
together to clear away obstacles to electronic filing that
include cumbersome IRS procedures and public resistance based
on inadequate information, fears, and, in some cases, cost.
Third, the key to increasing electronic filing is massive
IRS marketing, promotion and public education, which has been
missing. Taxpayers, not tax preparers, must be convinced of the
advantages.
And fourth, while we support most of the Commissioner's
recommendations for electronic filing, we strongly believe that
Federal subsidies for electronic return transmitters and
extending the tax filing deadlines for electronically filed
returns are unneeded and unwise.
First, H&R Block's role. H&R Block handles more than 18
million returns in the United States, Canada, and Australia.
All of our returns are filed electronically in Australia and
over 65 percent in Canada. In the United States, where we
process returns for 1 out of every 7 individual taxpayers, we
provide 7.3 million, or about half, of the electronic returns
the IRS receives from commercial practitioners.
To promote electronic filing, we spend $2.4 million on
television ads, have window banners in our 8,500 U.S. offices,
distribute more than 5 million brochures in English and
Spanish, target direct mail to 11.5 million prior clients, and
highlight the benefits on our Web site, on a CompuServe forum,
and in our ``Ask Henry'' syndicated newspaper column.
Electronic filing is provided free as part of the enhanced
services we offer at our 600 H&R Block Premium Offices and by
some of our franchisees. On March 1 we generally lower our
electronic filing fee from $25 to $15 at our other offices.
We plan to reduce fees in steps over several years as
volume increases. We will be reducing electronic filing fees by
one-third for returns we prepare in the coming tax season.
In addition, we recently concluded a 3-year agreement with
CompuServe to upgrade their system to provide capacity to
transmit up to 40 million electronic returns, an investment we
believe shows our strong commitment to increased future
electronic filing.
Second, government and the private sector must work
together to communicate the advantages of electronic filing and
to clear away IRS obstacles and public misunderstanding. There
are a number of advantages to filing electronically and a
number of reasons taxpayers do not do so. For most of our
clients, the compelling advantage and only driving force for
electronic filing is a quick refund. Because of the desire for
a quick refund, over 70% of our customers file early. Despite
the advantages, most taxpayers who receive refunds still do not
file electronically.
In H&R Block's case, all of our returns are prepared on
computer but only half are filed electronically. Nationally,
half of all individual tax returns are prepared on computer,
but only 13 percent are filed electronically.
Reasons for the fall off vary.
Many clients do not have enough information or have
misinformation. Some fear an increased possibility of audit,
worry about invasion of privacy, distrust computers, or are
more comfortable with the familiar ritual of a trip to the post
office.
For some taxpayers cost may be a factor, although we
believe this is less than might be expected. A recent USA
Today/Gallup Poll from April 2, 1997, finds only 24 percent of
paper filers cite fees as a reason for not filing
electronically. The vast majority give other reasons.
We tested free filing over several years in about one-third
of our offices and found 60 percent of our clients preferred
paper filing. So cultural factors, misinformation, or a lack of
perceived value may be more significant barriers than cost.
IRS procedures also add difficulty to electronic filing.
Cumbersome paperwork, signature requirements for electronic
returns, paperwork gluts over applications, revisions to
participate in the electronic filing program, and delayed
confirmation of electronic filer identification numbers could
all be eliminated or streamlined.
The application to become an electronic filer, for example,
cannot be filed electronically.
To clear these obstacles, government and industry must work
together.
My third point is that, short of mandating electronic
filing, the key to increasing electronic filing is massive IRS
marketing, promotion and public education, which has been
missing. The emphasis must be on persuading taxpayers and just
not tax preparers.
The 1040 booklet most taxpayers receive covers many issues,
but it has never emphasized the benefits of electronic filing.
We recommend that page 1 of each 1040 booklet have a large,
highlighted area asking taxpayers directly to, Please return
electronically for faster refunds, fewer errors and followup
letters, no greater audit risk, proof of filing, and lower IRS
data entry costs which saves tax dollars.
We are encouraged by plans being developed to launch an IRS
public service television campaign next year with tie-in
printed materials. Congress can help by relaxing appropriations
restrictions on the use of IRS funds for paid advertising.
Which brings me to my last point. We support most of the
Commission's recommendations for electronic filing, but we
strongly believe that Federal subsidies to electronic return
transmitters and extending tax filing deadlines are unneeded,
unwise, and divert resources from where our focus should be.
We support the Commission's recommendations for realistic
goals, clear strategy, private sector advice, and lower
barriers to paperless filing and payment.
But we do not believe a subsidy to electronic return
transmitters of up to $3 per return for taxpayers not charged a
fee is needed or appropriate, especially given pressures on the
IRS budget.
First, market forces are already moving to lower filing
fees. In some cases electronic filing fees is already offered
free, meaning subsidies would be a windfall for some firms. And
electronic filing is up 19 percent this year without subsidy.
Second, a subsidy of up to $3 per electronically filed
return may cost the IRS money since the average data entry
costs for paper return are less according to the IRS.
Third, electronic return transmitters are ill equipped to
verify whether their customers, mostly commercial electronic
return originators, are actually providing free filing, and the
program would be difficult to police.
We believe subsidies are a bad idea, but if any are
provided, they should go to taxpayers as a tax credit or to the
70,000 plus electronic return originators who have the ability
to enlist their customers, not to transmitters, most of whom
have no direct contact with taxpayers.
We also do not believe it is cost effective to extend the
tax filing deadline to May 15 for electronic returns.
If the primary target is the balance-due filer, who files
late in the season and might see some advantage in slower
payment, delaying that revenue by 1 month could cost the
Treasury as much as $100 million, adding to the deficit.
The taxpayer is already able to file for an automatic
extension if he needs more time, so the only incentive is the
benefit of slower payment, which increases Treasury borrowing
costs. The benefit would be greatest for large balance-due
filers.
We believe the IRS should focus more productively on the 71
percent of taxpayers that get a refund and have a stronger
incentive to file electronically because they may want it
quickly.
Electronic filing is growing, even without an extended
season or subsidies. We believe the key to further increases is
not to lose focus on the need for a massive IRS marketing
campaign that parallels private sector advances.
We look forward to working with the Subcommittee on these
issues. We are proud of the contribution we now make, and hope
to build on it in the future. I am happy to respond to your
questions.
[The prepared statement follows:]
Statement of Thomas L. Zimmerman, President, H&R Block Tax Services,
Inc., Kansas City, Missouri
Thank you for inviting us to testify on the recommendations
of the IRS Restructuring Commission to increase the number of
electronically filed (ELF) tax returns.
I'm Tom Zimmerman, president of H&R Block Tax Services,
Inc., the tax services subsidiary of H&R Block. Among our other
subsidiaries is Block Financial, which distributes Kiplinger
TaxCut tax preparation software. I have worked in the
tax preparation industry for 24 years, starting as a tax
preparer and rising to district manager, regional director,
divisional director, and executive vice president before
assuming my present position.
We strongly support electronic filing. We have worked
closely over the past decade with the IRS and more recently
with the Commission to accomplish that goal. We agree with many
of the Commission's electronic filing recommendations, but
believe that two of their recommendations--delaying tax filing
deadlines and subsidizing private-sector tax return
transmitters--would misplace priorities and resources. We do
not agree that they are cost-effective ways to increase
electronic filing.
H&R Block's Role
H&R Block handles more than 18 million returns in the
United States, Canada and Australia. All of our returns are
filed electronically in Australia and over 65% in Canada. In
the U.S., where we process returns for one out of every seven
individual taxpayers, we provide 7.3 million, or about half, of
the electronic returns the IRS receives from commercial
practitioners. This year, the number of electronic returns we
filed increased by 15.7%.
To promote electronic filing, we spend $2.4 million on
television ads, have window banners in our 8,500 U.S. offices,
distribute more than 5 million brochures in English and
Spanish, target direct mail to 11.5 million prior clients, and
highlight the benefits on our web site, on a CompuServe forum,
and in our ``Ask Henry'' syndicated newspaper column.
Electronic filing is provided free as part of the enhanced
service we offer at our 600 H&R Block Premium Offices and by
some of our franchisees, and on March 1 we generally lower our
electronic filing fee from $25 to $15 at our other offices. We
plan to reduce fees in steps over several years as volume
increases.
We will be reducing electronic filing fees by a third for
returns we prepare in the coming tax season. In addition, we
recently concluded a three year agreement with CompuServe to
upgrade their system to provide capacity to transmit up to 40
million electronic returns, an investment we believe shows our
strong commitment to increased future electronic filing.
Five Electronic Filing Advantages
Five advantages of electronic filing are clear: (1) refunds
in less than half the time of paper returns; (2) reduced
follow-up IRS correspondence as social security number, math
and IRS transcription errors are caught or eliminated [20%+
error rates for paper returns vs. less than 1% for electronic
returns]; (3) no greater risk of audit; (4) proof the return
has been filed; and (5) savings for the IRS with reduced data-
entry costs.
For most of our clients, however, the compelling advantage
and only driving force for electronic filing is a quick refund.
Because of the desire for a quick refund, over 70% of our
customers file early.
Obstacles to Electronic Filing
Despite the advantages, most taxpayers who receive refunds
still don't file electronically. In H&R Block's case, all of
our returns are prepared on computer but only half are filed
electronically. Nationally, half of all individual tax returns
are prepared on computer, but only 13% are filed
electronically. Reasons vary. Many clients don't have enough
information or have misinformation. Some fear an increased
possibility of audit, worry about invasion of privacy, distrust
computers, or are more comfortable with the familiar ritual of
a trip to the post office.
For some taxpayers, cost may be a factor-although we
believe this is less than might be expected. A recent USA
Today/Gallup poll (4/2/97) finds only 24% of paper filers cite
fees as a reason for not filing electronically while the vast
majority give other reasons. We tested free filing over several
years in about a third of our offices and found 60% of our
clients still preferred paper filing. So cultural factors,
misinformation, or a lack of perceived value may be more
significant barriers than cost. We continue to search for the
right mix of incentives and information to enable growing
numbers of taxpayers to benefit from electronic filing.
IRS procedures also add difficulty to electronic filing.
Cumbersome signature requirements (Form 8453), paperwork gluts
over applications and revisions to participate in the
electronic filing program (Form 8633), and delayed confirmation
of electronic filer identification numbers could all be
eliminated or streamlined. The application to become an
electronic filer, for example, can't be filed electronically.
To clear these obstacles, government and industry must work
together.
Where Focus Should Be
Short of mandating electronic filing, we believe what is
most needed is a massive IRS campaign, reinforced by the
private sector, promoting and marketing electronic filing and
educating taxpayers to the advantages.
The 1040 booklet most taxpayers receive covers many issues,
but it has never emphasized the benefits of electronic filing.
We recommend that page one of each 1040 booklet have a large,
highlighted area asking taxpayers directly to--
Please file your return electronically for--
Faster refunds
Fewer errors and follow-up letters
No greater audit risk
Proof of filing
Lower IRS data-entry costs which saves tax dollars
See pages ____________ for more information.
On subsequent pages, there would be a strong sales pitch.
We are encouraged by plans being developed to launch an IRS
public service TV campaign next year with tie-in printed
materials and more information in the 1040 booklets. Past
promotion of TeleFile has successfully boosted use by those who
file simple returns. The emphasis must be on persuading
taxpayers, not just tax preparers.
Congress can help by relaxing appropriations restrictions
on the use of IRS funds for paid advertising.
We are also encouraged by renewed efforts at IRS. A history
of inflated estimates, attempts at strategic plans, and delays
in acting on repeated recommendations all suggest that IRS
needed a spur to action. A new combination of IRS personnel
changes, Treasury oversight, Congressional criticism, and
Commission efforts may finally yield results. The problem with
electronic filing has been less one of uncertain strategy than
lack of resources and execution.
We support the Commission's recommendations for realistic
goals, clear strategy, private-sector advice, and lower
barriers to paperless filing and payment. We strongly believe,
however, that federal subsidies to electronic return
transmitters and extending tax filing deadlines are unneeded,
unwise, and divert resources from where our focus should be to
increase electronic filing.
Subsidizing Electronic Return Transmitters Unneeded
We don't believe a subsidy to electronic return
transmitters of up to $3 per return for taxpayers not charged a
fee is needed or appropriate, especially given pressures on the
IRS budget. First, market forces are already moving to lower
filing fees-in some cases electronic filing is already offered
free, meaning subsidies would be a windfall for some firms.
Electronic filing is up 19% this year without subsidy. Second,
subsidies may undermine the incentives some preparers now have
to invest fees in electronic filing start-up costs including
advertising and promotion, which could be counterproductive.
Third, a subsidy of up to $3 per electronically filed return
may cost the IRS money since average data entry costs for a
paper return are less ($2.65 vs. $4.15), according to the IRS.
And, fourth, electronic return transmitters are ill equipped to
verify whether their customers-mostly commercial electronic
return originators-are actually providing ``free'' filing, and
the program would be difficult to police.
We believe subsidies are a bad idea, but if any are
provided, they should go to taxpayers as a credit or to the
70,000+ electronic return originators who have the ability to
enlist their customers, not to transmitters most of whom have
no direct contact with taxpayers. Any subsidies should also be
targeted as an incentive to new filers, not used to reward
existing electronic filers.
Extending Tax Filing Deadlines Unwise
We also don't believe it is cost-effective to extend the
tax filing deadline to May 15 for electronic returns. If the
primary target is the balance-due filer of a complex return who
files late in the season and might see some advantage in slower
payment, delaying that revenue by a month could cost the
Treasury as much as $100 million, adding to the deficit. The
taxpayer is already able to file for an automatic extension if
he needs more time (although payment in full should be made by
April 15), so the only incentive is the benefit of slower
payment-which increases Treasury borrowing costs. The benefit
would be greatest for large balance-due filers.
New dates and a longer filing season would also add
complexity, create taxpayer confusion, and, by diminishing the
single focus on April 15 as the national deadline, contribute
to weakened compliance.
We believe the IRS should focus more productively on the
71% of taxpayers that get a refund and have a considerably
stronger incentive to file because they may want it quickly.
They have a built-in incentive to file electronically--if we
can educate them and promote the service.
Electronic filing is growing now even without an extended
season or subsidies. We believe the key to further increases is
not to lose focus on the need for a massive IRS marketing
campaign that parallels private-sector advances.
We look forward to working with the Subcommittee on these
issues. We're proud of the contribution we now make and hope to
build on it in the future.
Chairman Johnson. Thank you.
Mr. Wolfe.
STATEMENT OF LARRY WOLFE, SENIOR VICE PRESIDENT, TAX PRODUCTS
DIVISION, INTUIT, INC., SAN DIEGO, CALIFORNIA
Mr. Wolfe. Madam Chairman, Ranking Member Coyne,
Representative Portman, other distinguished Members, it is an
honor to make my first appearance before this Subcommittee,
and, in fact, before any Committee of Congress.
My name is Larry Wolfe. I am a CPA and vice president of
the tax products division of Intuit, a U.S.-based software
company, which produces a variety of tax and personal finance
products, including TurboTax and MacIntax, the Nation's leading
and best selling tax preparation software.
More than 14 million tax returns were prepared using Intuit
software last year. We followed closely and with great
enthusiasm, the work done by the National Commission of the
Restructuring of the IRS, led by Congressman Portman and
Senator Kerrey. The Commission got it right.
The Commission's report on electronic filing, taken as a
whole, is an excellent and balanced set of recommendations, and
it deserves Congress' support. There is uniform agreement that
electronic filing of tax returns is desired. Paper returns are
expensive to process, and while hard costs have proven
difficult to determine, the best estimates of processing costs
are about $7 per return, while truly paperless returns on the
other hand cost only pennies.
So what is keeping this from happening and what can
Congress do to help achieve these goals? We believe two things
need to be done. First, we need to eliminate everything that
makes electronic filing less attractive than the current method
of sending it in with simply a postage stamp. However, this is
not enough. To simply get to the point where taxpayers see both
methods as equal will not drive substantial increases in
electronic filing. We must make electronic filing the preferred
method of filing tax returns.
H.R. 2292 directs the Secretary of Treasury to implement a
plan to eliminate barriers, provide incentives, and use
competitive market forces to increase electronic filing. Intuit
supports this directive and encourages Congress to ensure that
every barrier is removed, and that taxpayers are incentivised
to file electronically.
Specifically here are the barriers that we would like to
see removed. First, eliminate the 8453 form; second, eliminate
the requirement to file paper copies of W-2 forms; third,
ensure that the IRS can accept all tax returns electronically;
fourth, eliminate the need to send in a check with a balance-
due return; fifth, work to eliminate public skepticism of
electronic filing. Taxpayers are uncertain about electronic
filing, and need to be assured through IRS promotional
campaigns that electronic filing does not increase the risk of
audit, and is a safe efficient way to file the returns. We are
delighted that the IRS is already working on this, and we
believe that they will see benefits from that.
Finally, most taxpayers pay between $10 and $25 to
electronically file their returns. This amount must be reduced
to zero in order to compete with the 32 cent stamp. The bill
includes a provision that requires the Secretary to implement
procedures to provide for the payments of incentives to
transmitters if they make electronic filing free for their
customers.
Collectively, these provisions are dramatic, and Intuit
fully supports all of them. They, however, will only make
taxpayers ambivalent about whether to file on paper or
electronically. In our opinion the IRS will not see the huge
increases in electronic filing that they are looking for simply
as a result of leveling the playingfield.
The second step must be to make electronic filing the
preferred method. We believe the following items are necessary
to create a real movement to electronic filing:
The first already exists. Only electronically filed returns
get an acknowledgment of receipt from the IRS. Second, allow
taxpayers who file electronically to view in a secure way
certain information about their accounts with the IRS. Third,
and most important, is to extend the filing deadline for
electronic returns. This will be the catalyst that causes
taxpayers to push the file electronically button, rather than
the print button on their keyboards. We support this filing
extension because we believe it is the most significant
incentive for people who have balances due.
We commend the Commission's work, and H.R. 2292 that
resulted from it. We encourage Congress to support the
provisions as a total package. As I conclude, I would be remiss
if I did not mention how impressed we are with the markedly
increased level of dialog, openness, and outreach by the senior
Treasury and IRS officials. We have enjoyed those
communications, and we believe that they will bear much fruit
in the future. Thank you very much.
[The prepared statement follows:]
Statement of Larry Wolfe, Senior Vice President, Tax Products Division,
Intuit, Inc., San Diego, California
Madame Chairman, Ranking Member Coyne, Representative
Portman and other distinguished Members of the Committee: My
name is Larry Wolfe. I am Senior Vice-President, Tax Products
Division of Intuit, Inc., a U.S. based software company which
produces a variety of tax and personal finance products
including TurboTax and MacInTax, a personal and professional
tax product that is the best selling tax preparation software
in the United States. Fourteen million tax returns are prepared
using our software. More generally, Intuit's mission is to
improve the way individuals and small businesses manage their
financial affairs. To that end, Intuit develops, markets and
supports personal finance, small business accounting, tax
preparation and other consumer software products. We provide
related supplies and electronic financial services that enable
individuals, professionals and small businesses to automate
commonly performed financial tasks and better organize,
understand, manage and plan their financial lives. It is an
honor to appear before the Subcommittee.
We followed closely, and with enthusiasm, the electronic
filing review and recommendations made by the National
Commission on Restructuring the IRS (``the Commission'') led by
Senator Kerrey and Congressman Portman. The Commission got it
right. The Commission's report on electronic filing, taken as a
whole, is an excellent and balanced set of recommendations. It
deserves Congress' support and we hope you will see that the
IRS, who are making strides of their own in the same direction,
is asked to implement it.
Benefits of Electronic Filing
Chairman Johnson's statement announcing this hearing
squarely addressed why incentives are needed. For Tax Year
1996, approximately 120 million individual tax returns were
filed. More than half, and probably as many as 60 million
returns, were prepared by paid tax preparers using a variety of
tax preparation software. In addition, at least 10 million tax
returns were completed by individual self preparers who use
consumer-oriented tax preparation software products such as
Intuit's. Only a small percentage of these electronically
prepared tax returns, less than 20 million, were submitted to
the government in an electronic format, and, we have been told
the majority of electronically submitted tax returns are
RAL's--refund anticipation loan recipients. Collectively, most
current electronic filers were receiving refunds. For these
reasons, the number of electronically submitted returns, while
increasing, is generally static when compared with the total
number of returns that could be returned in electronic format.
The Commission, the IRS and this Subcommittee have
recognized that there is an enormous financial and service
benefit to the government in electronically receiving the
returns currently prepared in electronic format, a number which
is growing each year. Although approximately 70 million returns
(out of the 120 million returns received by IRS) currently are
prepared electronically, approximately 60 million taxpayers
using PC's, or preparers, print out their tax return on paper
and mail it in. The IRS is then required to pay approximately
8,000 full time and, more importantly, 21,000 seasonally hired
workers to manually enter only 40% of the information contained
in these paper returns on IRS computers. This manual handling
of paper returns delays processing and introduces new errors to
the process.
The IRS figures reported regarding labor costs vary widely.
Assuming all returns take roughly equivalent time, the total
process of labor and service center cost to IRS is $7 per paper
return. During the press conference releasing the Commission's
report, Co-Chair of the Commission, Congressman Portman,
emphasized that the Commission found the $7 figure to be the
best available estimate.
In addition, the Commissions Report found that the error
rate for manually prepared paper returns is approximately 20%.
Addressing a return with errors requires multiple handling in
data processing, and consequently the cost of each wrong return
is far more than the estimated $7 average. Because
electronically filed returns usually are prepared by computer
programs with built in software checks, undergo pre-screening
by the IRS, and experience no key punch errors, the Commission
estimated the error rate for electronically filed returns to be
less than one percent. This low error volume will translate
into a huge cost savings if electronic returns grow.
Moreover, the actual cost of inputting such returns
requires aggregating labor, facility costs and computing. For
example, for every 15 million additional returns obtained
electronically, IRS could eliminate the cost of building and
maintaining one major service center.
As Chairman Johnson's announcement statement accurately
described and the Commission reported, returns prepared and
received electronically actually have a significantly lower
cost to process and have a higher accuracy rate than those
returns that are prepared manually. The Commissions Report
estimated that the cost of processing electronic returns was at
$1.15 per return, including the processing of additional
documents to authenticate the return, which costs H.R. 2292
will hopefully reduce.
Intuit Supports Commission Recommendations In the Proposed Legislation
Specifically, we believe the following six recommendations,
made by the Commission and already included in Title II of H.R.
2292, are critical and necessary:
First, the requirement to file the 8453 signature document
is being dropped. A signature alternative will be identified
and enabled. This will eliminate a significant barrier to
electronic filing that remains both for returns professionally
prepared and those self prepared. Under the Telefile program,
IRS already has evolved a way to provide personal PIN numbers
to taxpayers. Some method must be utilized to authenticate each
return and remove the current need to require signature forms,
or mailing a paper return for matching with an electronic
record. This will remove a barrier in the current system.
Second, the bill permits a limited power of attorney
permitting the taxpayer to authorize the IRS to speak to their
professional tax preparer with respect to an electronically
filed individual return. This will provide an incentive for
preparers to encourage electronic returns.
Third, moving towards secure account inquiry by individual
taxpayers is appropriately recognized, as is the need to
protect private information. This will provide an incentive for
taxpayers and encourage filing of electronic returns.
Fourth, an extension of 30 days for electronically filed
returns is being offered, and paperless payment options are
being enabled. This is a major incentive to taxpayers to
electronically file. In concert, the balance due filer, who
today has no incentive to file electronically, will find it
easier and more attractive to file electronically.
Fifth, the bill requires IRS to incorporate market
incentives for electronic filing to bring the cost of
electronic filing into equality with a $.32 stamp. I will
return to this issue for some additional comments, but cost to
taxpayers is a key barrier to electronic filing.
Finally, a strategic pe industries increased confidence
that the IRS understands the challenge, the benefits and the
opportunities to make electronic filing and payment the
preferred and most convenient means of filing.
Commission Recommendations That Intuit Believes Should Be Included in
the Subcommittee's Legislation
There are four recommendations identified in the report of
the National Commission on Restructuring the IRS: A Vision for
a New IRS, that H.R. 2292 has not, as yet, embraced. We would
recommend that four additional issues be included prior to
passage of the bill. These include:
The first, and most critical, is the need to eliminate the
requirement to file a W2 for electronically filed returns.
Paper W2s are currently attached to the paper 8453 signature
document when the electronic filing method is used. Eliminating
the requirement to file a paper 8453 document without also
eliminating the requirement to file paper W2s will not truly
provide a paperless filing. This barrier to electronic filing
must be removed.
Second, the Commission recommended expanding the range of
1040 returns that can be filed electronically. Today, there are
limitations in the electronic filing program (for example, the
number of stock transactions which can be reported on an
electronically filed return) which exclude a number of 1040s
from the electronic filing process. The returns excluded are
typically the more complex, and therefore, more costly to
keypunch. The IRS should be required, over a reasonable period
of time, to find ways for all returns to be permitted to be
electronically filed. This will remove an unnecessary barrier
to electronic filing.
Third, the extension incentive for balance due filers
should be accelerated. This is a huge incentive to a group that
will not otherwise file electronically, and the Committee
should clarify the effective date of this provision.
Finally, the Commission recommended permitting the IRS to
promote electronic filing. Today, the only promotional avenue
the IRS has for electronic filing is public service
announcements. These rarely run during prime time. To
aggressively advance and promote electronic filing, the IRS
should be authorized and funded to promote this program in
magazines, newsparrier to IRS effectiveness should be removed.
Incentives: A Critical Component
H.R. 2292, Section 201(c) embraces a version of the
Commission's recommendation on incentives, an issue that the
Commission found is of paramount importance in increasing the
number of electronically filed returns.
From an individual taxpayers perspective, there is little
or no economic incentive to file electronically. Taxpayers are
generally charged service fees ranging from $10 to $25 for
electronic filing. Occasional temporary promotions of
electronic filing at lower or no cost are just that--promotions
that are not likely to be continued. Therefore, a rational
taxpayer will continue to choose a $.32 stamp to mail a printed
return. A series of customer surveys conducted by independent
third parties have stated that cost is the single greatest
impediment to electronic filing. (A copy of one such polling
study, and another reported in USA Today are attached). We have
heard other companies say that cost of electronic filing is not
the main issue for their customers. We strongly disagree, and
would suggest that the Committee seek hard data if cost is not
perceived to be the most important issue. We do agree cost is
not the only issue.
In fact, in the polling data, 53% of these people surveyed
said economic incentives should be used to drive up electronic
filing, 40% said they didn't have an opinion, and only 7%
opposed use of economic incentives.
An economic incentive approach is appropriate for the
following reasons:
First, a proposed incentive system reduces governmental and
taxpayer risk to a minimum. IRS should only be asked to pay for
tax returns it actually received in the desired format. IRS
currently acknowledges receipt for filings it receives from
third parties. Electronic filing actually results in greater
certainty for taxpayers because they will have a record of
actual receipt of their return by IRS. (Paper returns do not
result in such receipts.) Currently, service providers and the
IRS are already doing this exact function for millions of
returns--the Commission proposed shifting a very high cost from
the individual taxpayer to a much smaller cost borne by all
taxpayers, in order to reduce total expenditures on IRS
operations. The IRS has stated that it has the ability to
accept as many as 100 million electronically filed returns
annually without requiring any new systems development effort.
Current IRS standards appropriately require suitability checks
of the transmitter--such as the technical background of the
concern, credit worthiness, and necessary background checks on
employees.
Second, this incentive does not require the IRS to enable
Internet access. Instead, transmitters would send their batched
returns on the public telephone network through a dedicated
connection to the IRS--as they currently do for the returns IRS
already obtains electronically. As Internet security and
encryption concerns are satisfied, the service providers can
utilize the Internet.
Finally, it makes economic sense once all costs of manually
processing paper returns are accumulated, that the IRS will
still net as much as $4 per return electronically filed, even
if it pays a $3 incentive fee per return, for every return,
every single year. The savings obviously would multiply if 10
million, 20 million, or more additional returns, already in
electronic format, were obtained in this manner.
It is the transmitters who have the costs, for example, of
telephone lines, servers, and staff at call centers to make
electronic filing work. Intuit would be pleased with the
incentive being paid wherever it will be effective, but it is
not clear how payments or credits to taxpayers will solve the
cost problem of transmitters.
The Commission's recommended incentive proposal would
permit a variety of vendors to provide electronic filing free
to the taxpayers. The resulting surge in ELF should save the
government substantial sums, year after year.
Drafting Comments
We note that Section 201(c)(2)(c) appears to distinguish
between preparer returns and self-prepared returns. We see no
policy reason to make such a distinction.
As a matter of drafting the numerous effective dates in the
bill, we were uncertain whether Section 202 contained an
effective date for corporate and individual returns.
No Competition with Private Sector
There is one other area where the Subcommittee could
clarify existing law and practice. Intuit and other software
companies, and I believe the preparer community, have no
objection to IRS aggressively making their forms available on
line. We and others spend tens of millions of dollars
integrating a software package that we warrant and that
responds to our customer needs. This bill should include simple
language indicating it is congressional policy to rely upon
value added private concerns to continue to service this
private market without government competition. We believe such
a firm policy guide would be useful, and consistent with OMB
policy circulars.
Dialogue with Treasury and IRS
The level of dialogue, openness and outreach by senior
Treasury and IRS officials has markedly increased in the past
year. We believe Congress should be made aware of this valuable
open channel between the stakeholders in the system.
Conclusion
While the IRS has stated they have sufficient legal
authority to implement this proposal, H.R. 2292 will provide
the necessary final push. Intuit believes the House Ways and
Means Committee's efforts are critical in assisting the IRS.
[GRAPHIC] [TIFF OMITTED] T1199.005
[GRAPHIC] [TIFF OMITTED] T1199.006
[GRAPHIC] [TIFF OMITTED] T1199.007
[GRAPHIC] [TIFF OMITTED] T1199.008
[GRAPHIC] [TIFF OMITTED] T1199.009
[GRAPHIC] [TIFF OMITTED] T1199.010
Chairman Johnson. Thank you very much.
Mr. Langer.
STATEMENT OF JOSEPH W. LANGER, PRESIDENT, NATIONAL ASSOCIATION
OF COMPUTERIZED TAX PROCESSORS, GREEN BAY, WISCONSIN
Mr. Langer. Madam Chairman, Members of the Oversight
Subcommittee, I appreciate the opportunity to testify on the
issue of electronic tax filing. The work done by the National
Commission on Restructuring the Internal Revenue Service, as
well as the changes recommended in H.R. 2292, are sweeping and
appropriate, and they address the issues facing electronic
filing today.
My name is Joe Langer. I am the president of the National
Association of Computerized Tax Processors, and for the last 8
years, I have been the chair of the electronic filing committee
of this association. And my profession, I am president of
Nelco, Inc., an electronic filing service provider and tax form
provider from Green Bay, Wisconsin. Our products are used by
over 100 companies throughout the country; different tax
preparation software companies.
Through my term as electronic filing chair, we have worked
with the IRS and State agencies to promote standards and make
recommendations to simplify and enhance electronic filing. This
past year alone we submitted a paper making 22 recommendations
to the Internal Revenue Service. The NACTP as an organization
continues to promote professional standards for software
development, and to promote a consistent method of automated
tax filing.
Over the life of the Federal electronic filing system, the
IRS has considered various types of signature alternatives.
While this consideration continues, States are enabling
paperless electronic filing systems, which either require no
signature document for filing, or require the return--to retain
a copy of the electronic return.
Today the State of Montana requires no signature document
at all, and 17 States require the signature document to be
prepared, but not submitted. It is time the IRS accepts one of
these alternatives.
Digital signatures using public and private keys are not
fully perfected to be implemented on a nationwide basis.
Personal identification numbers are not yet developed for tax
filing, and some have recommended a separate PIN for each type
of filing. Until these systems are updated, or a new system can
be made available to all taxpayers, another alternative, such
as those being implemented at the State level must be deployed.
True paperless filing will be a great benefit to electronic
filing, and promote its use over paper filing. Eliminating
paper will reduce the cost to both individual and tax
preparers. However, to be truly paperless the IRS must
eliminate the need for filing Form 8453. The electronic filing
system must accept all forms, all schedules. In addition, all
forms, including the W-2 worksheets or explanation, which are
attached to an electronic return must be submitted
electronically, not on paper. For the true paperless system,
electronic filing will grow substantially. The only way to
accomplish this goal is to invest in the technology for the
electronic filing system.
The proposed legislation in the Commission's report called
for an incentive to electronic filing transmitter. Our
membership believes to quickly change filing behavior and
achieve the highest long-term results, the taxpayer should
receive the incentive to file electronically. However, because
of the administrative ability of such an effort and the
perceived inequity with paper filers, and incentive-targeted
electronic filing infrastructures, those offering the service
will accomplish growth in electronic filing, and reduce the
burden on the professional tax preparer.
There are currently over 60,000 registered professional
electronic filers today. Only 2,500 transmit direct to the IRS.
The remaining 75,000 plus use a value-added network, such as a
third-party transmitter. Third-party transmitters charge tax
practitioners, from nothing for free electronic line to $10 a
return. Some include their electronic filing costs for software
development, product support and electronic transmission; in a
lump sum, the software. Most like to charge a separate fee for
the returns transmitted.
An incentive proposed of $1 to $2 will not cover these
costs. Third-party transmitters will pass these incentives on
to the tax practitioner clients, and continue to compete on a
basis of the products and services that they offer.
Practitioners costs include these electronic filing costs, as
well as the additional processing costs for an electronically
filed return.
Because not every return can be filed electronically, and
an electronic return is not paperless, the practitioner must
sort returns into paper, and electronic, and fill out forms for
every electronic returns. Practitioners will welcome these
incentives. However, without changes to the electronic filing
system to accept all forms, and to become entirely paperless,
the tax practitioners will not fully embrace electronic filing.
Consumers can purchase the software to prepare the return,
and file electronically. Companies today charge between $10 and
$15 to file electronically. With an incentive, the companies
offering electronic--to consumers can reduce their cost for
development, support and transmission. However, because there
is a separate fee charged for electronic filing, the remaining
costs will be added to the cost of the package, resulting in
higher software costs.
Legislation proposes extensions for electronic file
returns. NACTP has actively recommended creating nonfinancial
incentives to promote electronic filing. Because there is no
IRS data required for an electronic filed return, we support
extensions to file electronically filed returns.
In addition, allowing electronic return originators to
communicate electronically, file returns will also benefit for
the electronic filer. NACTP has recommended the electronic
communication of notices, delays in processing, and requests
for additional information to be sent electronically to the
electronic filer. By doing this the tax professional can
quickly satisfy the request from the IRS, and eliminate
additional burden on taxpayers.
Balance-due filers have not yet been attracted to the
electronic filing system. The ability to accept credit cards,
debit cards, as well as electronic funds transfer should
encourage balance-due filers. However, the major impetus behind
balance-due filing will occur when practitioners include
electronic filing as their standard method of filing all
returns.
Access to a taxpayer's account through a secure and private
method will add to the attractiveness of electronic filing.
Taxpayers can obtain answers to their questions regarding their
return and refund status, rather than calling the IRS.
During 1995 and 1996 I served on the IRS Commissioner's
Advisory Group while participating on the Commissioner's
Advisory Group and many subcommittees on such broad topics as
taxpayer privacy, taxpayer service, and electronic filing.
For electronic filing the occasional topic and meeting did
not serve to address the serious issues facing this system. We
vigorously endorse the recommendation to establish a separate
Electronic Commerce Advisory Group. This group must be
comprised by the IRS, a tax practitioner and computerized
processor group. It is a blend of these inputs which will
result in active and growing electronic filing. The issues must
be definable and discussed openly. The IRS just accepts these
recommendations and acts on them with the full support of the
service. Electronic filing only works with a strong
relationship with external stakeholders.
Today there exist an inequity between professional paper
return filers and electronic return filers. Electronic return
filers must go through an application process, including
fingerprinting and background checks, credit checks, and IRS
suitability. Paper return filers have no such requirement.
During my tenure on the Commissioner's Advisory Group we
recommended, along with the help of the director of practice, a
system of registering all tax preparers. In fact, Joe Lane has
the recommendation at the back of his testimony.
Our intention was to require registration of all paper and
electronic filers to create one process for all tax----
Chairman Johnson. Mr. Langer, I have to ask you to kind of
wrap up, so that we can get to more people before we have to go
vote.
Mr. Langer. In summary, the National Association of
Computerized Tax Processors actively endorses division for the
new IRS, published by the National Commission on Restructuring
the IRS. The pending legislation capitalizes these
recommendations, and seeks for a way to promote electronic
filing. Through electronic filing service to the taxpayer can
be greatly enhanced and the cost of the service reduced. Thank
you.
[The prepared statement follows:]
Statement of Joseph W. Langer, President, National Association of
Computerized Tax Processors, Green Bay, Wisconsin
Introduction
Madame Chairman and members of the Oversight Subcommittee,
I appreciate the opportunity to testify before this committee
on the issue of Electronic Tax Filing. The work done by the
National Commission on Restructuring the Internal Revenue
Service, as well as the changes recommended in Bill H.R. 2292,
are very sweeping, and appropriately address the issues facing
electronic filing today.
My name is Joseph W. Langer, and I am president of the
National Association of Computerized Tax Processors (NACTP) and
for the last 8 years I have been Chairman of the NACTP's
Committee on Electronic Tax Filing. In my profession, I am
President of Nelco, Inc., an electronic filing service provider
and tax form provider based out of Green Bay, Wisconsin. Our
products are used in over 100 tax software companies throughout
the country. Over my term as Electronic Filing chair, we have
worked with IRS and state agencies to promote standards and
make recommendations to simplify and enhance the electronic
filing system. This past year alone, we submitted a paper
outlining 22 recommendations to the IRS.
The National Association of Computerized Tax Processors
(NACTP) was founded in 1969 as a cooperative effort of
competing tax service bureaus to create standards in tax
processing and establish formal links with federal and state
agencies. Over the past 28 years, the NACTP has grown to an
organization of 50 companies offering tax preparation software,
electronic filing services, and tax form services. Our
organization continues to promote professional standards for
software development and consistent methods of tax filing. We
look for ways to encourage and simplify automated filing.
Digital Signatures/Paperless Filing
Over the life of Federal electronic filing, the IRS has
considered various types of signature alternatives. While this
consideration continues, states are enabling paperless
electronic filing systems which either require no signature
document for filing or require the return originator to retain
a signed copy of an electronic return. Today, one state (the
state of Montana) requires no signature document and 17 states
require the signature document to be prepared but not
submitted. It is time the IRS accepts one of these
alternatives.
Digital signatures, using public and private keys, are not
fully perfected to be implemented on a nationwide basis.
Personal identification numbers (PIN numbers) are not yet
developed for tax filing and may require a separate PIN for
each type of filing. Until these systems are updated, or a new
system can be made available to all taxpayers, another
alternative, such as those being implemented at the state
level, must be deployed.
True paperless filing will be a great benefit to electronic
filing and promote its use over paper filing. Eliminating paper
will reduce costs for both individuals and tax preparers.
However, to be truly paperless, the IRS must eliminate the
requirement for filing Form 8453. The electronic filing system
must accept all forms and schedules. In addition, other forms,
worksheets, or explanations attached to an electronic return
must be able to be submitted electronically, not on paper. With
a true paperless system, electronic filing will grow
substantially. The only way to accomplish these goals is to
invest in technology for the electronic filing system.
Financial Incentives
The proposed legislation and the Commission's report called
for an incentive to the electronic filing transmitter. Our
membership believes to quickly change filing behavior and
achieve the highest long-term results, the taxpayer should
receive the incentive to file electronically. However, because
of the administrability of this type of effort and the
perceived inequity with paper filers, an incentive targeted at
the electronic filing infrastructure will accomplish a growth
in electronic submissions by reducing the burden on the
professional tax practitioner.
Practitioner ELF
There are currently over 60,000 registered professional
electronic filers. Only about 2,500 transmit directly to the
IRS. The remaining 57,000 plus use a value added network call a
``third-party transmitter.'' Third-party transmitters charge
tax practitioners from $0 (that is, free electronic filing) to
$10 per return. Some bury their electronic filing costs for
software development, product support, and electronic
transmissions in a lump sum software cost. Most elect to charge
a separate fee for each return transmitted to cover these
costs.
The incentive proposed of $1-$2 will not cover these costs.
Because of this, third-party transmitters will pass on these
incentives to their tax practitioner clients and continue to
compete based on the products and services they offer.
Practitioner's costs include the electronic filing fees and the
additional processing costs required for an electronically
filed return. Because not every return can be filed
electronically and an electronic return is not paperless, the
practitioners sort returns into paper and electronic and fill
out paper forms for each electronic return.
Practitioners will welcome these incentives. However,
without changes to the electronic filing system to accept all
returns and to become entirely paperless, tax practitioners
will not fully embrace electronic filing.
Online Filing (Non-Practitioner ELF)
Consumers can purchase software to prepare their tax return
and file their return electronically. Companies charge $9.95 to
$14.95 to file electronically. With an incentive, companies
offering electronic filing to consumers can reduce their costs
for development, support and transmission. Because a separate
fee cannot be charged for electronic filing, the remaining
costs will be added to the cost of the package resulting in
higher software costs.
Non-Financial Incentives
The legislation proposes extensions for electronically
filed returns. The NACTP has actively recommended creating non-
financial incentives to promote electronic filing. Because
there is no IRS data entry required for an electronically filed
return, we support extensions to file for electronically filed
returns.
In addition, allowing the electronic return originator to
communicate on electronically filed returns will also be a
benefit for the electronic filer. The NACTP has recommended the
electronic communication of notices, delays in processing, and
requests for additional information be sent electronically to
the electronic filer. By doing this, the tax professional can
quickly satisfy the request from the IRS as well as eliminating
additional burden on the taxpayer.
Balance due filers have not yet been attracted to the
electronic filing system. The ability to accept credit or debit
cards, as well as electronic funds transfer, should encourage
balance due filers. The major impetus behind balance due filing
will occur when a practitioner includes electronic filing as
their standard offer.
Access to a taxpayer's account through a secure and private
method will add to the attractiveness of electronic filing.
Taxpayers can obtain answers to their questions regarding
return and refund status rather than calling the IRS. This
would be another benefit for electronic filing.
Electronic Commerce Advisory Group
During 1995 and 1996, I served on the IRS Commissioner's
Advisory Group (CAG). While on the CAG, I participated in many
subgroups on such topics as taxpayer privacy, taxpayer service,
and electronic filing. With the broad approach to this group,
no single topic received a strong focus. For electronic filing,
the occasional topic and meeting did not serve to address the
serious issues facing the system.
We vigorously endorse the recommendation to establish a
separate Electronic Commerce Advisory Group (ECAG). This group
must be comprised of the IRS, tax practitioner, and
computerized tax processor groups. It is a blend of these
inputs, which result in an active and growing electronic filing
partnership.
The issues must be definable and discussed openly. The
members of the group must be selected to contribute to the
process and search for real solutions to the electronic filing
challenges. The IRS must accept these recommendations and act
on them with the full support of the Service. Electronic filing
only works with a strong relationship with external
stakeholders.
Regulating Tax Preparers
Today, there exists an inequity between paper return filers
and electronic return filers. Electronic return filers must go
through an application process that includes fingerprinting
with background checks, credit checks, and IRS suitability
processing. Paper return filers have no such requirements.
During my tenure on the Commissioner's Advisory Group, we
recommended, along with the help of the Director of Practice, a
system of registering all tax preparers. Our intention was to
require registration of all paper and electronic filers to
create one process that all tax preparers could use. We would
require a minimum of continuing education for all tax
preparers.
The legislation envisions regulating all tax preparers
under Circular 230. While this can be the ultimate goal, many
tax practitioners who are not affiliated with a national
professional organization are not looking to represent their
clients before the Internal Revenue Service. Therefore, we
believe some type of registration for all preparers is
appropriate. Regulation through Circular 230 can be an ultimate
goal, but steps can be taken prior to imposing Circular 230 on
all tax preparers. When this happens, the current electronic
filing application process should be eliminated.
Conclusion
The National Association of Computerized Tax Processors
actively endorses The Vision For A New IRS, published by the
National Commission on Restructuring the Internal Revenue
Service. The pending legislation capsulizes these
recommendations and seeks ways to promote electronic filing.
Through electronic filing, service to the taxpayer can be
greatly enhanced and cost for the Internal Revenue Service can
be reduced. This results in a system of mutual benefit for the
taxpayer, the IRS, and the American public.
Thank you for this opportunity today.
Chairman Johnson. Your testimony, Mr. Harris' testimony. So
if you will; try to notice when the light turns red and wrap it
up. You have about 6 minutes, then we can go over and vote,
about 7 minutes, and hear the last two.
STATEMENT OF ROBERT J. CARVER, CONSULTANT, KACHINA GROUP,
ANNAPOLIS, MARYLAND
Mr. Carver. I would be happy to do that. Madam Chair, I am
happy to be here today to talk a little bit about why
electronic filing is important to the IRS.
My name is Robert Carver, and for 30 years I was in the
service center operations of the IRS. My last job was managing
the 10 computer centers in the service centers.
The effectiveness of IRS is directly related to the quality
of the information they can get their hands on. While we are
all talking about exploding information age and all the rest of
it, the IRS must keep up with that explosion and make some
sense out of it. the way I like to describe this, is in the
fifties the popular press said that most couples had 2.5
children, and in the nineties we found ourselves, most children
have 2.5 parents, and those parents have 2.5 employers, and
keep their money and so forth in 2 or 3 banks. And the world is
certainly getting more complicated.
Businesses now have independent contractors, part-time
helpers, consultants. They are multinational, they are
interstate, and in the past they were a lot easier to keep
track of for the IRS.
Now the IRS expects each of these taxpayers and businesses
to send a report in once a year so that the correct amount of
tax can be determined and paid. The IRS then must validate
information on those tax returns between and among them;
between the businesses, the banks, the pension funds, and the
individuals filing their return.
We expect this annual validation to be done every year, and
we expect it to be done without bothering the taxpayers, who
have sent this information in. IRS would love that same
ability, but they need information to do that. Lacking that
information, they must bother each of us to ask for more
information during the processes they go through to validate.
To get back to my enthusiasm for electronic filing however,
I would like to describe a little bit about how IRS gets the
information they use. Presently the IRS only uses about 40
percent of the data that the Internal Revenue Code desires, and
we as taxpayers pay our time and money to send into them. And
this sad fact is a result of two things that are well known.
The first is the state of the IRS computers that were
designed in the sixties; and the second is the high cost of
transcribing paper tax returns to get the information into
electronic format. And I have to add, I only see more complex
information being regarded by the IRS in the future, so this
will only get worse.
When it is all said and done, there are only three ways the
IRS can get the information it needs to do its job. The first
is to hire more and more transcribers, and at the present time
to change that 40-percent figure they would need at least two
to three times the number they presently have in today's
environment. These transcribers require typing skills, a skill
that is not taught by our schools anymore, and not utilized in
the business environment, so the pool of trained transcribers
is diminishing rapidly.
The second way to get this information to the IRS is to
optically scan or image the paper tax returns. My experience
with this particular technology is, that on a handwritten
document the best anybody can do is about 50-percent
recognition. If you want the rest of the data you have to send
it over to somebody to again, transcribe the additional amount
in. The rate's a little better on computer-generated
information, but it is still nowhere near 100 percent.
The only feasible way for IRS to receive, validate, and
manipulate all this data is through electronic filing. The data
exists in electronic formats in businesses, and in taxpayers'
computers, and in other government agencies' computers. To
continue to convert these electronic files to printed paper,
send it to the IRS, who must then transcribe or otherwise scan
it back into an electronic format is at best, time consuming
and very costly.
In addition, since there will never be enough funding to
hire all the transcribers necessary, the IRS will not be able
to do the job we expect it to do. The IRS needs vast amounts of
information to do its job. We should all encourage using the
most cost-effective and data-rich system available. In my
opinion, electronic filing is the only system that satisfies
that need. Thank you.
[The prepared statement follows:]
Statement of Robert J. Carver, Consultant, Kachina Group, Annapolis,
Maryland; and former Executive Officer, Service Center Operations,
Internal Revenue Service
Introduction
I am pleased to address the Subcommittee today on the
subject of the importance of electronic filing to the Internal
Revenue Service. My 30-year career with IRS has been involved
with the returns processing operation. I also held a position
as a Revenue Officer, but the majority of my time has been
spent in the ten Returns Processing Service Centers. My last
position before retiring in October 1995 was that of Executive
Officer for Service Center operations. That assignment involved
managing the ten processing centers with an annual operating
budget of $1.3 billion. I was responsible for the performance
of approximately 60,000 employees. In addition, I served on the
President's Welfare Reform Commission in 1995 as the IRS
representative.
At present, I am working with the Council for Electronic
Revenue Communication Advancement (CERCA), which is an
organization of companies to further electronic transmission
and processing of tax information. This organization is not
limited to dealing with the IRS but involves other Federal
taxing and State agencies. CERCA is a two-year old association
representing a broad cross-section of private companies and
Government agencies leading in the movement toward electronic
financial services. In addition, I am presently consulting with
a leading software company, a financial institution, and a
major accounting firm; but, my comments today are mine and are
based on my 30 years experience with IRS and, specifically,
with the experience I have had with managing the returns
processing operation.
IRS Mission and Needs
IRS' Mission is compliance; they must:
Ensure that all taxpayers file tax returns and reports,
report all income, expenses, deductions, and information
correctly, pay the correct amount of taxes, penalties, and
interest for domestic and international taxpayers.
Administer social programs; i.e., earned income tax credit.
Gather and validate data for statistics of income (SOI).
Interact with others; i.e., third parties (banks,
employers, other financial institutions), 50 states, other
government agencies, and other countries' government agencies.
Provide service to taxpayers using telephones, computers,
and written correspondence.
To accomplish this mission, the IRS must gather and
manipulate vast amounts of information, and the future only
holds promise of ever more data. This data manipulation
naturally falls into two phases of data processing.
The first is accumulation and validation.
The second is manipulation/comparison.
I will concentrate on the first phase for my testimony
today but, before I do, I would like to briefly outline the
several discrete information realities facing the IRS.
Taxpayer Service
Responsibilities: Receive and process 200+ million tax
returns and 3+ billion information documents (for tax and
statistics of income), provide customer service for tax law
questions and account questions.
Taxpayer Service Needs: The ability to research return
information, third party information, and modify (adjust) that
data.
Collection
Responsibilities: Payment of all types of taxes (income,
excise, pension, estate, etc.); oversight of trust funds (FICA,
SSA, etc.); validation of accounting methods used by businesses
(employee-employer relationships); enforcement of payments due
(seizures, sale, garnishment of wages and financial accounts).
Collection Needs: Access to business, financial, and state
data, and local property and licensing information. Access to
federal, state, and local legal services, sheriffs, and other
process servers.
Examination (Audit)
Responsibilities: Ensure taxpayers use valid accounting
practices for income and tax liability determinations; identify
and correct underreporting of income, bartering transactions,
and other schemes to avoid payment of taxes; evaluate foreign
and domestic tax treaties to ensure compliance with U.S. laws;
monitor, evaluate and correct tax treatments of businesses
involved in tax exempt and pension organizations. Examination
Needs: Access to all relevant tax and financial information on
taxpayers; such as, individual and business financial data
bases in banks, other financial institutions, state and local
tax data, international tax information held by foreign
governments. Ability to coordinate enforcement actions with tax
partners, foreign and domestic. Ability to apply computerized
evaluation programs (artificial intelligence) to data bases,
both within and outside the IRS.
Criminal Investigation
Responsibilities: Discovery and correction of fraud,
willful omissions, money laundering, income from drug, gang,
and other illegal operations. Criminal Investigation Needs:
Access to legal and illegal data bases. Ability to apply
computerized detection programs; such as, pattern recognition,
anomaly detection, and other artificial intelligence routines
to those data bases. Ability to coordinate investigation
activities with federal, state, local and foreign enforcement
organizations. Ability to share information with U.S. attorneys
and other judicial organizations. Ability to protect
information if all parties are not legally authorized to
receive such information.
Chief Counsel
Responsibilities: As the legal arm of the IRS, rules on
laws and regulations, acts as legal counsel to executives of
IRS in performance of their duties. Chief Counsel Needs: Access
to legal opinions, rulings, and judgments for tax matters.
Research capabilities in data bases in federal, state, and
local tax jurisdictions.
Importance of Electronic Filing
The reason I described the information needs of the major
IRS functions was to show how information on tax returns and
other documents (that often seems more than necessary to
satisfy a taxpayer's tax responsibility) is needed to carry out
the other responsibilities in the IRS mission.
At the present time, only about 40% of the data IRS
requires and taxpayers spend time and money providing is posted
to the main IRS files. This sad fact is due to the state of
sophistication of the IRS computer system (designed in the late
1960's) and the costs of paying people to transcribe the data
from paper returns and documents to usable electronic formats.
The result of this shortfall in data requested versus data
ultimately used is that IRS Auditors, Agents, and Officers, in
the performance of their duties, often must ask taxpayers for
copies of returns and documents (copies with all the data
intact).
We have watched, over the past years, as IRS tried
unsuccessfully to modernize its computer systems. It is my
opinion that one of the main reasons for these stumbles is the
reliance on the need to have paper tax returns and documents
converted to electronic formats. It seems that a paper return
with its signature is a concept the IRS has been unable to give
up. This is changing, but at a snails pace.
At this point in time, two things are true. The
availability of trained transcribers (typists) is nearly zero;
schools do not teach typing and businesses don't hire typists.
The state of the art of electronic scanning equipment to read,
interpret, and record data from computer generated, and
especially hand written, documents is less than acceptable for
the job IRS has before it.
This leaves only Electronic Filing of tax information the
``Best in Class'' option for IRS to accomplish its mission. The
state of the art of computer technology is ready, most
taxpayers are ready (more than 50% of individual tax returns
are prepared by third parties using computers and most
businesses use computers), and the computer industry is ready.
Transitioning from a Paper-Based Data Capture System to an Electronic-
Rich System
As IRS, or any large organization, makes this transition,
careful oversight will be needed to ensure complete success, a
success that is both effective and efficient. For electronic
filing to be cost effective for taxpayers, we must ensure the
current high costs of the manual transcription system are truly
eliminated as electronic filing increases. As the need for
skilled typists decreases, the costs are transferred to the
public, either by the individual entering data on a home
personal computer, or by the tax practitioner or business
employee entering data on a computer. In addition, the costs of
accumulating electronic tax returns by electronic transmitters
also increase. This eventuality will require some compensation
or other incentive to be effective.
As the volume of electronic returns increase, the physical
plant (space, machines, etc.) the IRS needs will decrease.
Oversight will be required to ensure that remaining workload
doesn't expand into the vacuum, thereby eliminating the
savings.
Before I retired from the IRS, I was responsible for the
operation of the 10 service centers. Among other things, the
service centers receive, perfect, and process all the tax
returns and documents received by IRS. My budget was about 26%
of the total IRS operating budget. Of that, over half was spent
transcribing (converting paper information to electronic) tax
information. In today's world, that expense can be eliminated.
If the IRS were to receive the bulk of tax information
electronically, it could use its budget for ensuring compliance
with tax laws and providing service to taxpayers.
Summary
The major functions of the IRS need information on all
taxpayers, third party businesses, international, federal,
state, and local taxing authorities. This information changes
every year and, in some instances, almost daily. This massive
undertaking is what the modernization effort should be about.
The only feasible way to enable IRS to receive, validate
and manipulate this data is through electronic filing. The data
exists in electronic format in taxpayers, businesses, and
governmental files. To continue to convert these electronic
files to printed paper format, send to IRS, and have IRS scan,
transcribe or otherwise convert it back to electronic format
is, at best, time wasting and very costly. In addition, since
there will never be enough funding to convert all the paper,
the IRS will not be able to accomplish its mission.
The IRS needs access to vast amounts of data, and we all
should encourage using the most cost effective and data rich
system available. It is my opinion that the use of electronic
filing is the only way to meet that goal.
Thank you.
Chairman Johnson. Thank you very much, Mr. Carver.
Mr. Harris.
STATEMENT OF ROGER HARRIS, VICE CHAIRMAN, FEDERAL TAXATION
COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS
Mr. Harris. Good afternoon, Madam Chairman. Thanks for the
opportunity to be back here today, speaking on electronic
filing. My name is Roger Harris, and I am vice chairman of the
Federal Tax Committee of the National Society of Accountants.
NSA represents over 16,000 independent accountants, who provide
accounting, business planning and tax preparation services, to
an estimated 4 million individuals with small businesses.
According to a recent survey of our membership, nearly 90
percent of our members have and use computers for accounting
and tax preparation services. However, only 22 percent of the
returns that are eligible to be filed electronically by our
members are actually filed electronically.
I also am president of Pagent Business Services. We have
been providing accounting services to small business for over
30 years. Our 400 franchises prepare hundreds of thousands of
tax returns, and yet only 5 percent of our franchises currently
file returns electronically.
I think these numbers indicate that we are the group of
people who need to be motivated if the 80-percent goal of
electronic filed tax returns is to be reached. Most of the
returns that we prepare are prepared by computer, but they are
printed out on paper, mailed in, and then ultimately put back
into a computer by IRS personnel. Clearly in the interest of
saving both time and money the IRS would rather see these
returns transmitted electronically. However, many practitioners
currently refuse, for many reasons, to embrace the electronic
filing program. To make this program successful, the IRS needs
to enlist the support of the practitioner community by
addressing all the reasons that they are currently staying away
from electronic filing.
The National Society of Accountants and Pagent Business
Services both support the underlying goals of the electronic
filing provision of H.R. 2292. We applaud the approach taken in
the legislation of letting the marketplace become the engine
for the future growth.
I think we all learned from the EFTPS Program, that even a
good program does not work well and is not well accepted when
it is mandated. We support the measures that you have
initiated, such as the elimination of the 8453, the current
signature form, until a truly digital system can be developed.
Perhaps a checkoff box on electronic returns, enabling
taxpayers to authorize the preparation of electronically filed
returns to communicate with the IRS.
The regulation of all preparers of paper, electronic and
information returns; and the creation of a procedure, allowing
for practitioners to transmit statements and schedules to make
the filing of more difficult returns possible. These measures
do in fact address some of the concerns practitioners have.
Other measures, such as extending the deadline to May 15,
will also cause some practitioners and some taxpayers to
embrace electronic filing. But it will not, in and of itself,
move us near the 80-percent goal.
It also creates a potential problem that we are not clear
the legislation addresses, such as, on April 15 our taxpayers
are faced with the decision to file electronically by May 15
and therefore give up their opportunity to file an extension.
If this is the choice then many of them will opt for the
extension and will choose not to file electronically, because
they only have 30 days to make that decision.
We also strongly support the implementation of the
Electronic Commerce Advisory Group, consisting of
representatives from the tax practitioner, preparer, and
computerized tax processor communities. We view this group as
an essential component of any strategy designed to foster
growth in the use of electronically filed returns. We do,
however, recommend two additional ways to strengthen the
effectiveness of this group.
The first recommendation is for small business
representation on this group. The current legislation provides
for the panel to receive input solely from tax practitioners
and elements of the electronic filing industry, and none from
the average small business owner. Because our membership and
our clients are both small business, we would emphasize that
small business input, in the early stages, of any new
electronic filing program would be valuable. And such input
would allow the IRS to gain insight, and perhaps avoid some of
the problems that we saw with EFTPS.
A second recommendation is that the IRS should be
encouraged to get out of the box thinking in this group. Look
for ways to solve these problems. For it to be widely accepted
electronic filing must benefit practitioners, taxpayers, and
small business as well as the IRS. Creating this type of
environment requires that the ECAG be empowered to think
creatively and outside the current paradigms.
While our members recognize that electronic transmission of
return will be savings to the IRS----
Chairman Johnson. I am sorry to interrupt you, Mr. Harris.
We only have 3 minutes left on this vote. I thought we had a
little more time left. It would be better if you wrapped up
when you came back. Save your conclusion. We will be back in
about 6 or 7 minutes.
[Recess.]
Mr. Harris. NFA's members recognize that the electronic
transmission of returns will bring savings to the IRS, but they
are also asking what advantage would they gain by becoming
electronic transmitters. Practitioners have the ability to move
large numbers of tax return filers into the electronic world.
We talk to our clients throughout the year and have an ongoing
relationship with them. I believe a practitioner has greater
influence over the client and recommending electronic filing as
the preferred method than any marketing campaign, regardless of
its focus. But practitioners are first and foremost business
men and women. Any change in their operating procedure must
have a valid business reason. If the IRS can develop a plan for
electronic filing that saves practitioners either time, money
or both, practitioners can then deliver to the Internal Revenue
Service millions of electronically filed returns.
The IRS should give serious consideration to adopting a
multilevel marketing campaign, focusing on incentives for
practitioners as well as individuals. In this way the goal of
80 percent I believe can easily be reached in 10 years.
While H.R. 2292 moves in a significant direction toward an
improved electronic environment, more needs to be done to
address the many reasons practitioners are reluctant to file
electronically, such as registration procedures for return
originators and electronic filing compliance visitation. These
problems that impede practitioners' use of electronic methods
must be worked out in a way that is mutually satisfactory to
both the IRS and the practitioner community.
In conclusion, I would like to emphasize NSA support for
the proposed improvements in the electronic filing program.
Over the next 10 years we will encounter opportunities that we
cannot even envision today. By thinking creatively and working
in partnership with the IRS, we hope to contribute to the
development of an electronic filing program that is mutually
beneficial to all parties involved.
We thank you for the opportunity to be here today, and look
forward to answering any questions that you may have.
[The prepared statement follows:]
Statement of Roger Harris, Vice Chairman, Federal Taxation Committee,
National Society of Accountants
The National Society of Accountants (NSA) is pleased to
testify on H.R. 2292, The Internal Revenue Service
Restructuring and Reform Act of 1997. NSA commends
Representative Rob Portman and Benjamin Cardin for introducing
H.R. 2292. The legislation, modeled on the recommendations
found in the report of the National Commission on Restructuring
the IRS, greatly elevates the prospects for modernization,
improvement in agency efficiency, and enhancement of taxpayer
services.
The National Society of Accountants is an individual
membership organization representing approximately 16,000
practicing accountants located throughout the United States.
NSA members are for the most part either sole practitioners or
partners in moderately-sized public accounting firms who
provide accounting, tax return preparation, representation
before the Internal Revenue Service, tax planning, financial
planning and managerial advisory services to an estimated four
million individual and small business clients. The members of
NSA are pledged to a strict code of professional ethics and
rules of professional conduct. As our members serve a sizable
small business constituency, NSA is in a unique position to
address the impact of electronic filing both upon tax
practitioners as well as individual taxpayers.
Electronic Filing
Overview of Electronic Filing
The National Society supports the underlying goals of the
electronic filing provisions of H.R. 2292. Most practitioners use a
computer to prepare tax returns; however, instead of electronically
transmitting the information directly to the IRS, many of those
practitioners print out paper returns which are mailed to IRS where it
is re-keyed into another computer. One of the keys to the success of
the electronic filing program is to entice the practitioner community
to embrace electronic tax information transmission.
The bill, while not mandating electronic filing, sets a goal that
80 percent of all returns filed by the year 2007 be filed
electronically. Of significant note, the bill sponsors rejected a
proposal requiring preparers by the year 2004 to file returns only
electronically. By rejecting the urge to mandate the electronic filing
of tax returns, Congress and the IRS are likely to avoid many of the
perception problems which have impeded implementation of the Electronic
Federal Tax Deposit System (EFTPS) over the last two years.
The EFTPS system is an excellent program and NSA supports its full
implementation. Nevertheless, the fact that EFTPS is largely a
mandatory system has resulted in resistance and perhaps hostility
toward the program by some small business persons and practitioners.
The drafters of H.R. 2292 have chosen the wiser course of letting the
market place become the engine for the future growth in the overall
electronic filing program rather than by mandating it.
Under the legislation, the IRS is required to develop within 180
days of enactment a plan ``to eliminate barriers, provide incentives,
and use competitive market forces to increase electronic filing
gradually over the next 10 years...'' To facilitate development and
implementation of the plan, the bill requires the IRS to establish an
Electronic Commerce Advisory Group to receive input from the private
sector. The IRS also is required to implement procedures for providing
incentive payments to transmitters of electronically filed returns,
incentives which would be based on the fair market value of costs
associated with electronically transmitted returns.
The National Society views the overall thrust of the requirement--
that the IRS develop a plan to spur growth in the use of electronic
filing--as being very positive. We hope that this plan will be
responsive to many of the concerns practitioners have had with
utilization of electronic filing in the past. According to previous
surveys of our membership only about 35 percent of NSA members transmit
electronic returns on behalf of their clients. In this connection, tax
practitioners who prepare complex returns are the least apt to use
electronic filing. The IRS' electronic filing program to date has
focused principally on the filing of simple returns by taxpayers
expecting a refund. H.R. 2292 clearly attempts to rectify these
problems by making significant attempts to reach out to the
practitioner community. We support this and look forward to being of
assistance to the government in making the system work as it should.
Checkoff Box and Regulation of Preparers
The National Society also is in complete support of the conceptual
provisions of H.R. 2292 relative to a checkoff box on electronic
returns and the initiative to regulate all preparers of paper,
electronic tax, and information returns. Under the legislation's
checkoff provision, the IRS is required to establish procedures
enabling taxpayers to authorize the preparer of electronically filed
returns to communicate with the IRS on matters concerning such returns.
According to the National Commission report, uniform requirements
of these kinds ``will increase professionalism, encourage continuing
education, improve ethics, and better enable the IRS to prevent
unscrupulous tax preparers from operating.'' We consider the goals
meritorious and concur in them. However, in the case of the checkoff
box provision, we strongly recommend that the provision be extended to
cover all types of returns, whether filed by paper or electronically.
The same principles and goals underlying the checkoff for paperless
returns also apply to paper returns.
Electronic Commerce Advisory Committee
As stated above, the legislation requires the IRS to convene an
Electronic Commerce Advisory Group (ECAG). It further requires that the
panel include representatives from the ``tax practitioner, preparer,
and computerized tax processor communities and other representatives
from the electronic filing industry.'' We strongly support
implementation of this electronic advisory group. NSA views the group
as an essential component of any strategy designed to foster growth in
the use of electronically filed tax returns.
The National Society recommends one additional way to strengthen
the effectiveness of the Electronic Commerce Advisory Committee. The
current legislation provides for the panel to receive input solely from
tax professionals and elements of the electronic filing industry, and
none from the average taxpayer or business establishment. We suggest
that the panel also include small business representation. By including
small business input at the early stages of development of any ``new''
electronic filing program, the IRS will gain additional insight and
might avoid some of the public relations mistakes the agency has made
with respect to its electronic return programs, such as the
implementation of EFTPS.
NSA views the ECAG as a vehicle where practitioners can work with
the IRS in developing an electronic system they can enthusiastically
adopt, allowing IRS to reach its goal of 80% electronic returns by the
year 2007. While NSA's members recognize that electronic transmission
of returns will bring savings to IRS, they also ask what advantage they
would gain by becoming electronic transmitters. Practitioners have the
ability to move large numbers of complex return filers into an
electronic environment. A practitioner has greater influence over his
client in recommending electronic filing as ``the preferred method'' of
filing than any marketing campaign regardless of its focus. But
practitioners are first and foremost businessmen and women. Any change
in their operating procedures must have a valid business reason. We
hope the ECAG will serve as a means to develop incentives to encourage
practitioners to switch to electronic means, as well as a platform for
discussion and solution of remaining problem areas that inhibit
practitioner participation in electronic programs.
Extension of the Due Date for Electronically Filed Tax Returns
For the purpose of ``encouraging'' more persons to file returns
electronically, H.R. 2292 provides taxpayers with an additional month
to file income tax returns if such returns are filed electronically.
This change in the due date involves electronically filed tax returns
for individuals, corporations, partnerships, and other information
returns. Payers would still be required by the legislation to provide
information returns to payees by January 31.
The National Society recognizes the Restructuring Commission made
the recommendation to realign the due dates in order to simplify return
processing and to foster paperless filing. NSA has not had a chance to
poll our membership regarding their position on the extension of due
dates for electronically filed returns. Nevertheless, should this
provision become law, NSA urges caution against granting taxpayers only
a one month extension for choosing an electronic filing method at the
expense of the current automatic four-month extension available to all
filers.
Procedures for Facilitating Truly Paperless Electronic Filing
For purposes of facilitating truly paperless electronic filing,
H.R. 2292 requires the IRS to develop procedures for the acceptance of
digital signatures. Until the IRS develops a method for acceptance of
digital signatures, the bill mandates that the IRS accept electronic
filed returns without signatures as long as the taxpayer retains a
signed copy of the original until the expiration of the applicable
statute of limitations.
The National Society supports the elimination of Form 8453, the
current signature form for electronic returns. We believe this not only
will help expedite the filing process for practitioners, but will
eliminate a step in such process that practitioners have found
daunting. Consequently, this would be a positive step in enhancing
electronic filing.
NSA urges the IRS to closely consult with tax practitioners before
implementing any procedures under electronic filing requiring the
taxpayer to retain copies of signed returns. We are concerned that to
the extent this requirement is not implemented properly and carefully,
it may increase the professional liability exposure of return
preparers, thereby negating any real prospects for spurring the use of
electronic filing overall.
Under the legislation, the IRS also is required to establish
procedures to receive explanatory statements or schedules in electronic
form for the purpose of eliminating the need for paper statements or
schedules. We believe this is a positive provision, one which is
designed to facilitate the filing of complex tax returns
electronically.
Availability of Credit Cards For Payment of Taxes
H.R. 2292 authorizes the IRS to accept payment of taxes by
commercially acceptable means, including credit cards. While the
National Society is supportive of this provision, we do raise two
issues relative to a taxpayer using a credit card to pay taxes. This
first issue concerns bankruptcy. Currently, credit card debt is treated
as an unsecured debt dischargeable in bankruptcy proceedings, while
income tax liability attributable to a tax return due within three
years prior to the bankruptcy filing may not be discharged. It is
conceivable that unpaid taxes charged on a credit card would be treated
differently from taxes that were simply not paid. The second issue
concerns the cost of processing the credit card payments, usually borne
by the merchant offering a credit card payment option. Although the
bill prohibits passing those costs on to taxpayers, the question
remains as to who will bear the processing costs for credit card
payments of income taxes. It is NSA's recommendation that the
protective language of the bill be very clear so that ultimately the
costs not be passed back to the taxpayer using the credit card payment
option.
IRS Electronic Filer Visitations
While not contained in H.R. 2292, NSA is concerned about a practice
used by the IRS in recent years as a means to address potential fraud
problems in the electronic filing program. We realize that the Service
must take steps to limit abuse of the system. Our members have
expressed concern that draconian efforts to stop fraudulent
practitioners may hamper the ability of honest practitioners to conduct
their practices during busy season. This is at variance with the
enhancement of the electronic program.
An example of this problem is a procedure known as an ``electronic
filing compliance visitation.'' During a compliance visitation, Service
personnel come into the practitioner's office--often unannounced--to
review the signature documents and W-2 forms the practitioner is
required to keep on file and review security measures regarding the use
of the electronic filing identification number (EFIN). After initially
performing all visits unannounced, the Service improved the visitations
by scheduling appointments with practitioners where no suspicion of
criminal activity exists. The past filing season was relatively
uneventful in this respect; however, practitioners remain concerned
about the electronic filing compliance checks that have caused problems
in past years.
NSA understands the reasons for conducting these checks and
acknowledges the need to perform them unannounced in certain
circumstances. What we must emphasize is that practitioners are already
``swamped'' at the time of year the visitations have taken place.
Consequently, the intrusion must be kept to a minimum. It often creates
an unfavorable impression with tax clients who are waiting to have
their tax interview. Further, the interviews must be delayed by the
practitioner who is constrained to take time out to meet with Internal
Revenue employees from Collection, Examination, and/or the Criminal
Investigation Divisions. The Service achieves the goal of completing a
compliance check at the expense of another valued goal, i.e. promoting
goodwill and open communication between the Service and electronic
filers. If the House Ways and Means Committee is interested in
investigating additional impediments to the growth and expansion of the
electronic filing program, the National Society recommends that the
Committee review the IRS' use of electronic filer visitation checks. We
believe that the visitation program is a significant deterrent to the
electronic filing program.
The IRS Management Structure
Internal Revenue Service Oversight Board
NSA knows that the House Ways and Means Committee is well aware of
the national press surrounding the provision found in H.R. 2292
regarding an independent Internal Revenue Service Oversight Board. We
believe an independent Oversight Board is one of the legislation's most
important contributions to the issue of making the IRS a more customer
service oriented agency. An independent Oversight Board has the
potential of affording the IRS the opportunity to take an objective
look at the agency's procedures and programs--as well as creating a
real opportunity for overcoming problems concerning them.
The legislation calls for the establishment of a 9 member Oversight
Board, two of whom are to be the Secretary of the Treasury (or the
Deputy Secretary) and a representative of the IRS employees union.
Under the bill, the other 7 Board members will be appointed on the
basis of their professional experience and expertise in the areas of
management of large service organizations, customer service,
compliance, information technology, organization development, and the
needs and concerns of taxpayers. H.R. 2292 provides that all members of
the Board may be removed at the will of the President of the United
States.
The National Society believes the independent Oversight Board will
contribute to the agency's ability to achieve a higher level of
customer service. An emphasis on customer service as part of IRS'
mission statement is what NSA believes is needed to significantly
improve the federal tax administration process. NSA's 16,000 members
and 4 million individual and small business clients salute the emphasis
of H.R. 2292 on improved customer service. In connection with the
Oversight Board, we have a recommendation we believe is important.
Small Business Representation on the IRS Oversight Board
NSA believes that the frustrations of small taxpayers and small
business persons played a critical role in the reasons for formation of
the IRS Restructuring Commission. All of us have heard the stories of
small business people working 60 to 80 hours a week in their business.
Small business persons are notorious for wearing many hats in the firm.
They are the firm's salespeople, marketing agents, bill collectors, and
service providers. At the same time, they must comply with complicated
federal tax laws and regulations. Because a small business owner is
often a jack-of-all-trades yet master of none, he will simply pay an
assessed tax penalty rather than take time away from the business to
fight it. In many cases, a small business person who lacks resources
available to larger corporations often pays--proportionately--a greater
level of tax penalties than large businesses. Large business
establishments are better able to afford and contest a tax matter as
opposed to the average small business person.
NSA's membership consists of small business owners who provide
accounting services for a small business clientele. Our experience in
this respect leads us to strongly recommend that final legislation
include small business representation on the IRS Oversight Board. H.R.
2292 already mandates that large businesses be represented on the
Oversight Board as reflected by a requirement that Board members have
professional experience and expertise in the area (among others) of
``management of large service organizations.'' Small business must be
provided with direct representation on the Board as well. Small
business has been described as the engine that drives our economy.
Without representation on the Oversight Board by small business, there
might not be input from a key and critical constituent group. We
believe small business representation on the Oversight Board is the
best way to ensure that the needs and concerns of all taxpayers are
heard.
Office of IRS Commissioner
NSA supports the establishment of a five-year appointment for the
Commissioner of Internal Revenue position. We also support the
provisions of the legislation giving the Commissioner greater
flexibility in the hiring, firing, and salary decisions involved with
IRS' senior management.
H.R. 2292 states that the appointment of the Commissioner ``shall
be made on the basis of demonstrated ability in management and without
regard to political affiliation or activity.'' The National Society
supports and appreciates the legislative intent underlying this
particular sentence of the legislation. The legislation strives to
ensure that any new Commissioner has the capacity and expertise to
manage a large establishment or entity--in a similar fashion to a chief
executive officer (CEO) managing and running a Fortune 500 company.
Nevertheless, we believe that safeguards be built into the legislation
in order for any new Commissioner to recognize the unique needs of
small taxpayers and small businesses. Thus, NSA recommends that the
final legislation (or report language) stress the need for the
Commissioner to focus on the needs of small business and meet on a
regular basis with representatives of the small business community and
those who serve it.
Customer Service
Overview of Customer Service
One of the major objectives of the National Commission's report and
of the legislation is to enhance the level of customer service provided
by the IRS. The tax practitioner community is an important stakeholder
relative to customer service. A great number of taxpayers deal with the
IRS through their representatives. Consequently, they experience IRS
customer services at all levels, from telephone contacts through
examinations, collections, and appeals. Based on their repeated and
varied contacts with the IRS, practitioners have a unique perspective
on customer service.
The legislation emphasizes the concept of customer service over
compliance. This is unlike the traditional public view that the IRS'
main mission is tax compliance, i.e. audits and collections. While the
importance of compliance obviously is clear, NSA agrees that the
service component should be the primary engine which drives the
agency's mission. We believe that a customer service oriented mission
will bring out the best in all who deal with the tax system. This is
what the public wants, and it is what we believe IRS employees want as
well.
There should be improvement in all aspects of IRS' customer
service. For example, from the public's perspective, the front lines in
IRS customer service is their principal experience when dealing with an
IRS representative on the telephone. The quality of the IRS' telephone
systems, as well as the way in which the IRS employees answer the
telephone, has shown substantial improvement in recent years.
Nevertheless, the IRS telephone system and customer relations process
continue to cry out for further and dramatic improvement.
The proper training of IRS employees and providing them with
technology are important keys to quality customer service. The
Commission's report strives to portray IRS employees as competent,
hard-working employees who want nothing more than to deliver the
highest quality in service to the public. In order to turn around the
supertanker we call the IRS, there needs to be a change in the
Service's management structure along the principles described above.
This includes better training of IRS employees. They also need to be
provided with more of the basic technology tools of the 1990s, tools
which NSA's members often take for granted. This includes providing
employees with more fax machines, copiers, and computers. Such tools
should be at a level to take them into the next millennium.
Office of Taxpayer Advocate
The National Society commends the sponsors of H.R. 2292 for
providing for certain meaningful improvements in the office of Taxpayer
Advocate. We view this provision as being critical in improving IRS
customer service. It must be stated at the outset that the Service's
problem resolution program is viewed by NSA membership as viable and
deserving of high marks. Nothing should be done to diminish its
availability.
The legislation builds on the beneficial customer service
provisions found in the Taxpayer Bill of Rights II (P.L. 104-168). The
Taxpayer Bill of Rights II (TBORII) established the office of Taxpayer
Advocate within the Internal Revenue Service. It empowered the Advocate
to resolve individual taxpayer problems, to analyze problems of the tax
system, to propose legislative and administrative solutions to those
problems, and to report to Congress on the operations of the Advocate's
office. Moreover, TBORII gave the Advocate broad authority to take any
action as permitted by law with respect to taxpayers who would
otherwise suffer a significant hardship as the result of IRS action.
In testimony earlier this year, NSA stated that in order for the
Taxpayer Advocate to be successful, he or she must possess an intimate
knowledge of the functioning of the IRS. This knowledge is best gained
from years of experience within the Service. At the same time, we also
stated that in order to truly be the taxpayer's advocate, this
individual must be willing to question, publicly as well as internally,
the functioning of the very agency to which his or her career has been
devoted.
NSA believes H.R. 2292 strikes the right balance in ensuring that
the Taxpayer Advocate is successful in his job within the IRS. The
legislation provides that the Taxpayer Advocate will be appointed by
and report directly to the Commissioner of Internal Revenue, with the
approval of the Internal Revenue Service Oversight Board. H.R. 2292
also provides that the Advocate must have substantial experience
representing taxpayers before the Internal Revenue Service or with
taxpayer rights issues. For a person who becomes the Advocate, but one
who has worked for a significant period of time for the IRS previously,
the legislation requires that the Advocate agree not to accept any
employment with the IRS for at least 5 years after ceasing to be the
Taxpayer Advocate.
From a positive perspective, we believe H.R. 2292 is carefully
crafted in that taxpayers are not foreclosed from benefitting from the
appointment of a Taxpayer Advocate who may happen to have the
experience and insight of an IRS veteran. Ironically, the IRS veteran
may in fact be the person best situated to ``fill the shoes'' of the
Taxpayer Advocate. By requiring that any IRS veteran interested in the
Taxpayer Advocate take an oath that he or she will not work for the IRS
for at least 5 years after leaving the Advocate post, the legislation
has taken critical steps to ensure that the Advocate is willing and
able to report openly about potentially sensitive issues within the
IRS.
H.R. 2292 broadens the scope of the Taxpayer Advocate's annual
report to identify areas of the tax law that impose significant
compliance burdens on taxpayers or the IRS. In addition, the scope of
the report must identify--in conjunction with the National Director of
Appeals--the 10 most litigated issues for each category of taxpayers
with recommendations for mitigating such disputes. The legislation also
makes certain improvements in the selection process, geographic
allocation, and career opportunities of problem resolution officers.
NSA strongly supports these improvements. We particularly support the
requirement that the Advocate take steps to ensure that local telephone
numbers for the problem resolution officers be published and made
available to taxpayers.
Performance Awards
H.R. 2292 requires the IRS to establish a performance management
system that covers all IRS employees, with the exception of members of
the IRS Governance Board, the Commissioner, and the Chief Counsel. As
part of this performance management system, the bill generally gives
the IRS flexibility in granting awards to employees. More specifically,
the legislation provides that ``A cash award...may not be based solely
on tax enforcement results.'' While this particular sentence appears to
be well intentioned, the National Society believes that the sentence
could be misconstrued to authorize IRS officials to make cash awards to
employees principally on tax enforcement results.
NSA believes that the legislation's criteria for cash awards should
be redrafted to highlight the point that customer service should be
considered an important determinative factor with respect to any
determination to make a cash award to an IRS employee. Tax enforcement
should be considered as only one factor in a determination of making a
cash award to such employee. We believe this change in the bill's
language is consistent with the spirit of the IRS Restructuring
Commission report encouraging the IRS to place greater reliance on
customer service and less on enforcement. We believe this kind of
change in the bill's language is good for tax compliance and for
taxpayers as well.
Taxpayer Protection Rights
The National Society is very supportive of the provisions
contained in Title III of H.R. 2292 which are designed to
expand and protect taxpayer rights. The following taxpayer
rights measures are considered some of the more significant
provisions from the perspective of NSA's membership.
Expansion of the Authority to Issue Taxpayer Assistance Orders
In order for a problem resolution officer (PRO) to issue a
Taxpayer Assistance Order under current law, the PRO must
determine whether the taxpayer is suffering or is about to
suffer a significant hardship. If a significant hardship is
deemed to exist, then the PRO makes a determination as to
whether the IRS action warrants being changed. The tax
regulations define a significant hardship as meaning a serious
deprivation caused or about to be caused to the taxpayer as a
result of IRS administration of the tax law.
H.R. 2292 modifies the current definition of significant
hardship by requiring the Taxpayer Advocate to consider whether
IRS employees followed applicable administrative guidance
(including the Internal Revenue Manual); whether there is an
immediate threat of adverse action; whether there has been a
delay of more than 30 days in resolving taxpayer account
problems; and whether the taxpayer will have to pay significant
professional fees for representation. NSA considers these to be
positive modifications which should help resolve a taxpayer's
problems in a reasonable and constructive fashion.
Offers in Compromise
The legislation provides for the IRS to develop and publish
schedules of national and local allowances to ensure that
taxpayers entering into a compromise can provide for basic
living expenses. While we feel this provision attempts to
address a real problem underlying the IRS collection process,
we are concerned that the provision (as currently drafted) does
not provide any practical relief to taxpayers.
NSA members believe that the current allowable expense
standards for Offers in Compromise and Installment Agreements
are inconsistent with the real cost of living for families.
Practitioners have informed NSA about their concerns that the
expense standards do not adequately compensate for such factors
as family size, housing and utility allowances, and the cost of
car ownership. With respect to the Offer in Compromise process,
these practitioners also are concerned that IRS Revenue
Officers are principally using the expense standards as strict
rules as opposed to general guidance.
The National Society believes guidance should be given to
IRS collection personnel that they are authorized to make
exceptions with respect to a taxpayer's expenses under an Offer
in Compromise, particularly when a reasonable basis exists
relative to the taxpayer's state of health or his or her
ability to generate income. Further, IRS Revenue Officers
should be given the authority to weigh available options for
achieving the most desirable result. Often taxpayers who cannot
negotiate an Offer in Compromise simply file bankruptcy,
causing the IRS to recover even less than if the taxpayer's
offer had been accepted.
We also feel that there must be consistency throughout the
nation for the program. The internal cultural change concerning
Offers in Compromise has made this difficult to achieve. More
training and oversight are positive ways to accomplish this. We
encourage these steps.
Problems with Interest and Penalties
The bill makes a number of positive changes in the law with
respect to interest and penalties. First, the bill eliminates
the differential in the interest rates for overpayments and
underpayments ``in a revenue neutral manner.'' Second, the bill
tolls the application of the failure to pay penalty while a
taxpayer is making payments under an IRS installment agreement.
Third, the legislation establishes procedures for a safe harbor
for taxpayers to qualify for an installment agreement should
the outstanding tax liability be under $10,000. While NSA
understands that the installment agreement provision is drafted
as a safe harbor, we recommend that the legislative report
language be drafted to declare that the provision does not in
any way restrict other available settlement options with the
IRS collection division, including other available options to
obtain an installment agreement. NSA commends the bill sponsors
for including these pro-taxpayer measures as part of the
legislation.
Other Pro-Taxpayer Initiatives
H.R. 2292 includes a number of positive provisions to
enable taxpayers to recover certain costs and fees when they
prevail and the position of the IRS was not substantially
justified. Other positive, pro-taxpayer provisions in the
legislation include grants for the development, expansion, or
continuation of qualified low income taxpayer clinics, certain
modifications with respect to the U.S. Tax Court's
jurisdiction, and procedures for cataloguing and reviewing
taxpayer complaints regarding the misconduct of IRS employees.
Tax Penalty Reform
NSA is very supportive of the provision mandating a study
by the Taxpayer Advocate on tax penalties by July 30, 1998. The
legislation calls for the Advocate to review the administration
and implementation of penalty reform recommendations made by
Congress in 1989, including legislative and administrative
recommendations to simplify penalty administration and reduce
taxpayer burden.
NSA believes that tax penalty reform should become the next
serious phase of IRS restructuring. Moreover, we strongly
recommend the bill be clarified so that the Advocate is
required to review the extent to which the federal government
relies on tax penalties for revenue raising purposes.
Removal of Preparer's Social Security Number from Tax Returns
The practitioner community is becoming increasingly
concerned about the requirement that a paid preparer's Social
Security number must appear on returns. Currently,
practitioners are required to include their Social Security
number on every return they prepare for a fee. Revenue Ruling
79-243 states that under Section 6109(a)(4) of the Internal
Revenue Code, ``any return or claim for refund prepared by an
income tax return preparer must bear the identifying number of
the preparer, the preparer's employer, or both ...(and) that
the identifying number of an individual shall be the
individual's Social Security number.'' Revenue Ruling 78-317
gives some relief by stating that ``an income tax return
preparer is not required to sign and affix an identification
number to the taxpayers copy of a federal income tax return,''
being required only to affix his Social Security number to the
copy of the tax return that is filed with the Internal Revenue
Service.
In today's world of instant access to volumes of sensitive
information about an individual, including even credit reports
accessible over the Internet, practitioners understandably are
very concerned that their Social Security number could be the
key to unauthorized release of their own sensitive financial
information. NSA's members feel that the requirement they
include their Social Security number on returns violates their
privacy, as it could provide a possibly unscrupulous taxpayer
with the opportunity to access certain records that otherwise
would not be available. Once the taxpayer leaves the
practitioner's office, there is no guarantee that he will
immediately file the original copy of the tax return with the
IRS, without first making additional copies. There is always
the possibility those copies could end up in an undesirable
location. As part of the House Ways and Means Committee's
deliberations on H.R. 2292, NSA suggests that the Committee
review this requirement with the Internal Revenue Service and
recommend development of a separate system for identifying tax
practitioners.
In conclusion, the National Society of Accountants supports
the legislation restructuring the Internal Revenue Service and
applauds the Subcommittee for addressing the important issue of
electronic filing of tax returns. Thank you for the opportunity
to contribute to this effort.
Chairman Johnson. Thank you, Mr. Harris.
Mr. Lane.
STATEMENT OF JOSEPH F. LANE, ENROLLED AGENT, NATIONAL
ASSOCIATION OF ENROLLED AGENTS
Mr. Lane. Thank you, Madam Chairman. The NAEA testified
five times before the National Commission on Restructuring, and
provided testimony written for the record for a sixth hearing.
We support entirely the report of the Commission. We believe
that some of the most far-reaching and innovative suggestions
are included in its electronic filing package. We are here
today to testify on the specifics. I think the Commission has
had a dramatic impact on forcing the Service to try to confront
some of the issues and problems that have been raised to them
by practitioner groups and taxpayer groups, and the data
processing industry over the last several years. I have to say,
we have been critical of the Service in the past for not
providing the kind of management we would like to see in the
Electronic Tax Administration arena. I think as a direct result
of the Commission, we now see things like the appointment of
Bob Barr, who will be the next Assistant Commissioner for the
Electronic Tax Administration, and that is a very, very
significant deviation from what their practice has been in the
past, and we applaud that. I think the Service is starting to
learn its lesson, and starting to focus on the need to broaden
the amount of input they are getting, and to be more inclusive
in their decisionmaking process. We urge them to continue that
effort.
We also believe their blueprint for implementing the
modernization of the data systems will take into account the
views of the people represented at this table, and the other
people in the practitioner community, to a far greater degree
than they would have had the Commission not been present.
Some of the discussion that happened this morning about
whether or not it should be the year 1999 or 2000 before some
of these considerations get online is of concern to us as well.
One of the concerns that we have about this request for
proposals going out, is the time delay it builds in just
because of the process that has been involved.
We are not talking rocket science here. There are a lot of
suggestions that everybody already knows as a result of a
year's worth of Commission testimony, that the IRS could
implement tomorrow to increase significantly the number of
electronically filed returns in the 1998 filing season. I think
we ought to take a look at what is submitted in the proposal
process, and maybe the Subcommittee could urge them to go out
front a little more on some suggestions; liberalize some of the
provisions that we are talking about here today, and have it
affect next tax season.
We outline in our written statement some specific programs
which we proposed to IRS 1\1/2\ years ago, which had they
followed would have resulted in about 1,800 additional
practitioners from our organization filing electronically this
past filing season. I think the Service needs to pay attention
to that.
We support, without reservation, the establishment of an
electronic commerce advisory group. We think that E-CAG will be
the focal point for IRS and industry communication, and help
the guidance and direction of the Service in its efforts to
establish a paperless filing system.
We also think that the Commission recommendations are a
continuously woven cloth. We have had some criticism today, and
some attention paid to the different pieces of whether or not
balance-due taxpayers will be attracted by it, an extension of
the filing date, and whether or not we should offer incentives.
I think each one of these things has brought out a certain
percentage. In order to get to the 80 percent, we need to
attract a certain percent of taxpayers who are motivated by
different realities. And I think the Commission's
recommendations, when they are considered as a whole,
accomplish that. It is important not to try to pick and choose
which one of these provisions you want to throw out or keep in.
I think as an experiment it makes sense to just bring the whole
package forward, because it is, as we see it, a continuously
woven cloth.
Particularly important, I think, is an indication of some
of the testimony we had today from Treasury. It reminds me of a
story when I worked here in the IRS National Office in 1972. I
had a meeting scheduled with someone at Treasury, and I spoke
to him the day before and confirmed the meeting for 2 the next
afternoon. I had to call the following morning to talk about
something, and his secretary said to me, ``Oh, he is in Red
China.'' This was about 1 month before Kissinger and everybody
else had gone to China, so it was all on the news here, and
everybody was saying, ``Wow, China.''
And I said, ``Well, I guess then we will postpone the
meeting until he gets back.'' And she said, ``No, he will be
back at 2 for your meeting.'' I said, ``Wait 1 minute, he was
in the office yesterday when I spoke to him, and he is in Red
China this morning, and he will be back this afternoon?'' And
she laughed and said, ``You do not realize; I forget you do not
work here. That is what we call the IRS.''
And I said, ``Why do you call IRS Red China?'' And they
said, ``Because it is big; it is huge; it is full of people,
and nobody knows what goes on over there.''
I think it was pretty obvious this morning. Maybe we should
have a reorganization of the Treasury Department next after we
finish this reorganization of the IRS, because they are not
bringing the innovative ideas to the table that we are talking
about. When they start to say that we cannot consider
incentives, and we cannot consider extensions of the filing
season, I bet you if you go back into the memorable notes of
this Subcommittee, back in the thirties and forties, when we
had a March 15 filing date, and we changed it to April 15, you
had the same testimony from the Treasury Department you had
this meeting, about moving it to May 15. So I think if you go
back into your records you are going to find the same
objections.
I was really concerned about the lack of responsiveness on
the part of Treasury. I believe that the IRS people are being
forced into a situation where they have to sort of go along
with that because that is their boss, but we are not happy
about that.
I think the 80-percent goal in the next 10 years is
imminently achievable. We got to the moon in less time. Why
they object to having specific goals and percentages is beyond
comprehension to me. I think in any business you cannot get
anywhere without setting a firm goal and shooting for it. And
if we wind up going all the way down the track, and committing
ourselves to that goal, and we only achieve 75 percent, I do
not think that is a failure; I think that is a dramatic
improvement in what we are doing.
So we support that. And quite frankly, I have to agree with
Roger. I think the 800-pound gorilla in the electronic filing
is the practitioner community. Fifty percent of your volume is
with practitioners. If you incentivise the system so
practitioners will get onboard with it, it will get you a long
way to that 80 percent a lot sooner than the year 2005. The
best way to incentivise that system is to turn around the
attitude of practitioners.
We polled our members. Over 90 percent of our members
prepare tax returns on computers; only 14 percent of them file
electronically. The primary motivation and the primary reason
why such a limited number participate is because of the fact
that they cannot file all tax returns electronically. One of
the most expensive things for practitioners to do, and anybody
that is representing a practitioner organization on this panel
can confirm this today, is to run parallel systems in their
office. Most practitioners have 300 to 400 clients. They have
to hire part-time people for the tax season. These are not
people that come back every year. So when you hire someone and
you teach them a process--here is how you process a tax return
and get it outside of the office--if you have to have one
system for electronically filed returns and one system for
paper returns, you are going to look out and say, Well if only
30 percent of my returns can be filed electronically, and the
other 70 percent have to be handled on paper, I am not going to
do anything electronically.
I am going to set up one system, have one uniform way of
processing this stuff so it goes out the door correctly. And if
IRS ever gets around saying they will accept 100 percent, then
I will consider switching over. That incentive is going to be
the greatest incentive you can give, accepting all tax returns.
The way you motivate practitioners is to motivate
taxpayers. And one of the suggestions we make at the end of our
testimony is the easiest way we know to motivate taxpayers is
to use the fear effect that IRS has on everybody today to your
advantage, basically by changing the statute and saying, that
if you file a timely filed return electronically, that your
exposure for audit will be 24 months instead of 36 months, I
guarantee you that will motivate taxpayers to create demand,
and what practitioners will serve first before anything else is
client demand.
If a taxpayer comes in to a practitioner and says, I want
this filed electronically, because then IRS only has 24 months
to audit me instead of 36 months, you have a couple of effects
right away.
First, practitioners will get onboard. Second,
practitioners' malpractice carriers will get onboard, because
they will come back to the practitioner and say, you are going
to tell us why you are not filing electronically, because we do
not want the exposure for another year, if we do not have to
have it unnecessarily. And the other thing quite frankly, if
you put the provision in that if the return is filed timely
electronically, and there are no mismatches with your IRP data,
your information returns data, it also puts pressure on the
filers of those 1099s and W-2s to get the data right, because
they could leave themselves open to a tort claim from the
taxpayer if they gave wrong information to the Service, and as
a result it kept the statute open another year.
So you perfect your data all the way down the line, and as
tax administrators, the Treasury and the IRS should be willing
to accept this, because they can argue they are getting the
data in purer form. They should be able to do a cross-reference
much quicker on the electronically filed data that they are
getting from the payers of the Information Return Program.
Quite frankly, you only have a 1-percent audit rate, so what
are you giving away? You really are not giving away much of
anything.
The other suggestion we would urge the Treasury to consider
or IRS, is to deal with the Federation of Tax Administrators,
which is right here in Washington, which represents the 43
State tax administrators that are around and have income tax
programs, and work out a unique program that allows an
electronic filer to file one tax return to satisfy a State and
Federal obligation. That would definitely attract taxpayers to
lower their accounting costs. They have less tax returns to pay
for in terms of preparation costs.
I think if those two things, coupled with the fact that IRS
has to accept all tax return data, all tax schedules, and white
paper schedules, submitted electronically would boost
electronic filing.
The interim recommendation in the package is a good one.
That is basically saying that if it cannot be accepted
electronically, then that schedule or paper will be treated as
a workpaper that will be maintained by the accountant and by
the taxpayer.
That is a good suggestion, but it is only an interim
suggestion. It cannot be a final suggestion. If it is the final
suggestion, what IRS has done is move the documentation and
filing responsibilities of the service centers into the
taxpayer's offices and the practitioner's offices, and there is
some real concern about that from the practitioner standpoint,
in terms of client-record retention. And from a taxpayer
standpoint--I mean, I cannot tell you how many times taxpayers
call me up at work--I know my clients--and say, can you send me
a copy of last year's tax return because I lost mine.
So we cannot rely on taxpayers to maintain their records.
And to have sort of an open-ended liability for practitioners,
you will not get any support on that. So as an interim measure
it is a good idea, but I think basically if the IRS decides it
is important enough to have a form or schedule, and they want
the information, then they ought to be forced to take it
electronically.
[The prepared statement and attachments follow:]
Statement of Joseph F. Lane, Enrolled Agent, National Association of
Enrolled Agents
Madame Chair and members of the Oversight Subcommittee, my
name is Joseph F. Lane, EA. I am an Enrolled Agent engaged in
private practice in Menlo Park, California. I am the Chairman
of the Government Relations Committee of the National
Association of Enrolled Agents and I am pleased to have this
opportunity to present testimony on behalf of NAEA's over 9,000
Members on the electronic filing provisions of H.R. 2292. NAEA
receives no federal contracts or grants.
As you know, Enrolled Agents are licensed by the Treasury
to represent taxpayers before the Internal Revenue Service.
Enrolled Agents were created by legislation signed into law by
President Chester Arthur in 1884 to remedy problems arising
from claims brought to the Treasury after the Civil War. We
represent taxpayers at all administrative levels of the IRS.
Since we collectively work with millions of taxpayers and small
businesses each year, Enrolled Agents are truly at the front
lines of tax administration.
Representatives of NAEA testified at five public hearings
conducted by the National Commission on Restructuring the IRS
and we submitted written testimony for the record for a sixth
hearing. In addition, our National staff attended numerous
informal meetings with Commission staffers and Commissioners.
We praise the work done by the Commission in focusing on
constructive ways of improving our tax administration system
and making the IRS more responsive to taxpayer input. Of all
the Commission's recommendations, we believe those connected
with electronic tax administration are among the most far-
reaching and innovative. If adopted, they will revolutionize
the way in which tax practitioners conduct their business in
the next decade and beyond and will have a profound effect on
American taxpayers as well.
The major focus of the Commission report was that the IRS
must become more business-like and must adopt new strategies in
handling its work, particularly in the area of electronic
information systems. The Service has begun in the last year or
so some major initiatives to help them reach these objectives.
As you know, in past testimony we have been critical of the
Service for its lack of dynamic, innovative management in the
area of electronic tax administration. However, we think the
Service deserves to be recognized when it begins to transform
its decision making process by making it more inclusive. Last
year's executive appointment of Arthur Gross to be Chief
Information Officer and last month's appointment of Bob Barr to
be Assistant Commissioner of Electronic Tax Administration are
solid indications that the Service has heard the complaints of
taxpayers, tax practitioners, Congress and data processing
professionals and has opened up its ``inner sanctum'' to
outside input. We applaud these moves and encourage many more
efforts to reach out and recruit individuals with the technical
and marketing backgrounds necessary to once again make the
Service a significant force in information systems expertise.
We believe the recently announced ``blueprint'' for
implementing modernization of IRS data systems will take into
account the views of numerous outside stakeholders to a much
more serious degree than past plans. We expect the soon to be
issued Request for Proposals seeking input from the
practitioner, tax software and tax publishing industries will
further the process of inviting the best minds to the table in
formulating a methodology for enhancing electronic tax
administration.
For the past two years, the IRS has operated a state of the
art web site which makes available forms, publications,
regulations, and press releases to anyone who can access the
Internet. This is an extremely important service to taxpayers
and practitioners because it is available 24 hours a day, 7
days a week.
IRS is reaching out more substantively to the practitioner
community for ideas on how to operate more effectively and
efficiently through the Commissioner's Advisory Group and the
Information Reporting Program Advisory Committee as well as
various task forces and focus groups. We especially endorse the
establishment of a unique Electronic Commerce Advisory Group.
The proposed E-CAG would serve as a focal point for IRS-
industry communication in this vital area and we believe
provide the necessary guidance and direction to the Service's
efforts to move toward the goal of a paperless filing system by
2005. Given the revitalization of IRS' Electronic Tax
Administration, we would recommend that the E-CAG be located
within the Commissioner's office and aligned with ETA, rather
than placed in Treasury.
We have been heartened to hear that IRS wants to put in
place as much of the Commission's recommendations as it can
administratively. This is indicative of an acceptance of some
of the valid criticisms leveled over the past year and we
commend the Service for its undefensive posture. We are
concerned however that there be no lessening of the forward
momentum toward enactment of the legislative proposals
advancing the Commission's recommendations which cannot be
administratively adopted without a law change. The Commission's
recommendations in the electronic tax administration area are a
continuously woven cloth. Each piece is critical to the
achievement of the goal of a paperless filing system. It would
not be possible to achieve the goal for instance if the IRS did
not accept all tax forms and schedules and notes via electronic
media or if it could not accept alternative forms of tax
payment via electronic funds transfers or if it still insisted
on actual taxpayer signatures rather than some other validation
process.
One of the most important recommendations is that paperless
filing should be the preferred and most convenient means of
filing tax and information returns. The American taxpayers,
their tax practitioners and the IRS are awash in paper, a
situation which simply cannot continue unless we are prepared
to see a complete breakdown in tax administration, not to
mention the environmental consequences of the need for all that
paper. Enrolled Agents, who are on the front lines of tax
administration, are seeing the beginnings of this breakdown
now. Our Members tell us that they are contending with more
errors in IRS paperwork than ever before, and it takes a great
deal of time and taxpayer money to untangle these errors. With
electronic filing, the error rates can be as low as 1% versus
as much as 20% for paper returns.
The benchmarks required in the Commission report--that
within the next 10 years 80% of returns be filed
electronically--are realistic only if certain changes are made
to the way the Service and tax practitioners interact. I would
like to share with you some demographic information reflecting
the situation of NAEA Members. During our 1996 annual
membership renewal period, we included a survey on the back of
the renewal form. More than 75% of our Members replied. Of that
group, almost all use a computer in tax preparation and the
overwhelming majority have a modem and CD-Rom. (In fact it's
pretty hard these days to find new computers that don't have
these items as part of the basic package.) One third of our
Members are online so they have access to the Internet and have
an e-mail address. We expect those numbers to increase
dramatically in the very near future. To illustrate, two years
ago, when NAEA began offering online communications to our
Members, we had only a couple of hundred Members online. Today
we have more than 3,000, ranging from our first President, Syd
Schuldiner, who is in his eighties, to newly minted EAs in
their twenties and thirties.
Since the vast majority of our Members use computers to
prepare tax returns, the information is already in digital
format. Yet our previous surveys have indicated that only 14%
of our Members file electronically. We have been studying the
reasons for this disparity for the past two years and have
formulated a strategy to effect a change in practitioner
perceptions about EF. In the course of our work we have
identified the following areas as the primary contributing
causes for practitioner nonparticipation in EF:
Forms Unacceptable for Electronic Filing
Many forms are not available to be filed electronically. As
one of our Members testified at the Commission's Des Moines
field hearing, she could have sent many more tax returns in
electronically if she had been able to handle the fuel excise
tax form, a form that is particularly important to her clients
who are farmers. Since it was not available electronically, she
had to file paper returns. We later heard the reason that
particular form was not available was because of revenue
protection concerns. However, we were never told how widespread
that problem was and were never asked to provide assistance in
correcting the problem.
The Commission report neatly handles the problem of forms
being unavailable for electronic filing by stating that those
schedules and attachments not available in electronic format
can be retained as worksheets in the taxpayer's files. We
believe this will be an effective interim measure until the
Service can reprogram the system to accept all forms and
schedules in the near future but do not recommend this be seen
as the final answer to this problem. There are too many
concerns about practitioner liability issues, multi-year file
retention requirements and client records retention habits.
There is also the very real possibility that this procedure
will trigger unnecessary audits because IRS will not be seeing
a complete return. If the IRS wants the data, it designs a form
or schedule for it. It should be required to accept it
electronically and not shift the burden for keeping some of its
records in the offices and files of practitioners and
taxpayers.
Lack of Incentives for Preparers
The traditional view of most practitioners was there was no
benefit to be derived by themselves or by taxpayers by filing
electronically, with the possible exception of those clients
interested in refund anticipation loans.
Indeed, their tax return processing costs were
significantly increased by opting to support electronic filing
because of the additional $.20 to $20.00 per return fees
imposed by tax preparation software vendors for using their
electronic filing option; by the initial insistence on
expensive, non-standard modems by the IRS; by the number of tax
forms the IRS would not accept electronically; and by the
additional record keeping requirements imposed by program
participation. These factors coupled with the primary IRS
marketing thrust of ``do it because it helps us'' failed to
elicit much response from the industry.
Today, the average practitioner with two or three hundred
returns must, in most cases, pay a substantial fee relative to
the average cost for their services to file electronically.
This additional fee is the per unit cost charged by the tax
preparation software vendor for utilizing the electronic filing
option.
NAEA believes that there needs to be a clear delineation
between the separate acts of preparing a tax return and
submitting a tax return. No one argues that software publishers
are entitled to be compensated for usage of their preparation
program. But, to permit them to additionally control the method
of submission is tantamount to permitting them to require that
all income tax returns prepared using their software must be
mailed via Federal Express at the cost of $15.00 per package
rather than via US Mail for $.32. The current situation is akin
to the early days of franchising when you had to buy all your
cups and paper goods from the franchiser at exorbitant rates
relative to the true market value.
We believe the IRS standard for electronic filing
submissions should be written to an unencrypted, open document
standard and that the practitioner-consumers be given the
option of utilizing whatever electronic filing transmission
service they select based on market place pricing. The process
already is in place to require all tax preparation software
vendors to make their program output conform to IRS
specifications. To add the additional requirement that they
provide open access to the data file needed for electronic
filing is relatively simple. The continuance of software
vendors hegemony must end if electronic filing is to receive
the fair test it deserves and the American taxpayers are to
recognize the return on their investment made in IRS computing
power.
The current bill provides incentives for preparers to
submit returns electronically by requiring paid preparers to do
so for all returns filed Jan 1, 2005. If we are going to reduce
the error rate and halt the sea of paper being sent to IRS,
then the move toward electronic filing incentives is
praiseworthy. We would suggest that it doesn't go far enough
and omits some details which can make a significant difference
in participation rates. We also believe that the amounts of the
proposed credits are too low to attract the support of the
majority of tax practitioners who after all have average
practice sizes of approximately 300 clients. For an average
practice of 300 taxpayers the total credits available of
$600.00 would do little to offset the tech support necessary to
resolve all EF issues.
We have found in our talks with members over the past few
years that there are many other incentives which would insure
greater EF participation. We proposed these to the IRS last
year in our pilot test proposal. They are:
1. Permit electronic communication between IRS offices and
practitioners on client account issues. This would permit e-
mail to be exchanged between IRS employees and practitioners to
expedite resolution of account problems. This is not available
in the vast majority of IRS offices!
2. Permit alternative forms of tax payments, including
credit cards
3. Permit the online submission of the Installment
Agreement request and Collection Information Statements
4. Permit the electronic submission of Powers of Attorney
and Transcript Requests
Currently tax return preparers are required to list their
personal Social Security numbers for identification on tax
returns they prepare. As an access to the most confidential
information, i.e., identity, credit and personal history, the
Social Security number is potentially the most damaging of
information to be disclosed in an uncontrolled environment. And
in fact, several cases have come to light in which criminals
lifted the SSN and used the information to create fictitious
identities, acquire credit cards, and run up huge bills. The
practitioners then had to hire legal counsel to straighten out
the situation. If a way can be devised to permit tax
practitioners who file electronically to avoid this
requirement, it would certainly be a powerful inducement to use
electronic filing.
We believe if these suggestions were adopted and the IRS is
required to accept all forms and schedules electronically and
the software publishers are forced to adhere to an open,
unencrypted file output standard then the market forces alone
will be sufficient to drive up EF participation rates. We also
believe that once these obstacles are cleared away--a
compelling case could be made in the name of good government
and cost effectiveness to require EF submission of returns by
practitioners who exceed a certain annual threshold in number
of returns prepared.
Oversight of Electronic Filing Preparers
One major IRS concern has always been the susceptibility of
the electronic filing system to fraud. This has led to problems
with the way electronic filing preparers have been treated and
we have had member complaints about the means employed by IRS
EF Revenue Protection efforts. While our Members' complaints
have abated over the last filing period about the approach some
IRS offices have taken in their revenue protection effort we
have to note that in some cases the overzealousness of some IRS
employees has fermented a very serious practitioner backlash
against EF We believe that providing oversight for ALL paid
preparers is an effective way to ensure the integrity of the
system. NAEA has long advocated the registration and regulation
of all paid tax preparers. IRS' own research repeatedly has
shown that those tax practitioners regulated under Circular 230
are rarely involved in tax refund scams. An IRS study of EITC
fraud done two years ago showed that 96% of the fraudulent
cases involved unregulated tax preparers. There are tens of
thousands of unregulated tax preparers each filing season. Many
of them are what we call card table guys who show up in a
storefront on January 1 and disappear on April 16. What kind of
accountability do you think someone like that has? And yet they
are involved in a system that collects $1.6 trillion in tax
revenues annually. Does this make sense?
While over-regulation has been a problem in many government
agencies for many years, I would argue that one of the basic
rights of taxpayers is the right to have accurate and timely
information so that they can be confident that they are in
compliance at all times. This includes the right to receive
correct information from IRS and it includes the right to
receive accurate returns and tax information from those who
hold themselves out to the public as tax practitioners. We have
the rather perverse situation in today's tax administration
system where those of us who have made the most commitment to
the tax profession: Enrolled Agents, CPAs and Attorneys, are
the most regulated. While those who have not bothered to get
the education necessary to stay current with the laws, have
made no commitment to supporting a professional organization
with established codes of ethics and standards of practice, and
have no substantial investment in a practice in terms of
equipment, libraries, etc. are completely unregulated by IRS.
We require more qualifications from barbers than we do
unregulated preparers and you can recover from a bad haircut in
three weeks!
There must be a level playing field among all tax
preparers. The Service should focus as much effort on paper
filers as they do electronic filers. They should make more
effort to listen to the problems their own procedures cause for
EF participants and resolve to implement changes which would
ease the burden on EF supporters. We look forward to working
with Bob Barr in this effort as he is intimately aware of the
marketplace concerns and problems with the IRS management of
this effort.
We accept the Commission's recommendations as the starting
point, but believe the current bill does not go far enough in
ensuring the accountability of commercial tax preparers. For
further information, we have attached the report of the IRS
Commissioner's Advisory Group (CAG) on this subject, a report
completed in 1994, prior to the outbreak of the fraudulent EITC
activity in the 1995 filing season. We urge the Committee to
consider inclusion of this recommendation in the current bill.
Extended Filing Dates
We are aware that the Commission staff conducted taxpayer
surveys which indicated a certain percentage of taxpayers would
support EF if granted extended due dates for filing and paying
taxes. Since we are in favor of increasing the number of EF
returns we would concur with this change. However, we have
several reservations about just what kind of volume increase
could be expected from this modification. When we polled our
members, we heard many concerns raised about how this would
just provide the procrastinators with another month to get into
their offices and about what liability there would be for tax
practitioners who assumed clients could file electronically
only to find in May they could not and now were faced with a
delinquent return situation. We could see some benefits for
this proposal only if the issue of IRS accepting all forms and
schedules was resolved either along the work paper route or
reprogramming to accept via EF. Additional concerns raised by
our Members include the coordination of an extended filing date
with filing deadlines for states and computation of estimated
tax payments.
One of the reasons for extending the due date was to permit
those filers of 1099s and K-1s to complete their work. In our
opinion, Congress should revisit the question of requiring all
partnerships and personal service corporations to have December
31 year ends. This change was implemented as a one year revenue
fix several years back and it has caused immense problems for
practitioners and taxpayers alike ever since. It would be far
preferable to require June 30 year ends for these entities.
This would insure that even on maximum extension that all K-1
data would be available before the individual tax filing date.
It would also prevent any income shifting games since
distributions would certainly fall in the taxpayer's tax year.
Relocation of Director of Practice to Treasury
Since the issue of moving the Director of Practice Office
is one addressed in the electronic filing section of the bill,
we felt the need to comment on it here, due to our prior
recommendation that all practitioners who file electronically
be covered under Cir. 230 and our frequent interaction with
that office. We have had experience working with the DOP's
office when it was part of Treasury and since it has been part
of the IRS. In our opinion having it within the organizational
plan of IRS works better than it did when it was headquartered
at Main Treasury. The DOP is responsible for running the
Special Enrollment Examination, background checks for the EA
candidates, monitoring and auditing Continuing Professional
Education reports, and enforcing the regulations under Cir.
230. Much of the administrative work is run out of IRS' Detroit
Computing Center. The last renewal cycle was the smoothest
we've ever experienced. It is our view that Detroit has
performed well and proved itself. Since most of the work
involves tax administration which is the focus of the IRS,
rather than tax policy which is the focus of Treasury, then it
seems logical that the Director of Practice should remain at
IRS and not revert back to the department.
Additional NAEA Recommendations for Legislative Action
We believe the Committee in the course of its deliberations
should consider these additional suggestions for increasing
Electronic Filing:
modify the statutory period for examination of an
income tax return from 36 months to 24 months provided that the
return is filed electronically by the due date and there is no
mismatch with other Information Returns Program data received
by the Service. This achieves a triple effect: first--it
motivates taxpayers to have their return filed electronically--
practitioners will service client demand first above all else;
second--it motivates IRP filers to perfect their data since
they could be liable to their clients should they misreport
information; and third--it motivates practitioner malpractice
insurers to pressure practitioners to file electronically
eliminate the requirement for an actual taxpayer
signature on a tax return and for the submission of the Form
8453 by the EF preparer
provide for joint Federal/State income tax filing
on one return for electronic filers--this would motivate
taxpayers who want to reduce their accounting costs each year
and may prove attractive to states since many now receive
copies of state and federal returns with all the attendant
costs of paper handling and storage
We believe that if these changes were incorporated into
this current bill that the 50% of all tax returns that are
prepared by tax practitioners would rapidly be converted from
paper submissions to electronic submissions well before 2005.
Summary
We appreciate the opportunity to appear before you to offer
our insights and views on the Commission's legislative
recommendations. The IRS has long talked about partnerships in
tax administration with the practitioner community. The time
has come for this talk to become reality and foster true
working relationships that provide for valued input and benefit
to both sides. There are many hard working, dedicated employees
within the IRS who share this desire for progress. We are
confident this legislation will provide the necessary framework
for more successful IRS/practitioner interactions and for a
more effective electronic tax administration system.
I will be happy to respond to any questions you may have.
[GRAPHIC] [TIFF OMITTED] T1199.011
[GRAPHIC] [TIFF OMITTED] T1199.012
[GRAPHIC] [TIFF OMITTED] T1199.013
[GRAPHIC] [TIFF OMITTED] T1199.014
[GRAPHIC] [TIFF OMITTED] T1199.015
[GRAPHIC] [TIFF OMITTED] T1199.016
[GRAPHIC] [TIFF OMITTED] T1199.017
[GRAPHIC] [TIFF OMITTED] T1199.018
[GRAPHIC] [TIFF OMITTED] T1199.019
Chairman Johnson. Thank you very much, Mr. Lane.
Ms. Kelley.
STATEMENT OF CAROLYN KELLEY, DIRECTOR, GOVERNMENT AFFAIRS,
AMERICAN PAYROLL ASSOCIATION
Ms. Kelley. Thank you Madam Chair, and the Subcommittee,
for the important work you have done in this area of electronic
filing. I am honored to be here.
The APA Reports represent more than 14,000 U.S. businesses
on issues related to payroll tax reporting, withholding and
depositing. As such, APA's members are responsible for
submitting hundreds of millions of the more than 1.4 billion
wage information and employment returns received annually by
the IRS and Social Security Administration.
APA agrees with just about everyone here today; that
electronic filing of individual tax documents will result in
lower cost and increase compliance for both the public and
private sector. However, we are here to urge Congress to
aggressively broaden this goal of expanding electronic filing,
to include the filings required of U.S. businesses. That is,
the over 1.4 billion information and payroll tax returns
submitted by U.S. businesses each year.
Many of these documents do not have the complex attachments
that make automating individual tax returns difficult
sometimes. APA recommends that any strategy for increasing
electronic filing of business returns and information reports,
should be developed with the input of private sector
stakeholders, and I think we have heard that a lot here today.
Thus we believe that that creation of an Electronic
Commerce Advisory Group is a good idea, and should be monitored
by Congress to ensure its recommendations are implemented when
appropriate.
I am the former chair of the Information Reporting Program
Advisory Committee, and a member of the Commissioner's Advisory
Group, and I am proud of the good work we did there, but I do
feel that Congress should monitor these advisory Committees to
make sure that suggestions can be implemented where
appropriate.
APA's other recommendations for increasing electronic
submission of business information and employment returns
include nationwide standards should be developed for all
electronic data formats, including signature alternatives and
transmissions procedures.
Underscoring Mr. Cardin's earlier comment, these standards
should be easy and inexpensive for taxpayers to implement and
use, and should be tested by both the public and the private
sector before being implemented. For instance, one of the most
distressing parts of the EFTPS implementation before the
first--was IRS' insistence that the system had been tested,
when in fact not one single taxpayer had put a payment through
the system about to be mandated. Internal testing of systems is
not enough. We need to go out and test with the Nation's tax
collectors and tax preparers.
Our second recommendation is we agreed that IRS should
remove electronic signature barriers to electronic, PC modem to
modem, and magnetic media filing of information and tax
returns. We support the Commission's provision in the
legislation calling for electronic signature development.
IRS should resolve the security barriers surrounding
electronic filing of information returns specifically. IRS has
stated that in no instance has the fate of a tax claim relied
on the validity of a signature on an information return. To us
this means that hundreds of millions of these documents can
potentially begin to be transmitted electronically without a
paper signature attachment, using a signature alternative.
APA believes that technological solutions exist today that
do this with a PIN. And we direct you to examine the current
automated W-4 program. EFTPS uses PINs and SSA is currently
starting to develop its electronic infrastructure, using them
for receipt of wage information.
I share the frustrations expressed today. The fact is, we
can withdraw money everyday from our banks using PINs, so the
technology must exist for us to give information, and we do not
understand these barriers.
According to SSA, of the 5.5 million employers filing
today, only about 10 percent are filing either returns or
information reporting documents electronically. However, as Mr.
Harris has pointed out, 50 percent of the remaining 5 million
are filing on paper, which has been created by a computer.
Because this information is already in an electronic
format, it could easily be submitted to IRS by modem. This is a
tremendous opportunity, and is being blocked by the lack of an
electronic signature alternative.
Further, we are very concerned that that States are
beginning to develop methods for electronic signatures and
programs to receive tax and information returns electronically
that are not standard; they vary from State to State. We need
to move to develop national procedures and standards quickly,
and hopefully the States will follow.
Another recommendation is that, new electronic procedures
for taxpayers should never be mandated under penalty. On this
we agree with the Commission and appreciate your movement in
this direction. Instead the pubic and private sector should
work together to develop systems that work for businesses, and
then businesses will flock to them to use the increased
efficiency and the cost savings.
Using EFTPS again, the mandate did not work as the
extremely harsh 10-percent penalty assessed for failure to use
the system provoked a predictable public outcry and resistance
to adopt it. Further, although U.S. businesses were mandated
under penalty, the U.S. Government was not, and when the system
was not ready on the effective date, taxpayers were set up to
be penalized for reasons out of their control.
This is crazy. We should be working together to improve tax
administration in this country, and we believe that the
Commission's recommendations go a far way to facilitate that.
I want to be clear though; we do not object to mandates,
just mandates of brandnew technology. Instead of these kinds of
mandated situations new electronic processes should first be
marketed to the segments of the business community where the
most savings and increased compliance would be realized, using
various incentives. Other segments will follow as they perceive
the advantages, especially if this marketing is done in
partnership with the private sector. Congress and IRS should
allow realistic deadlines for compliance with new electronic
requirements, and that means the system changes that the
taxpayers have to go through.
IRS also should provide business with several choices of
methods to use to file information and tax returns
electronically, including magnetic media and PC modem to modem
methods. For example, electronic data interchange equipment is
expensive, and available for tax use and only a very small
number of businesses. Larger businesses are reluctant to make
that kind of investment in payroll departments, and the cost to
small businesses could be prohibitive.
Our last recommendation I think has been discussed here, so
I will skip it, and ask that you should provide the same kind
of incentives to business filers as to personal filers. We want
to applaud you for the legislation's provisions to allow
businesses that file electronically an additional month to
submit Form W-2 information to SSA. This was easier done than
to move the individual date because the W-2 is still going to
the employee on January 31, so the employee is not affected.
But what this allows businesses to do, is catch the mistakes,
and then submit cleaner information to SSA. It is a very good
idea, and it was an innovative solution.
IRS should outsource when appropriate expertise is not
available within IRS, and APA is also glad to hear Mr. Barr is
coming on. Or when working on projects inside the agency is
going to delay them. I started working on an electronic 941 4
years ago, and we are dumfounded as to why that is taking so
long.
Finally, we support the Commission's recommendations on
single point filing, and we thank the Subcommittee for the
opportunity to comment today.
[The prepared statement follows:]
Statement of Carolyn Kelley, Director of Government Affairs, American
Payroll Association
The American Payroll Association congratulates the National
Commission on Restructuring the Internal Revenue Service on its
important work and interest in expanding electronic filing of
individual tax returns in the United States. The APA represents
more than 14,000 U.S. businesses on issues relating to payroll
tax reporting, withholding, and depositing. According to the
Service's own calculations, more than 70 percent of all federal
revenue is collected through income tax withholding. As such,
APA's members are the nation's tax collectors. Moreover,
payroll departments are responsible for submitting hundreds of
millions of the more than 1.4 billion information returns
received annually by the IRS and Social Security Administration
(SSA). These include wage reporting forms (Form W-2, ``Wage and
Tax Statement'' and Form W-3, ``Transmittal of Wage and Tax
Statements''), Forms 1099-MISC, ``Miscellaneous Income,'' for
reporting payments made to independent contractors, and
employment tax returns, including quarterly Forms 941,
``Employer's Quarterly Federal Tax Return,'' (covering income
tax withholding and FICA taxes), and Form 940, ``Employer's
Annual Federal Unemployment Tax Return,'' (reporting
unemployment taxes).
APA agrees with the Commission that electronic filing of
individual tax documents will result in lowered costs and
increased compliance for both the public and private sector.
Insofar as individual tax returns are concerned, APA leaves
comments to our colleagues who are expert in that area.
Instead, we urge Congress to broaden this expansion of
electronic filing to include the filings required of U.S.
businesses. Any strategy for expansion of electronic
submissions should include the over 1.4 billion information and
payroll tax returns submitted by U.S. businesses each year.
Many of these documents do not have the kind of complicated
attachments that make automating individual tax returns
difficult.
APA recommends that any strategy for increasing electronic
filing of business returns and information reports should be
developed with the input of the private sector stakeholders.
The strategy development team should include, at a minimum,
U.S. businesses, payroll service bureaus (who process, report
and deposit a significant percentage of U.S. payroll taxes),
the software designers who supply U.S. businesses with the
software needed to stay in compliance, tax practitioners,
Treasury, IRS, the Social Security Administration (which
administers some payroll taxes and performs complex balancing
processes with IRS), and the state tax administrators.
As far as a business strategy is concerned, the 180-day
period stated in the proposed legislation should be expanded at
least six months to allow for the development of the kind of
public/private partnership necessary for success. Congress
should monitor this to ensure that public input is being acted
upon where appropriate. We believe that the creation of an
Electronic Commerce Advisory Group is a good idea and should
include representatives expert in the processing of business
information and tax returns and be monitored by Congress to
ensure its recommendations are implemented where appropriate.
Recommendations:
IRS should work with the private sector in
articulating a strategy and invite users of the tax system and
software designers to lend their expertise. Any organization
that does not involve the expected users of processes before
building them is setting itself up for predictable, but
avoidable, failure. Only by involving the front-end users in
the design process can serious implementation problems be
avoided.
The public and private sector must work together
during all phases of system design, implementation, and
testing. Congress should provide oversight of this process to
ensure that the needs of the taxpayer are being met and should
remove barriers in the Federal Advisory Committee Act and any
other legislation which prevent such a process.
Reasonable standards should be developed for all
electronic data formats, signature alternatives, transmission
procedures, etc. These standards should be easy and inexpensive
for the private sector to implement and use, and should be
tested by both the public and private sector before being
implemented. One of the most distressing parts of EFTPS
implementation was IRS' insistence that the system had been
``tested'' when in fact, not a single taxpayer had put a
payment through the system about to be mandated.
IRS should remove electronic signature barriers to
electronic, PC modem-to-modem, and magnetic media filing of
information and tax returns and work with the private sector
and the states to ensure nationwide standards. We support the
legislation's provision calling for electronic signature
development. This standard signature alternative should be easy
and inexpensive for the private sector to implement and use,
and it should be tested before rolled out.
IRS should resolve the security barriers
surrounding electronic filing of information returns.
IRS has stated that in no instance has the fate of a tax
claim relied on the validity of a signature on an information
return. This means that hundreds of millions of these
information reporting documents can potentially be transmitted
electronically without a paper signature attachment. We thus
believe that most, if not all, of the (perceived) security
problems surrounding moving information returns electronically
to and from the IRS should be resolvable, without adding to the
years of delay that have already occurred. APA believes the
technological solutions exist today. IRS has to articulate
requirements, work with their ``stakeholders,'' and create
pilots in order to successfully implement programs.
For example, SSA already has begun receiving Forms W-2
electronically, using a bulletin board for smaller employers
and high speed bulk data transfer processes for larger
employers. It's our understanding that the growth of SSA's
program has been inhibited by the Service's delay in
establishing a method for electronic signatures and removing
the perceived security barriers.
According to SSA, of the 5.5 million employers filing
today, only about 10 percent are filing either returns or
information reporting documents electronically. However, 50
percent of the remaining five million are filing on paper
created by a personal computer. Because this information is
already in an electronic format, it could easily be submitted
to the IRS by modem. This is a tremendous opportunity. It
should be pursued, not held up by lack of electronic signature
methods or by concerns regarding security which may be
unnecessary.
APA believes the technology exists to do this with the use
of PINs. For example, EFTPS uses PINs. We are concerned that
the states are beginning to develop methods for electronic
signatures and programs to receive tax and information return
documents electronically that are not standard. IRS should
partner immediately with the SSA, the state tax and employment
agencies, the private sector and American National Standards
Institute (ANSI) to develop national procedures and standards.
Currently, the SSA is meeting with the private sector to
develop its electronic infrastructure. As digital signatures
and other methods are not yet available, SSA is examining the
feasibility of a PIN system. Challenges include how to validate
the employer's EIN and company name as it appears on the IRS'
business masterfile. We understand that IRS is not yet ready to
participate in developing a common system. We urge Congress to
urge IRS to work with SSA on this project.
After being designed, implemented, and tested in
partnership with the private sector, new electronic processes
should be marketed to the segments of the business community
where the most savings and increased compliance would be
realized. Other segments will follow as they perceive the
advantages.
New electronic procedures should never be mandated
under penalty. Nothing will kill private sector cooperation
more quickly than being penalized for making mistakes in the
new electronic environment. Mistakes will be made in any new
system as taxpayers are educated in new processes. (See below.)
If systems work for businesses, businesses will flock to use
them to increase efficiency and lower costs. For example, the
EFTPS mandate did not work, as the extremely harsh ten-percent
penalty assessed for failure to use the system provoked the
predictable public outcry and resistance to adopt the system.
Further, although U.S. businesses were mandated under penalty,
the United States government was not, and when the system
wasn't ready, taxpayers were set up to be penalized for reasons
out of their control. This is insanity. We should be working
together to improve tax administration in this country.
Congress and IRS should allow realistic deadlines
for compliance with new electronic requirements. From our prior
testimony on the Commission's report, we repeat the following
list of time periods which must be incorporated into any
successful implementation schedule:
1. The time it takes the regulatory agencies to produce
regulations.
2. The time it takes to educate the business community
about their obligations, especially in the case of small
businesses that may not have access to information and
professional expertise available to larger businesses. After
regulations, it takes some time before taxpayers are educated
about requirements, especially if regulations are complex or
require significant changes to existing practices.
3. The amount of time it takes for software design and
testing. Most U.S. businesses buy their tax processing software
from outside vendors. If these vendors do not have enough time
to develop products, businesses pay with costly custom systems
changes and/or manual or exception systems. If the business
does not buy commercial software, the amount of time it takes
to assess and then make changes to existing systems must be
taken into account. The more complex the regulations, the more
time businesses need to prepare for compliance.
4. The amount of time it takes to test system changes to
ensure correct deposits and/or the reporting of clean, accurate
information to the government agencies.
5. The amount of time it takes for government to design of
pilot programs to test transactions and transmission among the
various users before roll out.
It is important to note that these processes must be
accomplished in a linear fashion and cannot be accomplished at
the same time. Congress should work with the private and public
sectors to design realistic implementation schedules and then
ensure that the IRS is able to build their systems, produce
regulations, and train staff on schedule.
IRS should provide businesses with alternative
methods to file information and tax returns electronically
including magnetic media and PC modem-to-modem methods.
It is important that the government provide users with
alternative methods for automated filing. For example,
Electronic Data Interchange (EDI) equipment is expensive and
available for tax use in only a very small number of
businesses. Businesses are reluctant to make that kind of
investment in payroll departments, and the cost to small
businesses could be prohibitive.
Congress should provide businesses with incentives
to file electronically.
We applaud the legislation's provision to allow businesses
that file electronically an additional month to submit Form W-2
wage information to SSA. This will allow businesses to discover
and correct any problems before they submit wage information to
SSA. This saves both the SSA and employers the expense and
inefficiency of going through the W-2c correction process.
APA recommends that similar incentives be provided to
third-party processors of electronic business filings and
reporting as has been suggested for third-party processors of
electronic individual returns.
IRS should outsource when appropriate expertise is
not available within IRS, or, when working on projects inside
the agency will delay critical pieces of an electronic
implementation strategy.
We thank the Subcommittee for the opportunity to comment
today, and I'm happy to answer any questions you may have.
Chairman Johnson. Thank you. And I thank the panel for your
excellent testimony. It was really very helpful, and will
provide a lot of food for thought.
I would like to ask those on the panel that support a
delayed date for electronic filing to discuss why they think
that will be effective in more detail. I understand the
opponent's argument. I do not understand as well the
proponent's argument.
Mr. Wolfe.
Mr. Wolfe. We believe that right now there are very few
incentives for balance-due filers to file electronically. The
extension of the filing date would be one huge incentive for
them to do that.
Chairman Johnson. Why is that an incentive for them to do
that, when they can just file for an extension of their due
date, and not have the month limitation?
Mr. Wolfe. Our understanding is that an extended deadline
permits taxpayers to wait if they are procrastinators, for
another couple of weeks before they actually filed a return.
Another reason--it is a little more complex to explain--is that
if we keep an April 15 deadline for both electronic and paper
filers it actually penalizes electronic filers. Because if we
allow them to electronically pay their taxes that are due, that
debit would happen on April 15. And if they filed with paper
the check would probably wait a minimum of 1 week before it
would get to their bank account. So it would take away a
barrier, to some extent, by delaying the filing date.
Chairman Johnson. Thank you, that is very helpful.
Mr. Lane. Could I come in on that as well?
Chairman Johnson. You certainly can, Mr. Lane.
Mr. Lane. I believe it not only calls for the extension of
filing, but also the payment of the tax. Is that not correct?
So you have a real savings there of someone not having to pay
for the additional 30 days the balance due. So there is a real
incentive for someone then to file electronically, knowing that
they will be deferring the payment of whatever taxes would be
due without penalty or interest for that 30-day period.
And obviously, as I agree with what the Intuit spokesman
said, the issue is that there were very few incentives in here
to get the 30 percent of taxpayers who have balances due. Quite
frankly, our suggestion about limiting the audited exposure
period would be very attractive to balance-due taxpayers, since
they are the bulk of the people that get audited. They tend to
be the more complex returns. They tend to be the people who
have the higher audit rate than the one-tenth of 1 percent of
1040-EZs or 1040-As, that get audited.
So I think incentivising the balance-due taxpayer, which is
a big area of concern for anybody who is trying to get more
people to file electronically; that whole shortening of that
audit window would have a very very dramatic impact on those
taxpayers.
Chairman Johnson. Are there other comments?
Mr. Langer.
Mr. Langer. In the standard filing season some 30 million
returns are filed within the last 2 weeks, so I would suggest
that even refund filers would take that extra time and file
electronically if they had another month. And it does sort of
play into the day of filing mentality that people have, but at
the same time it will be attractive to refund filers and
balance-due filers as well. If they have an additional month if
they file electronically, I believe they would take that time.
Chairman Johnson. Mr. Harris.
Mr. Harris. I think the extended deadline is one of many
reasons that we can approach these balance-due filers and
encourage them. There are a certain group of people who always
want to wait until the last minute to do everything, and giving
them 30 more days, only if they file electronically will
clearly motivate that group of people. It is not, I think,
enough to get to the 80 percent, but I think it is one of the
many issues that we have to address. And I have heard nothing
but really good suggestions here today.
Chairman Johnson. And would you eliminate their right to
ask them for the right to file later, to defer their filing?
Mr. Langer. I think that that is the problem. If you do not
offer them an extension on May 15 to be equal to a paper
extension, you may in fact hurt some of the incentive, in that
now they are faced with a 30-day window, and they have no
options after that. So I would like to see that they still have
an option on May 15, if factors exist, that they could still
get an extension beyond that.
Mr. Harris. I agree with that. You need to provide the
provision someplace--it may be in the Code or just in the
regulations that come out afterward. But you need to provide
the opportunity on May 15. If they are not in the position of
filing a tax return at that point, because there is a K-1
missing or whatever, that they would be able to secure an
extension, even though they are committing to file that
extension electronically; that is fine. The return will come in
electronically, but you cannot have it--if you leave it set up
the way it is now, where, either they file for an extension on
April 15, or they just do not file for the extension and assume
that they have until the May 15 filing date, and then they do
not have all the data.
Or worse, you get to a point where for some reason they
cannot file electronically. This all assumes, before you
implement this, that the IRS has to accept all returns that can
now only be filed using paper. I assume that is what the
thinking of the Subcommittee is. The way the legislation is
drafted, they would have to be able to accept all tax returns.
You need to provide something for that person or you are going
to kill the incentive, because they will instead go back and
get a protective extension.
Chairman Johnson. Thank you. Mr. Carver, what is your
evaluation of the estimate that has been made, that a paper
return costs $7 for the IRS to process?
Mr. Carver. This is a real snakepit. I have been working
some with the Commission. I spent a lot of time working in the
Service before that, trying to come up with a cost.
My budget to run the 10 service centers was about $1.3
billion a year. Of that, about half--I am saying $700 to $800
million of that was for the returns processing, and that is
taking returns in, stacking them and sorting them to transcribe
the information in the usual format. That includes this error
loop that was discussed earlier.
But if you have 200 million returns--the 1040s are the main
cost factor. There are business returns, the 941 returns are
processed very inexpensively because there is not much data, so
most of the cost is 1040s. If you take that $700 or $800
million, and said there are 100 million tax returns, you are
pretty close to $7 or $8 a piece for labor costs. It does not
include the capital costs of those service center buildings;
the capital costs of the equipment that is purchased.
The budget I have was maintenance, some power and water,
and mostly salaries. So the cost of $7 or $8 is in my mind
pretty close. The danger to IRS though, by saying $7 to $8, and
have somebody cut their budget, that is too big a risk because
you do not know what the volume of returns are coming in. You
cannot close one of those service centers if you get a 10-
percent volume decline. You have to do something like saying,
OK, in 5 years, this is the plan, this is the volume you will
have, and you must close five service centers in that period of
time and be ready for it at that time. That is why I really
agree with setting goals, because it forces these capital goals
to come along with it. It is a tough figure though.
Chairman Johnson. In other words the effect on the whole
structure, the bureaucracy and its physical facilities, will be
so dramatic by the time we reach the 80 percent that it needs
to be planned for in advance.
Mr. Carver. Yes, ma'am, carefully and in phases. Some of
the numbers we developed earlier on a failed modernization
effort that was supposed to be in place by 1996. The numbers
that we were using for service center employees; that is, the
temporary people that we hire to transcribe and so forth, those
numbers are running $20,000 to $28,000. The system that was not
delivered last year and was supposed to be, would have
eliminated it.
So the numbers are much higher than that for electronic
filing, because it saves all of that work in the centers.
Chairman Johnson. And last, and then I will yield to my
colleagues. It does seem to me that 10 years is a long time to
reach 80 percent, given how may people are already doing a lot
of this that could be translated.
I think you look at the pace of technological change, and
the amount we at least know about what is currently happening,
it seems to me that our goal should be 5 years.
Mr. Carver. I agree. I think the 10-year figure is probably
going to be good for people who do not now have computers, and
cannot see themselves ever becoming automated. That gives them
enough cushion that they be will be comfortable for the rest--
--
Chairman Johnson. Does the 20 percent not give them cushion
anyway?
Mr. Carver. Yes, I think 5 years is good.
Chairman Johnson. Mr. Lane.
Mr. Lane. Can I just add something on? It seems to me--I
have been coming to these hearings for about 1\1/2\ years, and
I have heard the IRS asked what it costs to process a tax
return, at almost every one of those hearings. It is
inconceivable to me that 1\1/2\ years later we do not have a
firm number on that.
GAO ought to look into it. If they cannot come up with a
number then somebody someplace has to be able to say, Here is
what it costs to process this paper return. And we have heard
numbers. I agree with Bob, you take his number and it is $7 or
$8 a piece. If you say that to IRS, they say Well, no, somebody
said it was $1.17 at the Commission hearings. And the reaction
on that was, well, where did that number come from?
You know, there is an answer here, and it is not that
difficult to get at. I am sure there are going to be qualifiers
that go on, and explaining what the numbers should be, but if
they can't come up with it in 1\1/2\ years, then maybe you
ought to send GAO in, or ask for a committee of volunteer
auditors from our organizations; we would be happy to provide
it. But somebody ought to come up with that number so we can
know what we are talking about.
Chairman Johnson. I was disappointed in Mr. Lubick's
comment this morning, about the $7 being way way high. Because
when you look at the impact on the hiring of temporary
employees, I mean known high costs investments, it is really
hard to imagine that it is not going to save an enormous amount
of money, and increase the accuracy of the whole process. This
Subcommittee has spent years on how we should help taxpayers
protect themselves when they have a difficulty with the IRS.
Anything we can do to reduce the error rate is going to be very
good, not only for the taxpayers but for the bureaucracy.
When you look at the impact that complexity has had on our
tax system, it is very discouraging. That is only going to
dissolve slowly and over time. So anything we can do to ensure
accuracy of data going into the system, protection for the
taxpayer, I think this issue of guaranteeing 24 months
protection from audit instead of 36 months exposure is a very
thoughtful recommendation. You are right, that will motivate
people. And you only qualify if your data is accurate, and that
that accuracy is affirmed by the IRS through its own matching
processes so you are exposed to an intense scrutiny to be sure
that your data is accurate.
Frankly, I do not think we have a right to keep people in
jeopardy for 3 years in today's world, and that I think is a
very thoughtful suggestion. We appreciate your comments today.
While there are many more questions that could be asked by me,
I am going to yield to my Ranking Member, Mr. Coyne.
Mr. Coyne. Thank you, Madam Chairman. I would like to
address my question to the preparers or people who are
representing preparers.
Is there any category of the 120 million filers that
electronic filing is not necessary for or not desirable for, or
just is the wrong ticket for them?
Mr. Harris. Under the current system I think the numbers
speak for themselves. There is a great many people right now
that see no advantage in filing electronically. What we have to
do is create incentives for all of those people now to find
benefits in electronic filing. We see it working in the refund
market. There is a benefit to the taxpayer. There is a benefit
to the preparer to build their business.
Outside of that right now, most practitioners and most
taxpayers see absolutely no benefit in it. I think we should be
able to create benefit for all taxpayers if we really are
thoughtful in thinking in the future.
Mr. Coyne. What would our motive be for doing that? Why
would we want to do that?
Mr. Harris. To motivate all taxpayers?
Mr. Coyne. Yes.
Mr. Harris. Well, I think clearly, whatever the savings is,
whether it is $1 or $6, I think certainly we have a more
effective system.
I think also one of the things that we have to recognize is
one of the efforts of this Commission was to offer a better
service IRS, more service oriented. I think taxpayers play a
role in that. I think if they expect answers on a timely and
efficient manner, they should always be willing to furnish
information the same way. And it is not practical to be able to
ask someone to give me information immediately when I file my
tax return in a very inefficient manner. So I think the
taxpayers, if they really want good service, have a role to
play.
Mr. Coyne. And when you say save money by encouraging
electronic filing, you mean save money for the Service, for the
government.
Mr. Harris. Certainly there is a savings there. I think we
have to offer some incentive to others. Certainly it cannot
cost more to file electronically to the taxpayer. The tax
practitioners must be able to either find a way to save money
or use electronic filing as an incentive to build their
practice.
One of the problems with electronic filing initially was
that the initial focus was on the refund taxpayers. IRS could
input millions of 1040-As in the time it takes to do a couple
hundred thousand complex 1040s. So what the Service did was
focus on volume, which is all the little stuff--the 5 or 6, or
15 data elements.
For example, not a single tax return I prepared last year
could be filed electronically
Mr. Coyne. Could be.
Mr. Harris. Could be. They did not qualify, primarily
because the type of tax returns I do tend to have more Schedule
Cs or more partnerships than are allowable. There were
tolerance levels built into the system. So really what the IRS
needs to do is focus on--to answer your first question. There
is no segment of that $120 million that we would not benefit by
having go in electronically. Everybody would benefit from it.
The practitioners benefit from it because there is one path to
get everything in. You get a benefit you do not get now, which
is a confirmation back IRS got it.
I think I alone support the post office on certified mail
receipts. I mean, we send everything certified, return receipt
requested. I think everybody at the table probably does the
same thing. So there are real incentives to have everything
going electronically. The bigger the returns--the more complex
the data entry elements for IRS, the more expensive it is for
IRS to process that return. I think Bob Carver could back that
up. So why not emphasize on getting those tax returns first. So
there are real incentives for everybody to do it.
Mr. Coyne. Mr. Zimmerman, I wanted to clarify something
that I think you said. You had offered a free electronic filing
service and only 60 percent of your clients took advantage of
it, is that right?
Mr. Zimmerman. Forty percent of our clients took advantage
of it, 60 percent did not. What we have to come up with is a
way to show that there is a perceived value to the clients to
file electronically. They have to want to do this. There has to
be a reason to do this. Just to save the IRS money is not a
good enough incentive for a taxpayer. There has to be something
in it for them. And I think it is part of the education
procedure.
One of the things that we find is a majority of our younger
clients will take electronic filing. The older clients are much
more hesitant to file their returns electronically. That is why
it is an education procedure. That is why we suggest that the
IRS mount a massive campaign to educate the public on why it is
important to do so and what the benefits are.
People just get into the habit of mailing that tax return.
They like to take it home. They like to review it before they
drop it into the mailbox. When it is electronically filed, we
push the button, it is gone, and for all intents and purposes,
they do not get another opportunity to look at that tax return.
So, again, it is just educating the general public on the
benefits of electronic filing. And certainly one benefit is
those returns are correct. The paper error rate of 20 percent
is reduced to less than 1 percent on electronic returns. That
really gives a client peace of mind, knowing that that return
is accepted, has been received by the IRS, and it is, for all
intents and purposes, correct.
Mr. Lane. Can I add something to that? There is a
tremendous--and we talked about this before in hearings--There
is a tremendous mythology among the taxpayers about their
dealings with IRS, and a sizable percentage out there will say,
Well, I do not want it to go electronically to IRS because I
have a higher chance of getting audited, that is true. We
still, 25 years later, are explaining to people, if you use the
label from the tax package it does not mean you have a higher
chance of audit. But they absolutely believe those three codes
up there, that are basically a check digit so IRS can save some
keystrokes, actually code their return for audit, so they throw
it away.
We have this tremendous mythology built up. It is almost
like saying, as long as I have had this Ways and Means pitcher
here, a bat has not flown into the room, so that keeps bats
away, and it is crazy. But that is the logic they have. So what
we have to do is focus on educating the taxpayers, and the best
thing the Service could do would be to come out and say, We
have less audits on electronically filed returns than we do on
other returns, you would get a stampede of people in to file
electronically, and they need to publicize that. The problem is
that the Service would be reluctant to do that because they
would think they would be putting out a full-page ad for
anybody that wanted to do a tax refund fraud scheme to just
start filing electronically.
But that is the case. Tom is right. It is an education
issue with taxpayers.
Mr. Coyne. Thank you.
Chairman Johnson. Mr. Portman.
Mr. Portman. Thank you, Madam Chair, and thanks to all of
you for being here. I noticed in looking at the Commission
testimony in preparation for this, that each one of you also
has testified before the Commission, with the exception of Mr.
Wolfe and Mr. Zimmerman, who were represented by your able
senior executives. One of them is sitting behind you, Mr.
Zimmerman, who did a great job for H&R Block. But I appreciate
all the time and effort that you have put into this.
This is really exciting because there are very few things
in the world that are truly win-win, and this is win-win for
the taxpayer and the IRS. It is unbelievable to me that we are
in this situation where we have not made more progress, because
it is so clearly a classic win-win situation. And Joe Lane
mentioned that it took us less time to get to the moon than we
are laying out for this 80-percent filing. It took us 8 years
to get to the moon, and since Joe is surely as charismatic as
John Kennedy, maybe we should shift from 10 to 8 years.
But this is just a great example, I think, of being able to
do something that is good for the taxpayer, that also happens
to help the government and the IRS quite a bit.
Let me just ask Mr. Carver one general question, because
you have been great before this Subcommittee and the Commission
on arriving at cost data and so on. I have a more general
question though, because you did run the service centers and
have real institutional knowledge of the Service.
Just personally, if you do not mind--we are off the record
here, right? Why has the IRS not moved more aggressively over
the last decade and a half in the electronic filing area? What
is your personal view of that?
Mr. Carver. I have probably a half dozen personal views. I
think the simplest reason was, the beginning of their
modernization effort, the technology they envisioned was
scanning and optical recognition. Every return that came in
electronically removed returns from that, and their business
case and how to pay for it. I think that was some of the
beginning.
The second part of it though is, we talk about taxpayers
being reluctant to do electronic filings; revenue agents and
criminal investigators who do statistics of income are having a
tough time figuring out how not to have a piece of paper that
somebody signed, knowing what they were signing, with that
penalty of perjury. They just do not believe you are going to
get the truth, and they are having a tough time managing their
world of audit, or statistics, or criminal investigation
without paper and evidence. And that is a smaller group, but
that smaller group is at the senior levels of every
organization. And it is the large car/small car syndrome, I
think. I really believe that is it.
Mr. Portman. One of the outcomes of successful enhanced
electronic filing would be fewer temporary employees at the
service centers, and fewer service centers, I suppose.
Mr. Carver. Yes.
Mr. Portman. And I honestly do not think that is the reason
we have not moved as aggressively although one might surmise
that having more employees at the IRS might have been one of
the motivations for not moving to this, because you will have a
smaller and more efficient IRS--I do not think that was the
reason. I think there are other reasons. You stated cultural
reasons; the fact that certain technologies were viewed as the
preferred method. But again, we have an opportunity here to
meet all of those concerns, and I think have benefits to the
Service, the taxpayer and so on.
There are a lot of questions I would love to ask, and maybe
I can talk about them in private later. But this Subcommittee
has to come up with this report, and Ms. Johnson has asked most
of the good questions. I think we have gotten good answers. The
two key ones are the fee and the extension, I think, that we
still need a little more input on.
Let me just be clear. I think H&R Block stated its position
clearly on the fee and the extension. In terms of the general
notion--let us stick with the fee for a second--of paying a
fee--forget who it is paid to--do we have agreement from the
other panelists that that would be a good incentive to put in
place?
Mr. Harris. The payment to the practitioner or the
transmitter?
Mr. Portman. Yes.
Mr. Harris. I think there needs to be an incentive. That
would help. I mean it would certainly move some people to give
them $2 or $3, or whatever the number is for each return they
file electronically.
Mr. Portman. In the legislation though there is no
stipulation as to the amount; it is a fair market cost.
Mr. Harris. I think there has to be clear incentive to the
practitioner community that this is in their best interest. I
do not know what that number is. I am not even sure what that
incentive is. It could be something as out of the box as
furnishing them the software at no charge to electronically
file the returns, but there needs to be incentive to move
people into electronic filing.
Mr. Portman. OK. Extension of deadline. I am sorry. Mr.
Carver.
Mr. Carver. Just a quick one. The realities of those people
that work in the service centers now--the temporary employees--
if you do that same entry work, because you have to sit there
and enter every item in the software, whether it is at your
home PC or whether it is in the H&R Block office of a
practitioner's office, there is a labor cost. And I think it is
fair, that if the government is getting a much better quality
product, and able to do their job better, that they split some
of the savings they are having for not doing that labor, back
with the people they are transferring the labor costs to. That
is my personal feeling about it.
Mr. Lane. Can I come in under fee issue? The fee issue, as
we have pointed out in our testimony, there are other ways to
incentivise practitioners to get involved in this. The fee is
an interesting concept, and as I said, we see the package as a
consistently woven cloth. It is a toolbox, and there are 10
tools in it, and they are all needed for different things.
The problem you have with the restriction on $2 or $3,
whatever it is, but if they cannot be charging the client for
electronic filing--The problem you have with that, is that for
a small practitioner with 200 or 300 clients, you are talking
about a $600 payment, and in exchange for taking on all of this
additional processing work, which if they are not able to
charge the fee to the client, they are going to be paying a
transmitter, because they do not transmit themselves; they are
going to be paying a fee to some transmitter.
So the problem you have is the technical support, if it is
not bundled into their software package--some software packages
provide the electronic filing option for no additional charge.
And I think what will happen is--we happen to support a
marketplace resolution to this problem. I think what will
happen is, if the IRS accepts all forms, and incentivises it
along the lines that are suggestions we proposed in our pilot
test--let us file powers of attorney electronically, let us
file transfer requests electronically, let us file balance-due
returns on March 15, and not transfer the credit until April
15. I mean there are all sorts of incentives you can build in.
The market will exist. You will get a tremendous increase in
electronic filing, without the necessity of having to have the
Treasury shell out this money.
I have some concerns and our members have some concerns,
about taking away the ability to get the technical support you
need to support filing these things electronically, because
they are complicated processes; they are not just pushing a
button and sending it off in many cases. Sometimes they bounce
back, and then somebody has to do the work on resolving that.
That whole issue for the average firm, of $600 that they
would get back is probably not worthwhile. It would be a
disincentive to the practitioner. But as we see it; there are
some cases it is going to be an incentive, so we did not object
to it, but I think we have some problems the way it was worked.
Mr. Portman. It is part of the woven fabric, plus over time
those fee structures will adjust to take that into account.
Mr. Lane. Exactly. The marketplace will determine what the
pricing structure will be.
Mr. Portman. My time is up. Just on the extension, and Mr.
Zimmerman, I understand you are opposed to the fee and opposed
to the extension. Let me just ask a general question on the
extension.
As part of this woven fabric as Joe said, because it is a
combination of many different incentives, is there any
objection specifically to the extension as part of this series
of incentives?
If I have a moment, Mr. Zimmerman, I will let you speak,
subject to the Chair's cutting me off because my time is up, as
to your concerns on the extension.
Chairman Johnson. You can respond.
Mr. Portman. Your concerns on the extension, and again, I
thank you all for your work.
Mr. Zimmerman. Yes, I think there is excess capacity in the
system now, certainly in the many operations out there. It is
certainly true in H&R Block offices. We've got excess capacity
from the middle of February clear to the 1st of April to file
more returns electronically, prepare more returns
electronically. So I do not believe moving the deadline is
going to be that large of an incentive or that it is really
going to dramatically increase the number of returns.
The fee issue is something that I think is important, and
the first step that we need to do, before any incentives are
discussed, is to figure out exactly what we are dealing with.
How much does it actually cost us to process a return at the
IRS? Before we can start divvying up the money and the savings,
it would really be nice to know exactly how many dollars that
is. And then, if there are sufficient dollars, and it makes
good business sense to do that, incentives might be the way to
go. But certainly, just throwing this out on the table, and not
knowing where to start does not seem to be too prudent to me.
Chairman Johnson. Ms. Thurman.
Ms. Thurman. You have not really had much input into this,
and you actually are one of those that proposed the $3 or
whatever fee. Maybe you would like to explain to us, and I
realize your position is a little different because you are a
transmitter, and not necessarily one who puts everything
together. You just kind of bundle it and send it to us. So
maybe you would like to give us some explanation on your
reason.
Mr. Wolfe. This idea is something that the Commission came
up with. We supported the Commission's position.
We believe that cost is the number one, or most significant
reason people do not file electronically. We would like to get
that cost down to zero. One of the ways that we think would be
most effective is to pay an incentive. Specifically we believe
the incentive should be paid to the transmitter, because the
costs of electronic filing--not what taxpayers pay, but the
real costs of doing it--are primarily incurred by the
transmitters. Transmitters have the computer systems, the
programmers, the customer service staff, the technical support
staff that make this happen. We believe over time volume will
increase so that we can get the actual cost of transmitting the
returns down to just several dollars. Our belief is that if
that can happen, and if an incentive then is paid to cover
those costs, there is no reason that we as a company should not
provide that free to all of our customers, including
professional preparers, as well as in consumers. If electronic
filing is provided for free, then hopefully that will extend
all the way out to the individual taxpayers.
Ms. Thurman. I am not sure that I understand all of this.
If my accountant decides to send my tax return by electronic
transfer, he cannot just do that? Do I have to go through
somebody? Is that by law?
Mr. Harris. Some can. Some have made the decision to have
the ability to do it themselves.
Ms. Thurman. What is the cost to them to do that if they
decide to do it in-house, without anybody else in the middle?
Mr. Lane. It depends on the software product they have.
Ms. Thurman. I am sorry?
Mr. Harris. It can vary from software product to software
product.
Mr. Lane. It depends on the software product. It can be 20
cents, it can be $20, depending on the package that you
purchase. Some of the software vendors have an additional
charge for each tax return that is submitted electronically.
And it also depends on whether or not there are any financial
products in connection with it. For example, if there is a
refund anticipation loan that is connected with it, there are
additional fees on top of that. And then that has to go through
a transmitter because there is not a direct transmission from
the practitioner's office to the Service, because there is a
bank involved, and then there is a financial product involved.
So it has to go through a transmission source, and then the
bank. So there is a controlling element that is outside the
practitioner's office when that refund comes back through.
I confused you more.
Ms. Thurman. I do not know that I am confused necessarily,
as much as that I think there is a lot more to this whole idea
of transmitting electronically that is outside of the realm of
IRS, as much as it is within the business world in itself.
Mr. Lane. That is right.
Mr. Harris. It is more than just pushing a button. I think
the perception is the software that we use to prepare manual
returns or paper returns, all you would have to do is push a
button and it would go electronically, and it is not that
simple. There is more work involved. There is more cost
involved that the practitioners now have to charge for to make
money, or they have to have the increase in business, which
right now the refund marketplace provides.
Ms. Thurman. So who then controls all of this? I think what
I am trying to get to is that it seems that it is easy for us
to talk about IRS on this end as far as the electronic filing,
but what I am hearing you say is there are a lot of other steps
that are incurred that really have nothing to do with IRS at
all, and so then, if that is controlled, who controls that, and
who stops those barriers from happening, and how do I get to
that point that I can push that button and send my filing?
Mr. Harris. I think that the ECAG that this bill is putting
in place is extremely important. It has to bring all parties
together to develop a program that is beneficial to everyone,
including the taxpayer, the practitioner, and the IRS. And I
just do not think that program exists today.
Ms. Thurman. So where is Bill Gates when we need him?
Mr. Langer. That program really does exist today with many
of the software packages. There is a lot of integration done
with tax packages and transmitters and all electronic filers,
trying to make that as easy as possible. There is a cost to
develop the software; there is a cost for support, which is
mentioned here. And the cost for the telephone communication is
actually probably the smallest cost of that whole process. And
so that can happen today. Companies like Intuit, other tax
preparation companies, actually do have it, where you can
basically press a button; the file is created. It goes through
validation. It is transmitted either directly to the IRS or to
the transmitter, and then goes on from there. So that really
does happen today.
Mr. Wolfe. To give you a quick example, with TurboTax and
people who file from home, our costs last year to actually
process a complete electronically filed return were $10. We
believe that we can drive those costs down dramatically. But
those costs included computer costs, costs that we paid to
outside companies, such as Nelco and NUTS, as well as the
significant costs of Intuit personnel in call centers that take
calls, and are answering questions from individual taxpayers
about how electronic filing works.
Ms. Kelley. And if I can make the comment, that is true in
businesses as well, business taxpayers. They cannot just flip a
switch, and there is a significant amount of internal
preparation that goes into that as we saw with the EFTPS.
Mr. Lane. Let me give you an example, just of some of the
additional strokes you have to do. When you file a paper return
most practitioners do not key in all of the W-2 data; they only
key in the wage data on there, because for calculation purposes
that is all you need. But if you file an electronic return you
have to rekey everything that is on the W-2 because that has to
get transmitted electronically. So there are additional
keystrokes in the practitioner's office.
This is what I was talking about before, where when you
start to do parallel systems in an office you have a tremendous
potential to mess up and have it come back, if the part-time
person you have working for you does not understand the
difference between an electronically filed return, what path
that follows once it leaves the preparer's office as opposed to
a paper return. So there are additional steps that complicate
it.
Mr. Zimmerman. Let me run down just a couple of things
here. These are some of the steps in the electronic filing
process. We have our preparers, 85,000 of them, that we have to
train and educate on how to electronically file returns. We
have our software development group that develops our
electronic filing package. We have our support group which
supports that electronic filing package because the returns
that we send to the IRS are bounced back because of errors, and
we have to correct those.
We have all of our phone lines in our 8,500 offices,
several thousand of them out there that we use to file directly
from our offices to our third-party transmitter. We have all of
our advertising that I mentioned, that we spend up front to get
people interested in coming in to electronically file their
return. We have our transmitter cost that we pay to a third
party. We've got all of our back office costs of bundling up
all the 8453s, attaching the W-2s, and mailing all that
information to the IRS; getting letters back from them saying
that we are missing 8453s and W-2s; going back out to the
client, getting that information; remailing that information
back in to IRS so they can do their verification. And the
paperwork nightmare of the 8633s. Every time we move a district
manager around I have to sign off on all of these forms so that
we can electronically file returns.
So, if you start putting all those costs together, and if
you have a good high quality electronic filing product, it is
not inexpensive.
Mr. Carver. I just need to add one thing. This is a
transition cost. As the IRS is going to have downsize as
electronic goes up, and change the way they do it, the industry
on the outside is going to do it. I think Joe's case is very
clear about two filing lines. When it gets to be one all the
software people in the country will have to provide that, and
so it will be seamless at that point. But in the meantime there
is some transition costs. So I think if you make it 10 years,
these costs will hang around a long time. If it is a shorter
period of time than that it is amazing how fast the software
and the rest of the industry can adapt to what their customers
want. It is incredibly fast.
Ms. Kelley. And the same thing is true with businesses, and
I say with complete confidence, that to the extent that
business can work with government on these electronic programs,
their costs will go down.
Chairman Johnson. Will the gentlelady yield.
Ms. Kelley. All right.
Chairman Johnson. I understand the point about two systems
and the problems that that creates, and the inevitability of
the two systems situation during the transition. But I do not
quite understand Mr. Zimmerman's comments in the light of Mr.
Wolfe's comments.
Many of the costs that you point to, Mr. Zimmerman, you
also have with paper filings. And what are the unique costs,
over and above, for an electronically filed return, and are
there any offsetting savings?
And Mr. Wolfe, when you say $10, are you saying that it
cost you $10 over and above what it would cost you to file that
same return manually, through paper?
Mr. Zimmerman. It is very hard right now for us to break
out these costs between our electronically filed returns and
our paper returns, just because they are dual systems, and most
of it is all blended together. So I cannot give you an exact
cost of what it cost to file a return electronically versus on
paper.
Hopefully, once we get systems that are integrated, it will
be less expensive, we can charge less, and certainly we are
going to lower our fees this year and we are going to see if
that helps drive more business in, and helps us increase the
number of electronically filed returns.
Chairman Johnson. But for instance in advertising, you are
going to advertise anyway. It is a question of what you say in
the advertisement, and you are going to advertise in a way that
you think will maximize your position in the market. And if you
are advertising electronic filing in your advertising, it is
because you think it is going to expand your customer base.
So I do not know that we can attribute your advertising
costs to the cost of electronic filing.
Mr. Lane. Could I add something? He does have a cost. The
way the current system is set up, if he does a 1040-EZ for
somebody, and files it, that is a 1-page form. If he files it
electronically, he still has to send IRS the 8463--I mean the
thing with the signature, and the W-2s, so he has in effect
doubled his costs by sending that to you electronically,
because he still has to send in a piece of paper and a W-2
attached to it, which he might as well just have done with the
1040-EZ. So he has incurred twice the costs to file that return
electronically than it would have been to just sent it to you
on paper.
Mr. Zimmerman. There are incremental costs to doing this,
and again, I think as we work together we can drive those costs
down, so it becomes cost effective for both the IRS and for
taxpayers to transmit their returns electronically.
Mr. Lutes. Our company only does electronic filing, and we
create software only to electronic file. And we have a
development center of about 25 programmers that do Federal and
State electronic filing software, and that is all we do. And we
also have support staff to have customers call in about only
electronic filing issues. We work with companies like Intuit.
They handle all of the tax preparation calls; we handle the
electronic filing costs. And so the costs of what we have done
really is the electronic filing cost alone. So we can identify
that cost very easily.
Chairman Johnson. And what is your cost per return?
Mr. Lutes. It kind of varies, based on the company a little
bit, but it can range from anywhere from $4 to $7.
Chairman Johnson. Mr. Wolfe.
Mr. Wolfe. The $10 number that we quoted is for people
using our product at home. We find that people that use it the
first time generally have more questions, and it costs money to
answer their questions. When electronic filing is being done
through a professional preparer, they get very good at it, and
so there are fewer questions that are asked of us.
Our software is perfectly capable out of the box of
printing a paper return, so the costs that we incur, the $10
that we incur for electronic filing, are all incremental costs.
We believe, as several others have testified, that we can drive
those costs down dramatically. We are implementing new systems
that will be fully functional this year, and even more
functional next year, if that is possible. And we think that
those costs are going to come down to the $3 range very very
quickly as volume increases.
Chairman Johnson. Thank you.
Ms. Thurman. I think you made a very good point about this
issue, that the longer we linger, the longer it is going to
take people to really get into this. And so, with the
Commission--and there have been these recommendations for IRS
and what they should be doing--if you were given the
opportunity to tell those people out there in the world that
were trying to get this done electronically, what would you
tell them that they needed to do quickly? What kind of
recommendations would you be giving them?
Mr. Carver. Of the 70 percent that are already in
electronic format today--and we are talking about
practitioners, we are talking about the business returns and so
forth. And I would start this meeting process, this committee
process, to meet with those people to find out what it would
take them--how quickly they could do it.
Ms. Thurman. And they have not done that to this point.
Mr. Carver. They have not done that, and they need to hear
from those people, what it would take to get there in 2 years,
or 3 years, or 5 years. And if you want to pay what it takes
for 2 years, then you could do that. If you think the 5 year or
the 3 year is a better one, then that is the way you go.
Then the next step would have to be for those people who
are not presently filing electronically, or do not have a
computer, and then you need a separate kind of scale for them.
But to say 10 years for everybody misses this opportunity of 70
or 80 percent of the volume that is there, ready for some
significant work; some hard work, but some quick work.
Ms. Thurman. I want to ask Mr. Lane one other question
because you emphasize this point in your testimony about the
issue of the window period of time, from the 24 to 36 months.
Quite frankly, what I do not know is what the answer from
IRS would be. Maybe you can help me with this, since they are
not here. But if we were to say that that was the incentive
instead of money incentives or other, which is a lot easier
probably to carry out, why would they tell you that that is--or
they may not tell you that that is not something that could
happen.
Mr. Lane. Well, putting myself, in the guise of speaking
for the IRS--I did that at one point; I do not do it anymore.
Ms. Thurman. Oh, but give it a shot.
Mr. Lane. I would suggest that their initial reaction from
a cop perspective would be to resist it. The reality is, they
are giving away nothing if they analyze it with a cold eye, and
look at it unemotionally.
Very few tax audits are started in the third year of the
statute, most of them are started in the year after filing or
the second year after filing. Very few are open in the third
year after filing. Very few electronically filed returns are
audited to begin with, and they have an overall audit rate at 1
percent. So you are not looking at a significant giveaway. I
think they would resist it, but if they were forced to look at
it and really consider it, they might go along with it.
Mr. Carver. If I may just add a quick comment. I think they
would be very supportive of it. They cannot do their audit
until they get the data through, and that data takes 18 months
today. When you guarantee them the data is there in 6 months
they will be ready and willing to change it, but not until.
Ms. Thurman. Mr. Carver, I agree, and in fact that has been
a contention that I have talked with some other folks about,
because there has been some legislation that has been
introduced. But some are saying, well, if we do not get the
information how can you do this, and why would you limit us. So
there is a lot of controversy over that.
Madam Chairperson, I appreciate you giving me this
opportunity to do extended questions, and thank the panel.
Chairman Johnson. Thank you, Ms. Thurman. I do want to just
ask you one other question. Repeatedly the issue of the forms
that cannot be received electronically have come up, and Mr.
Lane, you particularly have mentioned over and over again that
we need to be able to get all the forms on. And clearly the
whole 1040 community is the biggest community, and their forms
are not acceptable yet.
I do not see that we can reach the 80 percent unless we can
get more forms on, because 80 percent of the taxpayers are not
going to be eligible. So at what pace do you think the forms
could be accepted by the IRS. What timeframe would we be
looking at? Because clearly 100 percent of form acceptance is
going to be really important to getting this system moving, and
all the taxpayers involved.
Mr. Carver, do you have any thoughts of that, and then I
will open it to all of you.
Mr. Carver. Yes, I do. The reason that there are so many
forms and schedules now that are not on there, is because of
the state of the equipment they have inside the service
centers. It is old computer equipment that cannot handle any
more complexity----
Chairman Johnson. But just to stop right there 1 minute.
That is going to take us quite a few years to fix, is it not?
Mr. Carver. No, ma'am. I think that the equipment they need
to replace it with is off-the-shelf kind of equipment that
exists today. It is a matter of putting enough programmers on
it to include that into the program. If you wanted to farm it
out to the private community, they could probably do it a lot
quicker. I mean, I just think it is a matter of how many
resources you can get----
Chairman Johnson. Do you think this is a couple of years
project to get all the forms on?
Mr. Carver. Absolutely. At the outside?
Chairman Johnson. At the outside. The rest of you.
Mr. Langer. I made a recommendation to the Service this
spring, on how they could accept all forms electronically this
year. They have the ability to accept what they call
unformatted statement. And with any software company they have
the ability to print the return, and print it basically in an
unformatted way, much like the form would appear, but only in a
text format. And that would allow any form to be filed
electronically, and really not change the process that they
already have; just allow more statements to be attached to the
form electronically.
They like the idea; they have not acted on it at this
point.
Ms. Kelley. Ms. Johnson, if I may. I think as well the
expansion of electronic filing into business returns and
business information documents, can really spike up what IRS is
receiving, because as I stated before, some of those returns do
not have the kind of complex schedules that some of these
individual tax returns have.
Also, if you take a look at market segmenting, when I was
on IRPAC, the IRS Information Reporting Program Advisory
Committee, there was a gentleman from a major financial
institution that raised his hand and said they could give IRS
50 million returns tomorrow, if they had the equipment to
accept it. So, I think if the IRS looked at, instead of
mandating everyone, look at the kind of companies that are
willing to give them large volumes, and go after things in an
incremental fashion, which seems to go against their
implementation philosophies to date, that you might see a very
large return in a shorter amount of time, than trying to figure
out the entire universe. And again, working with the gentlemen
here and other kinds of companies that can provide you with
that large return on a smaller investment, I think I would be
beneficial to upping your volume.
Chairman Johnson. I appreciate your patience in this rather
long hearing, but we do very much appreciate your input. Thank
you. The hearing is adjourned.
[Whereupon, at 2:28 p.m., the hearing was adjourned.]
[Submissions for the record follow:]
Statement of American Bankers Association
The American Bankers Association (ABA) is pleased to submit
this statement for the record in connection with the September
9, 1997 hearing before the Subcommittee on Oversight of the
Committee on Ways and Means of the United States House of
Representatives on the recommendations of the National
Commission on Restructuring the Internal Revenue Service
(Commission) to expand electronic filing of tax returns.
The ABA brings together all elements of the banking
community to best represent the interests of this rapidly
changing industry. Its membership--which includes community,
regional, and money center banks and holding companies, as well
as savings associations, trust companies, savings banks and
thrifts--makes ABA the largest banking trade association in the
country.
At the outset, we would like to commend Chairman Nancy
Johnson (R-CT) for holding this hearing to further examine the
June 25, 1997 report of the Commission. We would also like to
commend Representative Rob Portman (R-OH) for his work as co-
chairman of the Commission and for the introduction, along with
Ben Cardin (D-MD), of the ``Internal Revenue Service
Restructuring and Reform Act of 1997'' (H.R. 2292). This
important legislation would provide a number of incentives to
encourage the electronic filing of tax and information returns.
It would also authorize appropriate amendments to the Internal
Revenue Code to ``facilitate paperless electronic filing.''
The ABA has worked closely with the Commission to develop
proposals to improve compliance through the effective use of
advanced technology. The ABA particularly supports the
Commission's recommendations to expand electronic filing of tax
and information returns. Electronic filing would significantly
improve efficiencies and promote the goals of the financial
services industry to expand new products and services while
also promoting Internal Revenue Service (IRS) efficiency and
other objectives.
The Taxpayer Relief Act of 1997 (P.L. 105-34) [hereinafter
TRA] contains a provision, which if left uncorrected, will
impede rather than encourage electronic filing. A critical
component of the streamlining of the electronic filing process
is reducing the number of paper checks written by taxpayers to
the IRS. The payment of taxes by credit card is an important
subcomponent of reaching that goal. Permitting taxpayers to
make tax payments by credit card is also expected to improve
taxpayer convenience and satisfaction. The TRA permits the
payment of taxes by credit card but prohibits the payment of
any fees by the IRS for use of a credit card tax payment
service. By contrast, the instant legislation, H.R. 2292,
introduced prior to passage of the TRA, contains a comparable
provision that would also provide for a separate budget
appropriation for payment of credit card fees. ABA urges you to
correct the current law and pass legislation that would allow
the IRS to pay appropriate merchant fees in connection with
credit card payment of taxes.
We believe that most taxpayers will not be able to use
their credit cards to pay taxes under the TRA provisions.
Typically, one bank is responsible for processing a merchant's
charges and for servicing the merchant's account. Credit card
companies incur costs and receive payments from merchants for
those services, and we believe the IRS will not be able to
receive those services free of charge.\1\
---------------------------------------------------------------------------
\1\ By way of background, there are generally two parts to a bank
credit card transaction. The credit card ``issuing bank'' handles card
issuance and the cardholder relationship. It receives income from
consumers to cover its operational and processing expenses. The
``acquiring bank'' handles processing for the merchant (in the instant
case, the IRS) and receives income primarily from a ``merchant discount
fee'' to cover operational and processing expenses, credit risk, and
expenses to support the merchant (including authorization, merchant
accounting, customer service and supplies).
---------------------------------------------------------------------------
It is axiomatic that anyone buying a service should pay a
fair value for said service. There should be no special
legislative exception made for the IRS. We believe that the
implication that corporate taxpayers should provide financial
services to the IRS, at no cost to the IRS, establishes a
dangerous precedent with respect to the financial services
industry and others. It has been suggested that the costs of
providing credit card services be passed on to the taxpayer/
customer. We do not believe that is the proper solution. The
IRS will likely receive a negative reaction from taxpayers that
will only serve to increase taxpayer dissatisfaction with the
IRS and the entire income tax process. Our proposal to permit
IRS payment of credit card merchant fees would not provide any
special treatment for banks. Indeed, it would simply restore
the level business playing field that the TRA inadvertently
upset.
Currently, governmental entities at all levels, state and
local as well as federal, are allowing taxpayers to make
payment by credit card. The TRA provision prohibiting the IRS
from paying ordinary merchant fees departs from current
practice and prevents credit card banks from being able to
offer card services to the IRS and, ultimately, to consumers
who wish to expedite the filing and payment of federal taxes
through the use of credit cards.
Conclusion
The ABA urges you to pass legislation that will allow the
IRS to pay the appropriate merchant fees in connection with tax
payments made by credit card. Without modification, the current
law will continue to impede and discourage the full
implementation of electronic filing of tax and information
returns.
We appreciate having this opportunity to present our views.
American Society for Payroll Management
New York, NY 10025
September 18, 1997
A. L. Singleton
Chief of Staff
Committee on Ways and Means
U.S. House of Representatives
1102 Longworth House Office Building
Washington, DC 20515
Honorable Ways and Means Committee Members:
ASPM is a professional association of the senior managers who
control the preparation of payroll and employment taxes for large
employers in the United States. We represent large employers, systems
vendors and tax service providers. As a group, we collect and account
for a major proportion of the income and employment taxes the Internal
Revenue Service receives.
We take great pride in collecting and paying the taxes exactly as
required by law in a cost-efficient and timely manner. However,
Congress and the IRS could make our tasks easier by changing many of
the ways they do business.
Although there are many areas in which IRS restructuring may be
appropriate, ASPM would like to see them attack Simplification and
Reduction of Reporting Burden first. There are several initiatives
which could significantly reduce employer burden as well as streamline
IRS into a more effective operation. Some of the best initiatives, such
as the Simplified Tax and Wage Reporting System (STAWRS) have stalled
before the complexity of reforming the existing system and because of
the inability of federal and state agencies to agree to standardized
approaches. We believe that Congress must keep initiatives to simplify
and standardize reporting systems alive, if the cost of tax collection
is to be reduced. It is not desirable for Congress to issue mandates
for new reporting programs to the states and employers. However, it is
very important that Congress empower the IRS and SSA with the ability
to set standard formats and definitions for all employers and federal
and state agencies to use. State and federal agencies should be
encouraged to exchange data in these standard formats, where
appropriate, rather than require employers to report the same
information repeatedly to different agencies in slightly different
formats. Tax simplification will be difficult, if not impossible to
achieve without standardization of formats or input requirements. SSA
and IRS have a partnership in the collection of wage and tax
information that needs to be streamlined and strengthened. We believe
that state and federal agencies, such as INS, should leverage their
efforts from these existing systems and not require additional,
duplicate layers of reporting. Congress, not IRS, is responsible for
ensuring duplication does not happen. No real progress will be made on
tax simplification and reduction of employer reporting burden until
Congress mandates a national harmonized wage code.
ASPM believes a steady program of systems modernization must be
pursued at IRS. Employers are rapidly changing and developing new
technologies for exchanging data, imaging and networking. We have
readily partnered with IRS and SSA in moving to new technologies, but
IRS must pursue its upgrades in a deliberate fashion. We can support a
limited number of enhancements each year, so it is incumbent upon IRS
to move ahead steadily and avoid falling behind the current
technologies and then trying to suddenly leap ahead. It is the crash
modernization program that leads to millions of dollars of wasted
modernization efforts. We strongly urge Congressional, OMB and IRS
budget makers to keep IRS systems modernization efforts funded at
consistent and proper levels, while requiring IRS to rationalize and
automate these systems. This modernization effort is a partnership
between employers and the government agencies, because it reduces the
administrative cost and it lessens the burden of tax collection. Goals
for electronic filing will not be met if IRS does not pursue a measured
and planned systems modernization effort.
ASPM believes IRS should strengthen its out-reach programs aimed at
employers. Since employers collect the vast majority of the tax, it is
clear employers must have timely, accurate and understandable
regulations, guidance and publications, if we are to fully comply with
the law. Without its partnership with the employer community, the IRS
could not function. Yet, much of IRS regulation is aimed at levying
egregious penalties for minor compliance failures, such as the late or
insufficient deposit penalties. Severe penalties should be limited to
chronically non-compliance employers, the fraudulent taxpayer, or
grossly negligent taxpayer. The consistently compliant employer should
not be subject to egregious penalties for minor or rare human errors.
The complexity of the laws that employers are expected to administer is
mind-boggling to anyone who is not regularly involved. It requires a
great deal of effort to know all of the restrictions, reporting and
deposit requirements. Compliance and collections can be helped only by
the IRS taking a proactive and positive role in educating employers
about current requirements and involving employers in pending changes.
Improvement in the numbers of employers using electronic filing options
can increase only if outreach programs educate them about the
advantages and technical requirements of electronic filing. It is very
interesting that IRS is proposing closing its Martinsburg Computing
Center telephone support center at the same time it is starting
initiatives aimed at improving customer service. The Martinsburg phone
support center has traditionally been very responsive and has delivered
high quality customer service to employers and other electronic filers.
Martinsburg is widely considered to be one of IRS's most successful
call sites.
With OMB and Congress constantly searching for new revenue sources,
such as non-cash employee benefits and ever faster deposit deadlines,
the complexity and difficulty of the payroll and employment tax job is
increasing all the time. It is extremely difficult to withhold more
than an employee was paid to cover a non-cash employee benefit and to
make that deposit on time. Congress and IRS in writing the legislation
and regulations need to keep in mind the business systems that underlie
these processes. It is very difficult for a payroll system to process
payments made from the Accounts Payable department, which may be in
another office or even in another city. While payroll withholding is an
extremely effective tax collection tool, it cannot be used in such a
way that it requires the employer to take on the employee's role in
proper withholding election, nor can it require the employer to use
information that it does not have. Out-reach programs, such as employer
conferences, improved publications, improved communications and high
quality telephone support more than pay for themselves in improved
compliance and reduced efforts spent on error correction and prompt tax
collection. ASPM believes that Congress should either encourage or
require the IRS to work with industry representatives, such as ASPM, in
designing processes, developing procedures, and implementing
legislation that affects a specific industry or segment of industries.
Too often, IRS develops a process or writes a regulation and then asks
for public reaction after the fact. It would be far more efficient for
the IRS to have those affected working with the IRS. This would reduce
the likelihood of major flaws, the need to rewrite or redesign and
would increase industry buy-in.
The Internal Revenue Service frequently takes the blame for things
that Congress does. It is very tempting for Congress to use tax
penalties or loss of tax exemption for benefits in order to enforce
social causes. This places IRS in the position of enforcing provisions,
such as discrimination testing of benefits plans. ASPM urges you to
place enforcement of social goals with the enforcement organization in
the department or agency responsible for that function, such as DOL or
INS. It is important for the cost-effectiveness and efficiency of the
IRS that it stay focused on its core mission; revenue collection. Such
unrelated regulatory requirements make electronic filing of information
and tax returns from employers much more difficult and error prone.
It is important that Congress pass legislation that is clear and
enforceable. It is just as important that IRS write timely regulations
that allow employer compliance to be effectively and efficiently
implemented. It is important that Congress empower IRS to reward
compliance and punish noncompliance. The worst thing Congress can do
from a compliance perspective is to pass retroactive changes to the tax
law. This almost always rewards the non-compliance employer and
punishes the compliant employer. The repeated lapsing of the tax
exemption for educational assistance and its retroactive extension has
encouraged employers to take a wait and see approach toward compliance.
It has also greatly complicated the job of developing automated systems
to perform electronic filing.
We would like to recognize the progress SSA and IRS have made in
electronic reporting of W2 information, especially the download of
state information from SSA/IRS files to state revenue offices.
Currently, employers are sending W2 information by magnetic media or
paper to the Social Security Administration (SSA). SSA captures federal
and state data from the W2s, then passes the data to the IRS. SSA or
IRS could transmit the data directly to the States. Getting the
information in bulk and a standard format would have to be much more
efficient and effective for the states than receiving large numbers of
separate transmissions from thousands of employers. The current process
utilizes very old technology requiring the manual loading of tapes and
the processing of batch programs. This causes long delays. IRS
frequently does not get the electronic submission information until six
months after we submit the information. This time lag needs to be
greatly reduced. The transmission from the federal agencies could be
made via electronic file transfers and automated to eliminate a large
number of what are now manual tasks. It would also benefit employers,
especially large employers that do business in many states. Currently,
employers must create magnetic tapes, cartridges or paper for each
state and file this information separately with a different set of
requirements for each state. This is a very costly year-end mandate for
employers and for the states receiving the information. It would take
federal leadership to mandate a standard format, but would not require
significantly more federal or state effort.
Electronic submission of W2 information is in pilot and should be
put on a fast track, so it could be made available to all employers.
Many employers are rapidly moving into newer, client-server
technologies and the old tape formats are not even available on their
newer equipment. When budget cuts were made last year, the IRS systems
modernization project was heavily reduced. This makes no sense for
employers nor for the federal government. Meaningful modernization of
these systems is essential, if IRS is to continue to receive electronic
information from employers without placing an extreme burden on
employers to keep and maintain obsolete equipment solely to report to
SSA and IRS. Budget funds should be redirected to meaningful
modernization efforts and not just reduced.
For all reporting requirements, the form of the reporting should
follow the function being performed. Employers do not mind reporting at
the state level, but such reports should be submitted to the employer's
state who should in turn distribute the information to the other
states. Things like child support should be sent to one central state
agency, not to counties. Each state should distribute to the other
states and to its own counties. If information is required to go to the
federal government, then it should only go to one place in the federal
government and then be distributed electronically to the other federal
agencies, the states, and their agencies.
ASPM would like to see IRS and SSA work more closely together. SSA
and IRS also need to work more closely with the states. For example,
SSA has asked IRS to accelerate W2 filings for employers going out of
business. Paper forms for 1997 have been issued, but magnetic media
formats have not been issued and won't be until July or August, 1997.
The TY 1996 magnetic media format cannot be used because of 1997 format
changes. When an employer with more than 250 employees goes out of
business, they must still file on magnetic media. SSA recommends that
the employer going out of business go back to IRS and apply for an
exemption to allow them to file on paper. This is a lot to expect of an
employer going out of business.
On the pilot W2 magions for 1998, pilot project employers will be
using the magnetic media specifications. Has SSA coordinated with the
states that are still expecting the old federal format? Anyone helping
IRS and SSA with a pilot must now consider if they will be incurring an
extra expense of filing with both formats. This is still in the early
``discovery stage'' as bulk filers contemplate participating in the
pilot TY 1998 SSA program, but these questions should already have been
answered.
IRS should continue and emphasize development of a unified
reporting standards specification for federal and state wage forms as
they have done in the past with the TIGERS group within ANSI X12.
Currently, federal and state specifications vary from agency to agency.
This causes employers to spend endless hours in maintaining and
conforming to the different specifications. The continued development
of Electronic Data Interchange (EDI) is recommended. Also, federal and
state ID numbering is just as varied. It would be more efficient to
replace the current federal and state agency IDs, with a single
employer ID.
The Simplified Tax And Wage Reporting System initiative (STAWRS)
was making great progress toward standardization and automation of
reporting. There has been a tendency in the current administration to
de-emphasize this effort because of the changing political climate and
resistance from the state government agencies.
ASPM and the members involved with STAWRS strongly support this
initiative and recommend that it not only be continued but re-
emphasized. This program has been supported and funded by both
Democratic and Republican administrations and is essentially a
nonpartisan issue. It is a program that would greatly reduce tax and
information reporting burden on large employers and bulk reporters who
collect the great majority of taxes and report the greatest volumes of
information to government.
STAWRS really consists of two primary proposals:
1.) Single-point filing and processing of tax related information.
Congress needs to mandate that a single federal agency (like IRS,
the most logical choice), be the sole collection point for all tax
related information. If this mandate is given to IRS, the legislation
would have to make it a specific part of the agency's mission, so any
funds at the agency's disposal could be used to pay for the costs of
collecting and distributing the information. Specific empowerment to
distribute the information for legitimate governmental purposes to
other government agencies with specific safe-guards on the
confidentially of the information would need to be included. All other
agencies would need to have a mandate to cooperate with the effort to
build the centralized collection point and would need to be given
incentives for using the centralized collection agency.
There are significant disparities between the interests of federal
agencies and various state agencies and they will not willingly
cooperate unless there is something in it for them. Low cost or no cost
distribution and rapid distribution of revenues collected through
centralized single-point filing would be required to overcome state
objections. If incentives are provided and data dissemination is rapid,
then the various states would have substantial reasons for joining
voluntarily, especially in areas that have traditionally resisted
single-point filing proposals in the past, such as state unemployment
tax agencies.
Any single-point filing project would need to be phased in over a
period of years as state agencies choose to join. We would recommend
starting with W2 and Unemployment information and operating a pilot for
large employers and bulk filers. Then expand the program to
increasingly larger numbers of employers. Such participation would have
to be voluntary, but we think a surprising number of businesses would
participate.
Each state could have one record for each employee in a
standardized format that every state would have to accept. The format
would include income tax and unemployment data. The content of the data
in the fields could be calculated differently for each state. The
record format of the data would be exactly the same. Any state
participating would have to use the standard file format, such as the'S
record in the current W2 filing. In this manner, a 50 state employer
would submit 4 files each year for processing all of the tax related
information, instead of the 251 tapes that presently can be required.
Most large employers do not have employees in all 50 states, but even
an employer who does business in only 16 states would see a reduction
to 4 files from 81 files. The cost savings to business and government
would be very substantial resulting in higher profits, more employment,
more productivity, lower tax rates, and increased tax collections. It
will also result in better relationships between employers and the
government. More profits and more employment income results in more
federal revenue, while lower government costs should result in lower
tax rates. This results in a big win for state and federal government
and a big win for employers.
2.) Harmonized federal and state wage code.
The main reason that STAWRS has politically stalled out is the lack
of a standardized or harmonized national wage code. The federal
government and each state have set their own definition of taxable
wages. Each state has also set up its own definition of wages that are
covered for fement taxes. This has resulted in 51 different systems and
methods for calculating unemployment wages. Each is reported quarterly.
Many of the states have independently settled on the same calculations
and many states already use the federal definition of taxable income
for income tax purposes. Many states have voluntarily moved toward
using federal information in the ANSI X12 program, because it makes so
much sense to do so. Unfortunately, many other states have not. The
Congress has the power to mandate that the states use a uniform
calculation and format for calculating unemployment wages and taxable
income wages for income tax purposes. The Congress could also mandate
that the states convene and settle amongst themselves upon a standard
format and calculation by a certain date or face the federal government
deciding for them. This would allow businesses to use the same
calculations for every state and would greatly reduce the cost and
complexity of the computer programs used to produce the information,
while greatly reducing errors and noncompliance. Reduced costs and
improved collections would have many of the same economic benefits
discussed under single-point filing above.
For state and federal income taxes, the federal taxable income is
the obvious standard that should be used. We believe the Congress
should mandate that states with income taxes must use the federal
taxable wage as the starting point for their own income taxes. They
could make whatever adjustments they wanted from that point, but this
should be the only taxable wage that they could demand of employers and
would be required to accept the standard format. Once they are required
to use the standard format and the federal wage, using a single-point
filing service is a smart move.
It is difficult or impossible for any one state or even a group of
states to show the leadership necessary to bring all of the states
together, especially when there are so many diverse interests involved.
Therefore, it falls to the Congress to show the leadership necessary to
remove unnecessary costs and reporting burdens from business and
taxpayers. It is a compelling national interest that our economy and
tax systems operate as efficiently as possible, if we are going to
compete effectively in world markets through the next century.
It is our understanding that Form 941 is in a pilot test for
electronic filing. It should be opened up to all employers. Also, an
electronic vehicle should be developed to file 940 and 945. The primary
employer concern about 941 filing is how IRS calculates penalties. IRS
applies penalties based upon applying the amount necessary to make up
the short payment from a portion of the next payment received. This has
the effect of making each subsequent payment also delinquent. Under the
current method the penalties can be pretty egregious. If a mistake was
made early in a quarter the error (underpayment), if not found, could
create enormous penalties. There needs to be some kind of relief on the
penalties for late deposit procedures under the IRS regulations. IRS
needs a better process for determining if payments are timely. There is
potential for re-engineering this process that would be a win for both
the IRS and employers.
The magnetic filing of Form 945 has been dropped by IRS for lack of
volume and cost-efficiency. Thus, EDI filing of 945 is unlikely. IRS
asked the bulk return filers to do a pilot magnetic media filing for
Form 940 and bulk filer test partners declined, until IRS has worked
out the bugs on the EDI for Form 941 and has it ready for a wider
release. The bulk filers also needed to get beyond the implementation
of EFTPS. The employer/taxpayer community can only support a limited
number of system changes each year, so it is extremely important that
IRS maintain a steady continuing modernization program rather than
sudden massive changes.
Respectfully submitted,
Clark G. Case
Financial Systems and
Employee Accounting
Manager, City of
Winston-Salem, NC, Vice
President of The
American Society For
Payroll Management,
Government Relations
Committee Chair
cc: Dan Glum, ASPM President
ASPM Board Members
ASPM Government Relations Committee Members
Contact Information:, Clark G. Case, P.O. Box 2511, Winston-Salem, NC
27102, Phone: 910 727-2660, Fax: 910 727-8299, Internet:
[email protected]
Statement of Harriet Bograd, Attorney, New York, New York
Introduction:
I am Harriet Bograd, attorney and consultant to nonprofit
organizations. I am the founder and coordinator of the
``Nonprofit Cyber-Accountability'' listserv, an e-mail
discussion group on how information technology can help make
nonprofit organizations more accountable. In the past two years
I collaborated with Peter Swords of the Nonprofit Coordinating
Committee of New York on a research project on ``Accountability
in the Nonprofit Sector.'' I am also a Research Affiliate at
Yale University's Program on Nonprofit Organizations.
The ideas submitted here are my own, but they have been
informed by three years of daily discussions with hundreds of
people. The Nonprofit Cyber-Accountability listserv, currently
with 280 members, makes it possible for an ever-widening circle
of state and federal officials, nonprofit leaders, scholars,
accountants, attorneys, journalists, grantmakers, fundraisers,
and ordinary citizens to engage in a consensus-building
dialogue on nonprofit accountability.
This testimony starts by stating my recommendations,
discusses why these are important, answers possible objections
to these proposals, and finally lists resources for learning
more about ``nonprofit cyber-accountability.''
I endorse today's testimony of the National Council of
Nonprofit Associations, which discusses in greater depth the
Form 990 and its uses.
Recommendations: Electronic filing of Form 990, publishing Form 990
data on the web, and a staggered schedule for mandatory electronic
filing of Form 990.
H.R. 2292 offers a great opportunity for Congress to take
steps which would cost little but would make a big difference
to the nonprofit sector. I urge you to direct the IRS to accept
electronic filing of Form 990 very soon, to publish all
electronically filed data from Form 990's on the World Wide
Web, and to make electronic filing mandatory for charitable
nonprofits and private foundations, according to a staggered
schedule based on gross receipts.
Here is a more detailed statement of these recommendations.
Congress should:
1) Direct the IRS to accept electronic filing of Form 990
for 501(c)(3) organizations starting with fiscal years ending
on or after 12/31/98;
2) Require the IRS to make all electronically filed data
from Form 990's and Form 990-PF's available to the public on
the Internet, in a searchable database [exception: data about
donors need not be disclosed by nonprofits, and should not be
published on the Web]; and
3) Require nonprofit organizations to file electronically,
according to a timetable staggered by the gross receipts of the
organization. Electronic filing of Form 990 and Form 990-PF
(for private foundations) should be mandated at least for those
``charitable'' nonprofits which are tax exempt under Section
501(c)(3).
The following is a suggested schedule for mandatory
electronic filing of Form 990:
IRS should accept electronic filing of Form 990 and Form
990-PF for fiscal years ending on or after 12/31/98. For the
first year, all electronic filing should be voluntary, as
groups get used to the system, and problems are worked out.
After this, electronic filing should be mandatory according
to the following schedule [a similar schedule should be
developed for private foundations]:
Nonprofits with annual gross receipts over $10 million
should be required to file electronically for fiscal years
ending on or after 12/31/99.
Nonprofits with gross receipts over $1 million should be
required to file electronically for fiscal years ending on or
after 12/31/2000.
Nonprofits with gross receipts over $500,000 should be
required to file electronically for fiscal years ending on or
after 12/31/2001.
Starting with fiscal year ending on or after 12/31/2002,
all groups which are required to file Form 990 or Form 990 EZ
should be required to file electronically.
The IRS Commissioner should have discretion to delay the
effective date of mandatory electronic filing for the last two
groups (the groups not over $1 million) if the Commissioner
concludes that such a requirement would impose a hardship on
such groups. In making this decision, the Commissioner should
consider the accessibility of computers, necessary software,
Internet connections, or other services which would facilitate
electronic filing for such groups.
I am suggesting that this schedule of mandatory electronic
filing be included in the legislation itself, rather than in
regulations. It has been distressing that the Treasury has not
yet been able to issue even draft regulations on disclosure of
Form 990, even though more than a year has passed since
Congress called for these regulations in the Taxpayer Bill of
Rights 2. Because of the risk of similar delays, I suggest that
Congress simply set the schedule for mandatory electronic
filing in the legislation.
Why these recommendations are important:
As members of Congress consider issues of electronic filing
and the IRS, I urge you to pay attentio opportunities related
to electronic filing of Form 990. Form 990 is the annual
information return which nonprofits must file each year with
the Internal Revenue Service, and the information in it is of
great importance for nonprofit accountability. In contrast to
other tax forms which are confidential, the information on the
Form 990 (except for lists of donors) is required to be made
available to the public. Yet it has been notoriously difficult
to obtain copies of Form 990 either from many nonprofits or
from the Internal Revenue Service. Furthermore, many people
(such as employees, clients, or board members) who have
concerns about nonprofit accountability issues are hesitant to
ask for copies of Form 990 from the organization, for fear that
they might be risking their jobs or benefits or confronting
socially awkward situations.
Information technology offers a powerful and inexpensive
solution to this problem. Form 990's can be filed
electronically, and the information collected can automatically
be posted in a searchable database on the World Wide Web. With
such a system in place, valuable data about nonprofits would be
easily accessible to board members, employees, journalists,
state government officials, and scholars. Easy access to Form
990 data would help people prevent, identify, and correct
abuses, make better decisions, and find out more about the
nonprofit sector.
Alleged obstacles to mandatory electronic filing of Form 990:
What are the obstacles that have made it difficult for the
IRS to move forward with electronic filing of Form 990?
First, as H.R. 2292 recognizes, the Exempt Organization
Division has had inadequate resources to do its current job,
let alone to work on new initiatives. As of 1996, the Exempt
Organizations Division was responsible for supervising 1.2
million nonprofits with only 400 agents and a budget of $62
million per year. In other words, the IRS had one agent for
every three thousand nonprofits. Since the 1996 data was
compiled, IRS staffing has rther staffing cutbacks are planned.
The contrast with the Securities and Exchange Commission is
daunting; the SEC has a budget of about $300 million to
supervise between 9,000 and 14,000 publicly-traded
corporations.
I strongly support those provisions in H.R. 2292 which
would provide the Exempt Organization Division with more
adequate resources. Yet the IRS resources will continue to be
much more modest than those of the SEC, for example. Making
Form 990 accessible on the Web (with mandatory electronic
filing) will allow many citizens to become ``voluntary
auditors'' who assist the IRS and the state regulators in the
oversight of the nonprofit sector.
Second, there has been an erroneous fear that mandating
electronic filing would be politically unpopular--that the
nonprofit groups would object to such a requirement. I have
discussed this issue with hundreds of people, including people
who work with nonprofits of all sizes, and I expect that there
would be surprisingly little resistance if electronic filing
were mandated on a staggered schedule. The vast majority of
nonprofit groups are ethical and responsible, and want to
support systems of accountability that will give the public
greater confidence in the nonprofit sector. More and more
nonprofits are rapidly gaining access to computers and to
modems or the Internet, either in their own offices or in the
offices of their tax preparers. As people get used to
electronic filing of personal and corporate tax returns,
electronic filing of Form 990 will become a simple and
inexpensive step to take.
Third, when the IRS forms processors set a ``queue'' for
which forms to convert for electronic filing, they start with
the forms that the IRS spends the most time processing. Since
the Exempt Organizations Division has not had the resources to
keypunch the paper forms it receives, Form 990 becomes low on
the ``queue. But this means that the information in Form 990's
has been inaccessible and, in essence, squandered. The IRS
personnel have not even keypunched them, let alone reviewed
them, and the public has had difficulty getting to see them.
Although the volume of Form 990's processed by the IRS may
be lower than the volume of some other forms, the public nature
of these documents, and their importance for the health and
integrity of the nonprofit sector must be reckoned in setting
priorities for electronic filing. Although it is true that they
are not now keypunching much of the Form 990's, IRS and state
government agencies which oversee nonprofits could do a much
more efficient and effective job if they had all the data from
Form 990's accessible in a searchable database. An electronic
filing/Web posting system would dramatically reduce the costs
of making Form 990 data available to government he public. It
would ease the burdens for nonprofit filers and eliminate
keypunching errors introduced when government officials process
these forms. Form 990's would be more accurate and complete,
because preparation software would handle calculations and
check that essential fields were completed.
Statement of Ann Mitchell Sackey, Executive Director, The National
Council of Nonprofit Associations
We offer this testimony to urge Congress to assign the
Office of the Assistant Commissioner of Employee Plans and
Exempt Organizations responsibility for the development of a
system through which nonprofit organizations would
electronically file their Form 990 (Return of Organization
Exempt From Income Tax), thus creating complete accessibility
to all filed Form 990s on the Internet. We believe that the
filing and disclosure requirements for nonprofit organizations
should be a high priority for Congress. Our focus is limited to
nonprofits which are organized and operated for the public
benefit, as described under section 501(c)(3) of the Internal
Revenue Code of 1986, as amended.
We believe that the filing and disclosure requirements of
public-benefit nonprofits should receive a high priority in
Congress because of their importance to the nation. In 1992,
over one million nonprofits existed and nonprofits generated
more than $500 billion in annual funds. They created 6.5
percent of the national income in 1992. Including full time
employees and full time equivalent volunteers, nonprofits
employed nearly 11 percent of the total U.S. employment in
1992. In 1994, nonprofits employed 15.1 million people. (These
are the most recent statistics on the sector as documented by
the INDEPENDENT SECTOR, an umbrella group of national nonprofit
organizations.)
Electronic filing (posting all Form 990s on an IRS Web
site) would provide enormous benefits for detecting and
stopping abuses, for supporting better decision-making about
nonprofits, and for conducting research. Electronic access
would save money for the IRS and state charities regulators,
who now spend large amounts of time shuffling and filing papers
and keypunching data for analysis.
Each year, every nonprofit must file an IRS Form 990, an
annual information return. About forty states also require some
or all charitable nonprofits to file a copy of the Form 990
with them. With its attached Schedule A, the form is 10 pages
long. It includes a variety of information about the
organization, including: identifying information (e.g., name,
address, phone, employer identification number); detailed
financial information; program service accomplishments; list of
officers; directors; trustees; and key employees; executive
compensation; payments to independent contractors;
relationships with other taxable and tax-exempt entities; and
more.
The Form 990 is a valuable data collection tool and must be
viewed as such. The U.S. Internal Revenue Service, state
charities officials, and representatives of the nonprofit
community have worked together over the years to refine and
improve Form 990. The data in the collected Form 990s provides
a uniform baseline of information about individual nonprofits
and the nonprofit sector in general. Many efforts seek to
continuously improve the quality of the data and to enable
people to more effectively use the reported information.
There are three basic uses of 990 data. First, the
information can help identify, prevent, and punish abuses.
State charities officials, journalists, concerned board
members, employees, and clients can find valuable information
in Form 990 to prevent or uncover abuses such as self-dealing,
quasi-looting, excessive compensation or improper engagement in
political activities. These users must be able to review Form
990s without nonprofits knowing that they are being
investigated.
Second, stakeholders can use the information to make better
informed decisions. With Form 990 information, potential
donors, managers, and board members (as well as all the other
players listed above) can compare present and past financial
performance and benchmark one group's financial performance
with others in its field.
Third, practitioners, policy-makers, and researchers can
apply Form 990 data to investigations on the composition and
history of the nonprofit sector, its sources and uses of funds,
its financial vulnerability and debt management, and its
economic performance.
A public-benefit nonprofit must show its Form 990s, for its
most recent three years, to those who come into its office and
ask to see them. Soon, they will have to be mailed out upon
request. These means of accessing the Form 990, however, take
time and have the further disadvantage of revealing to the
organization who is asking to see their Form 990. The system we
are urging you to consider answers both these objections.
To summarize, the Form 990 is the basic nonprofit
disclosure form that is used by both the IRS and state
charities offices. It provides the base of nonprofit
accountability. We believe that providing all 990s on the
Internet will promote nonprofit accountability and will enable
everyone to access an organization's 990 without notifying the
organization. Staff, board members, or other semi-insiders who
suspect improper activities will be able to look at the 990 to
see whether the activities have been disclosed or whether the
990 has been filed fraudulently. Would-be malefactors, knowing
that their 990 is electronically available to the public, may
approach filing their 990 more seriously. Many refer to such a
system as cyber-accountability. While cyber-accountability
might be implemented through a number of means, we offer a
simple, inexpensive explanation. (It enjoys the further virtue
of being almost developed.) Cyber-accountability would be
constructed through the following process:
1. The EO Division of the IRS would maintain a 990 Web
site, available to anyone with access to the Internet. By going
to the Web site, a user could request a 990 form for
completion. It would appear on the user's screen in a format
similar to the paper-copy Form 990. S/he could then complete
the 990 by key-punching in the data elicited. When the 990 is
completed, the user could electronically transmit it to the
IRS.
2. The 990 Web site would receive and store in a database
each 990 filed.
3. By accessing the 990 Web site, any 990s could be viewed
by the public immediately after it was filed. This could be
done by entering the organization's name or Employer
Identification Number (E.I.N.)
4. Seconds later, the organization's 990 would appear on
her screen. She would be able to download it and print it out.
At the end of this process, she would have a hard-copy of the
organization's 990. This could be done for one organization or
for many. For example, all of the day care centers located in
three or four contiguous zip codes could be accessed at once.
The user could easily copy the data on the 990 Web site to a
file, using a standard database format. The data could then be
sent anywhere. The Exempt Organizations Division of the Office
of the Assistant Commissioner of Employee Plans and Exempt
Organizations and state charities offices could easily transfer
this data to their system.
As of this writing, the pages of the 990 have been encoded
into the language of the Web, converted to HTML. The next step
will involve writing programs to store and retrieve submitted
information. A demonstration project, now underway, will help
to produce the system. If requested, the completed system could
be loaded into a computer and made available to the IRS for
less than $25,000, requiring nothing more than plugging into a
power outlet and connecting to the Internet via a phone line.
Several states have expressed an interest in the system; New
Hampshire will most likely install it next spring.
A little over a year ago, the Taxpayers Bill of Rights
(H.R. 2337) was signed into law. Among other things, it
requires public-benefit nonprofits to give or mail copies of
their annual Form 990s to anyone who requests them via mail or
in person, for a reasonable cost. A group risks hefty penalties
if it does not comply. However, this disclosure requirement
will not go into effect until the Secretary of the Treasury
issues regulations that spell out an exception: if a group
makes its Form 990 ``widely available,'' then it does not have
to give out or mail copies. We believe the system described
above would largely satisfy this ``widely available''
requirement.
Statement of Robert M. Tobias, National President, National Treasury
Employees Union
Madam Chairwoman, Members of the Subcommittee, thank you
for this further opportunity to present the views of the
National Treasury Employees Union (NTEU), the exclusive
representative of IRS employees, on the Report of the National
Commission on Restructuring the Internal Revenue Service. As
NTEU's National President, I welcome this opportunity to share
our thoughts on the electronic filing of tax returns at the
Service.
The IRS processes 205 million tax returns each year; l20
million of these are individual tax returns. In order for the
IRS to effectively collect the taxes that run our government,
the taxpaying public must find the IRS to be not only fair, but
efficient. Although it still has a ways to go, the IRS has come
a long way in improving its operations in recent years. The
IRS, and the employees who make it run, perform remarkably well
despite its faults.
The guiding principle of the Commission Report was that
customer service and taxpayer satisfaction must become
paramount at the Internal Revenue Service (IRS). NTEU
wholeheartedly agrees. Customer service must become the engine
which drives the Service. Expanding, demystifying and removing
the barriers to electronic filing not only carries with it the
ability to improve service to IRS customers, but compliance as
well.
But, Madam Chairwoman, I must tell you that I remain deeply
troubled by reports in the press that indicate this whole
exercise may be little more than a political smokescreen and
fundraising tool based on ridiculing the Service. Today's Wall
Street Journal makes clear that IRS bashing is alive and well,
quoting the Senate Majority Leader as stating in a recent radio
address, ``The IRS is intrusive, abusive and out of control.''
Senator Lott's comments are by no means the first of this
nature, but they ought to be the last. How do we restore the
IRS' credibility with the public when their elected officials
routinely, unfairly and unjustly denigrate the agency and its
mission?
The purpose of today's hearing is to explore ways to
encourage electronic filing. I do not believe any of us have
the power to inspire commitment to electronic filing and
confidence in the IRS while remaining silent when elected
officials unfairly bash the IRS as if it is collectively
abusive, inefficient and can only be improved by being
scrapped.
The Members of Congress who introduced IRS restructuring
legislation, based on the Restructuring Commission's report,
recognize that they have a responsibility to educate their
colleagues that disparaging remarks have an effect opposite to
that which their legislation suggests. They know IRS bashing
promotes the view that the government's tax collection agency
is to be ridiculed and that paying one's federal taxes need not
be taken seriously.
Hearing comments such as Senator Lott's, why then would an
individual be compelled to even try electronic filing? Why
would they believe the IRS can be trusted to receive and
accurately process their return electronically? Why would they
believe the assurances they have been given that electronic
filing does not lead to additional audits? What they hear from
their elected representatives is just the opposite--the IRS
cannot be trusted.
As the President of NTEU, I am committed to the path which
my colleagues on the Commission and I have embarked on--to make
the IRS a world class, respected organization. It is time for
Congress to make a similar commitment and to leave the rhetoric
behind.
There are several specific recommendations contained in the
Commission Report on which I wish to comment relevant to
today's hearing. While the Commission Report suggests that
expanding the number of taxpayers who file electronically has
the potential to increase cost savings and compliance, it also
points out that it cannot be accomplished without a
comprehensive plan. NTEU believes that it also cannot be
accomplished without the appropriate financial resources. While
the Commission Report states that electronic filing ``holds
great potential to increase cost savings and compliance with
only a small investment by the IRS,'' NTEU believes that to
reach its goal of more universal acceptance of electronic
filing, the IRS will require a sizable investment--both
financially and in terms of a comprehensive overhaul of how the
IRS promotes the benefits of electronic filing and how it
interacts with its customers.
The Internal Revenue Service reports that l4 million
taxpayers filed their tax returns electronically in l997, a l9
percent increase over l996. Moreover, the IRS estimates that
l9.2 million Americans will file electronically in l998, almost
double the number who filed electronically in l995. The IRS is
clearly moving in the right direction.
The Commission Report rightly suggests that only a
comprehensive plan that appeals to all segments of the taxpayer
and practitioner population will make electronic filing the
preferred method of tax return filing. The Commissioners
envision formation of a partnership between the IRS and
practitioner community, elimination of the necessity to file a
signature form with electronic returns, the establishment of
uniform requirements for preparers, and electronic acceptance
of all tax forms as good starting points. The Report also
emphasizes the need to establish paperless payment methods and
realigned due dates as inducements to electronic filing. I note
that the IRS has expressed some concern regarding the proposal
to extend due dates for electronic filers, adding that this is
the one area where there is presently no confusion--tax returns
are due on April l5. I urge the Committee to review this area
carefully.
Those currently taking advantage of electronic filing
methods typically are due a refund and tend to be clustered in
the lower income levels. A l99l IRS research study showed that
the ability to receive an earlier refund was the greatest
inducement to filing electronically. There is currently little
or no incentive for taxpayers owing taxes to file by this
method.
In March of l995, the publication Tax Notes reported that
taxpayers filing forms l040A and l040EZ represented almost 77
percent of electronic returns. These, they reported, are also
the returns with the lowest processing cost savings for the
IRS. The greatest savings potential lies with the Form l040
returns, however, this same report found that only 2.8 million
of the 62.7 million taxpayers in this group chose to file
electronically.
The Commission Report also states that financial incentives
may be necessary to induce a greater number of individuals to
file electronically. For many individual taxpayers, there is
little or no incentive to file electronically. Fees for ELF
filing are usually in the neighborhood of $25, yet it only
costs .32 cents to mail a paper return. Clearly, cost is one of
the largest disincentives to electronic filing and may be a key
barrier preventing more taxpayers from taking advantage of ELF.
A May, l997 national survey of l,035 adults by The Mellman
Group found that ``interest in electronic filing increases
dramatically when it is positioned as a no cost option to the
taxpayer.'' Twenty-two percent of their respondents reported
that they would be almost certain to file electronically if it
were free.
The Commission recommendation that transmitters receive a
financial incentive that is shared with taxpayers is worthy of
further consideration. However, there are other electronic
filing inducements that I believe make even more sense and
encourage Congress to consider as well.
To establish electronic filing as the preferred method of
tax filing, it must be made available to a much broader segment
of taxpayers. It must be easily understood, simple to
accomplish and available at free and convenient locations. For
example, terminals with user friendly software could be made
available to taxpayers at local IRS walk-in offices. Customer
service personnel staffing these offices could be available to
answer questions and provide guidance. Even libraries, post
offices, and banks could be outfitted with IRS-connected
terminals. These venues typically make IRS forms available now,
it only makes sense that as part of a comprehensive plan to
stress both customer service and encourage electronic filing,
these same locations should provide electronic filing
capability.
Moreover, what could be more customer-service oriented than
providing taxpayers with free and convenient locations to file
their taxes electronically? To promote acceptance of electronic
filing among a broader group of individual taxpayers, customer
service must be part of the equation. For those taxpayers
wishing to file electronically from their homes, user-friendly
software should also be considered. Just as tax forms are
distributed free of charge, free electronic filing software for
use with home computers should also be considered.
While some seek expansion of electronic filing because of
the allure of the possibility of reduced labor and overhead
costs, they ignore the main principle underlying the
Restructuring Commission's Report: Customer Service and
Taxpayer Satisfaction must become paramount. Electronic filing
holds the potential to improve both, but only if the savings
achieved from its expansion are reinvested in the Service. To
do otherwise ignores the basic principles of the Commission
Report.
NTEU supports the expansion of electronic filing. It is the
future. We believe equally as strongly that the efficiency
savings that result must be reinvested in compliance and
customer service functions at the agency. It is not as though
the compliance rate is so high that there is nothing further to
accomplish. And, it is not as though the IRS' customer service
effort is so complete that we can afford to remove staff
resources from the agency. Positions that become excess to the
agency's needs with advances in electronic filing should be
shifted to customer service functions. That is the answer to
improving IRS customer service satisfaction and compliance
levels while simultaneously improving acceptance of electronic
filing.
NTEU is committed to making the IRS the world-class,
respected organization it must become. I hope that Congress is
equally committed to providing the resources necessary to make
this a reality. Funding shortfalls and the vagaries of the
annual budget process have played havoc with the IRS and its
ability to effectively plan in the past. I look forward to
working with this Committee and the others that oversee the IRS
to insure that our joint goals become reality.
Thank you.