[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
FREE ELECTRONIC FILING AND NATIONAL TAXPAYER ADVOCATE ANNUAL REPORT
=======================================================================
HEARING
before the
SUBCOMMITTEE ON OVERSIGHT
of the
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
__________
FEBRUARY 13, 2003
__________
Serial No. 108-5
__________
Printed for the use of the Committee on Ways and Means
U. S. GOVERNMENT PRINTING OFFICE
87-113 WASHINGTON : 2003
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512-1800
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001
COMMITTEE ON WAYS AND MEANS
BILL THOMAS, California, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
E. CLAY SHAW, Jr., Florida FORTNEY PETE STARK, California
NANCY L. JOHNSON, Connecticut ROBERT T. MATSUI, California
AMO HOUGHTON, New York WILLIAM J. COYNE, Pennsylvania
WALLY HERGER, California SANDER M. LEVIN, Michigan
JIM McCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
DAVE CAMP, Michigan JIM McDERMOTT, Washington
JIM RAMSTAD, Minnesota GERALD D. KLECZKA, Wisconsin
JIM NUSSLE, Iowa JOHN LEWIS, Georgia
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
JENNIFER DUNN, Washington MICHAEL R. McNULTY, New York
MAC COLLINS, Georgia WILLIAM J. JEFFERSON, Louisiana
ROB PORTMAN, Ohio JOHN S. TANNER, Tennessee
PHIL ENGLISH, Pennsylvania XAVIER BECERRA, California
J.D. HAYWORTH, Arizona KAREN L. THURMAN, Florida
JERRY WELLER, Illinois LLOYD DOGGETT, Texas
KENNY C. HULSHOF, Missouri EARL POMEROY, North Dakota
SCOTT McINNIS, Colorado MAX SANDLIN, Texas
RON LEWIS, Kentucky STEPHANIE TUBBS JONES, Ohio
MARK FOLEY, Florida
KEVIN BRADY, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
Allison H. Giles, Chief of Staff
Janice Mays, Minority Chief Counsel
______
Subcommittee on Oversight
AMO HOUGHTON, New York, Chairman
ROB PORTMAN, Ohio EARL POMEROY, North Dakota
JERRY WELLER, Illinois GERALD D. KLECZKA, Wisconsin
SCOTT McINNIS, Colorado MICHAEL R. McNULTY, New York
MARK FOLEY, Florida JOHN S. TANNER, Tennessee
SAM JOHNSON, Texas MAX SANDLIN, Texas
PAUL RYAN, Wisconsin
ERIC CANTOR, Virginia
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 February 6, 2003, announcing the hearing............. 2
WITNESSES
Internal Revenue Service:
Hon. Robert E. Wenzel, accompanied by Terry Lutes, Director,
Electronic Tax Administration................................ 6
Nina E. Olson, National Taxpayer Advocate...................... 30
______
Electronic Tax Administration Advisory Committee, Kevin Belden... 19
Free File Alliance, Michael F. Cavanagh.......................... 25
SUBMISSION FOR THE RECORD
Americans for Tax Reform, Grover Norquist, statement............. 44
FREE ELECTRONIC FILING AND NATIONAL TAXPAYER ADVOCATE ANNUAL REPORT
----------
THURSDAY, FEBRUARY 13, 2003
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to notice, at 3:00 p.m., in
room 1100 Longworth House Office Building, Hon. Amo Houghton
(Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]
ADVISORY
FROM THE
COMMITTEE
ON WAYS
AND
MEANS
SUBCOMMITTEE ON OVERSIGHT
CONTACT: (202) 225-1721
FOR IMMEDIATE RELEASE
February 06, 2003
No. OV-1
Houghton Announces Hearing on
Free Electronic Filing and National
Taxpayer Advocate Annual Report
Congressman Amo Houghton (R-NY), Chairman, Subcommittee on
Oversight of the Committee on Ways and Means, today announced that the
Subcommittee will hold a hearing on Free Electronic Filing and the
recently issued Annual Report of the National Taxpayer Advocate. The
hearing will take place on Thursday, February 13, 2003, in the main
Committee hearing room, 1100 Longworth House Office Building, beginning
at 3:00 p.m.
In view of the limited time available to hear witnesses, oral
testimony at this hearing will be from invited witnesses only.
Witnesses will include Internal Revenue Service (IRS) Acting
Commissioner Robert Wenzel, the National Taxpayer Advocate Nina Olson,
Electronic Tax Administration Director Terence Lutes, and Electronic
Tax Administration Advisory Committee Chairman Kevin Belden. However,
any individual or organization not scheduled for an oral appearance may
submit a written statement for consideration by the Committee and for
inclusion in the printed record of the hearing.
BACKGROUND:
The Subcommittee will hold a hearing to evaluate the legislative
recommendations of the National Taxpayer Advocate and the leading
problems faced by taxpayers, as described in the Taxpayer Advocate's
Annual Report. In addition, the Subcommittee will hear testimony from
IRS officials concerning the IRS Free Filing initiative. Free Filing, a
partnership with the private sector consortium of electronic tax
preparers is designed to increase the number of taxpayers filing
electronically.
In announcing the hearing, Chairman Houghton said: ``We will hear
about the new initiative that allows more taxpayers to file their taxes
for free over the Internet. This will substantially increase the number
of people filing their taxes electronically--benefiting taxpayers and
the IRS. I also look forward to a discussing ways to improve our tax
laws and streamline the functioning of the IRS with Nina Olson,
National Tax Payer Advocate.''
FOCUS OF THE HEARING:
The hearing will focus on the IRS Free Filing initiative,
electronic tax administration, and the National Taxpayer Advocate's
annual report.
DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:
Please Note: Due to the change in House mail policy, any person or
organization wishing to submit a written statement for the printed
record of the hearing should send it electronically to
[email protected], along with a fax copy to
(202) 225-2610, by the close of business, Thursday, February 27, 2003.
Those filing written statements who wish to have their statements
distributed to the press and interested public at the hearing should
deliver their 200 copies to the Subcommittee on Oversight in room 1136
Longworth House Office Building, in an open and searchable package 48
hours before the hearing. The U.S. Capitol Police will refuse sealed-
packaged deliveries to all House Office Buildings.
Note: All Committee advisories and news releases are available on
the World Wide Web at http://waysandmeans.house.gov.
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 HOUGHTON. The hearing will come to order. Good
afternoon everybody, and we are delighted that you are here. I
am flanked by two very distinguished people--not franked--and
we are going to learn about an innovative agreement that the
Internal Revenue Service (IRS) has entered into with the
private sector to bring free electronic filing to millions of
taxpayers this year, the Free File Initiative, and I want to
believe that both government and taxpayers are going to
benefit. Many taxpayers will no longer have to pay an average
of $12.50 per return to e-file, and they will receive tax
refunds on an average of 14 days instead of 4 to 6 weeks. The
government is going to benefit from reduced errors in
processing costs. Last year, 47 million taxpayers filed their
tax returns electronically, and the initiative should lead to
many millions of additional e-filed returns.
So, before us today on our first panel is one of America's
most dedicated public servants, Bob Wenzel, who is now the
Acting Commissioner of the IRS. Mr. Wenzel was nearing what he
thought was the end of a 35-year career with the IRS when the
outgoing Commissioner, Charles Rossotti, asked him to
reconsider his retirement plans and twisted his arm a little
bit. So, to his credit and to our great benefit, Mr. Wenzel
took up Mr. Rossotti's offer and served an additional 5 years
as Deputy Commissioner. It has now been over 40 years since Bob
Wenzel first joined the IRS. Few individuals can point to such
a long and distinguished career in public service. He is a
great example for us all.
Now, also on our agenda is a review of the National
Taxpayer Advocate's (NTAs) annual report to Congress. As was
the case last year, Nina Olson's report is an excellent and
invaluable resource, and due to the leadership of Ms. Olson and
her predecessors, the Taxpayer Advocate has become the tax
system's most effective guarantor of taxpayer procedural
rights. She has brought us a number of thoughtful
recommendations that we are going to review today.
So, now I would like to yield to a good friend of mine, the
new Subcommittee Ranking Member and the best-looking Ranking
Member we have had in many years since Mr. Pickle, Mr. Pomeroy
of North by-God Dakota.
[The opening statement of Chairman Houghton follows:]
Opening Statement of the Honorable Amo Houghton, a Representative in
Congress from the State of New York, and Chairman, Subcommittee on
Oversight
Good afternoon. Today we are going to learn about an innovative
agreement that the IRS has entered into with the private sector to
bring free electronic filing to millions of taxpayers this year: the
``Free File'' Initiative. Both government and taxpayers will benefit.
Many taxpayers will no longer have to pay an average of $12.50 per
return to e-file and they will receive tax refunds in an average of 14
days, instead of four to six weeks. The government will benefit from
reduced errors and processing costs. Last year, 47 million taxpayers
filed their tax returns electronically, and the Initiative should lead
to millions of additional e-filed returns.
Before us today on our first panel is one of America's most
dedicated public servants, Bob Wenzel, who is now the Acting
Commissioner of the IRS. Mr. Wenzel was nearing what he thought was the
end of a thirty-five year career with the IRS when incoming
Commissioner Charles Rossotti asked him to reconsider his retirement
plans. To his credit--and to our great benefit--Mr. Wenzel took up Mr.
Rossotti's offer and served an additional 5 years as Deputy
Commissioner. It has now been over 40 years since Bob Wenzel first
joined the IRS. Few individuals can point to such a long and
distinguished career in public service. He is truly an example for us
all.
Also on our agenda is a review of the National Taxpayer Advocate's
Annual Report to Congress. As was the case last year, Nina Olson's
report is an excellent and invaluable resource. Due to the leadership
of Ms. Olson and her predecessors, the Taxpayer Advocate has become the
tax system's most effective guarantor of taxpayer procedural rights.
She has brought us a number of very thoughtful recommendations that we
will review today.
I would now like to yield to a good friend of mine, the
Subcommittee's Ranking Member, Mr. Pomeroy from North Dakota.
Mr. POMEROY. Mr. Chairman, I am overcome by an introduction
of that nature. I want to congratulate you as you begin another
year as Chairman of this Subcommittee on Oversight, and your
agenda for the very first meeting, I think, is consistent with
the leadership you have brought to oversight using the powers
of this Subcommittee to explore how we can improve the Tax
Code, how we can make it easier for individual tax filers, and
how we can capture their feedback through the Taxpayer Advocate
position, always working to improve the Tax Code, make it more
fair and easier to comply with for the taxpayers of this
country.
I know of your own interest, Mr. Chairman, in tax
simplification, and in a place where there are often many
partisan issues that divide us, this ought to be our
overarching topic that unites us, and I am very much looking
forward to participating in bipartisanship initiatives with you
as we seek to improve the Tax Code.
I appreciate your recognition of Mr. Wenzel in light of the
long and illustrious career he has offered on behalf of all of
us. Congratulations to you, and it is a capstone achievement to
serve as Acting Commissioner. Have you had that opportunity in
the past, Mr. Wenzel?
Mr. WENZEL. First time.
Mr. POMEROY. Well, it is a very appropriate capstone on a
career of great public distinction, and we appreciate your
efforts. With that, let's hear from our witnesses, Mr.
Chairman.
[The opening statement of Mr. Pomeroy follows:]
Opening Statement of the Honorable Earl Pomeroy, a Representative in
Congress from the State of North Dakota
I am honored to have been elected as the Ranking Member on the Ways
and Means Oversight Subcommittee. Working with Chairman Houghton, on a
bipartisan basis, we will monitor the tax, health, Social Security,
trade and human resource issues within the Committee's jurisdiction.
This is a challenge I proudly accept.
It is appropriate that our first hearing of the 108th Congress
focus on the Internal Revenue Service. Clearly, the IRS must administer
our tax laws in a fair and efficient manner and the Subcommittee is
responsible for overseeing its operation. I look forward to today's
discussion of the IRS' new tax return ``Free File Program'' and the
Taxpayer Advocate's annual report to the Congress.
The Free File Program is designed to provide low-income taxpayers
with a no-cost way to prepare and electronically transmit their tax
returns to the IRS. I support this initiative which is new for the 2003
tax return filing season. As we proceed, I want to make sure that
taxpayers have easy access to the Free File Program and that the
initiative works as intended.
Finally, I am pleased to receive the Taxpayer Advocate's Annual
Report on IRS operations. I look forward to working with the
Subcommittee to address the issues raised by this study. I am
particularly interested in pursuing the legislative recommendation
designed to better enable married couples, who own a farm or other
small business, to file a simplified tax return. By simplifying the
process of reporting, both spouses will be eligible for Social Security
and Medicare benefits and avoid tax penalties for incorrect filings. I
will continue to seek the assistance of my local Taxpayer Advocate from
Fargo, North Dakota as the Subcommittee considers this issue.
I thank Chairman Houghton for scheduling this important hearing and
look forward to the testimony of the hearing witnesses.
Chairman HOUGHTON. Thank you very much. Would you like to
make an opening statement, Mr. Portman?
Mr. PORTMAN. Mr. Chairman, I appreciate just a very brief
one to say I am very excited about the Free Filing initiative.
The IRS Commission, which met for 2 years on the issues of how
to reform the IRS, determined after a lot of research on the
filing problems that it was far more effective and efficient to
file electronically. In fact, we found that not only was it
less than half the cost of filing by paper, but the error rate
was so much less. At that time the error rate was 22 percent;
11 percent by the taxpayer, 11 percent by the IRS. The error
rate with electronic filing was 1 percent or less. That alone
has significant cost savings not just for the IRS, but also for
the taxpayer the downstream costs were enormous. So, I am just
delighted that after going back and forth on this issue for
really the last 4 years, we finally have an understanding with
the private sector that we will be able to offer free filing
that covers 60 percent of all taxpayers.
This is a breakthrough, Mr. Chairman, and I think
absolutely essential if we are going to come close to meeting
our target, which is quite ambitious, of 80 percent of filers
are filing electronically. We are now, I think, at about 36 or
37 percent. We will hear more about that.
I just wanted to commend the Service for finally working
with the private sector, and commend the private sector folks
who have been part of this in coming up with an arrangement
which I think will be very helpful to meeting our shared goals.
Thank you, Mr. Chairman.
Chairman HOUGHTON. Thank you very much. Ms. Tubbs Jones,
would you like to make a statement?
Ms. TUBBS JONES. Well, I would like, thank you, Mr.
Chairman. I would like--good afternoon. This is my first
Subcommittee on Oversight hearing. I have managed to visit
Health today, this afternoon, and I am serving on Social
Security and Select Revenue Measures. I am glad to have an
opportunity to meet you, Mr. Wenzel, and you, Mr. Lutes, as
well; look forward to having an opportunity to get to know this
process a little more. I get lots of IRS calls in my
congressional office, so I will be glad to know who I can pick
up the phone and call and get some results. So, thank you very,
very much. Mr. Chairman, looking forward to serving with you,
sir.
Chairman HOUGHTON. Thank you very much.
Mr. Kleczka.
Mr. KLECZKA. Mr. Chairman, I don't have any opening comment
except to say it is good to be back to the Subcommittee on
Oversight after an absence serving on the Committee on Budget,
so, Mr. Chairman, you will have to put up with me for a couple
of years.
Chairman HOUGHTON. Okay. That is great. Well, now I would
like to call the first panel, who are already there. Mr. Robert
Wenzel, who, as we said earlier, is the Acting Commissioner,
and then Mr. Terry Lutes, who is Director of the Electronic Tax
Administration (ETA) of the IRS. I don't think you are going to
be giving any testimony, but you will be here; is that right,
Mr. Lutes?
Mr. LUTES. Yes.
Chairman HOUGHTON. Okay. Mr. Acting Commissioner, the floor
is yours.
STATEMENT OF THE HONORABLE ROBERT E. WENZEL, ACTING
COMMISSIONER, INTERNAL REVENUE SERVICE, ACCOMPANIED BY TERRY
LUTES, DIRECTOR, ELECTRONIC TAX ADMINISTRATION
Mr. WENZEL. Mr. Chairman and distinguished Members of the
Subcommittee, thank you for this opportunity to discuss the
joint IRS-private sector Free File Initiative. Also let me
thank you, Mr. Chairman and Members of the Subcommittee, for
your leadership and efforts to promote electronic filing and
make it available to more taxpayers.
As you mention, accompanying me today is Mr. Terry Lutes,
our IRS Director of Electronic Tax Administration.
As you know, the IRS Restructuring Reform Act of 1998
mandated that at least 80 percent of individual tax returns be
filed electronically by the year 2007. We have certainly made
progress toward that goal. Last year 35.6 percent of individual
returns were e-filed, and this year we expect the number to
climb to over 40 percent. Nevertheless, even with a 16-percent
annual growth rate, the IRS would fall short of the 80-percent
goal.
Now, to meet this ambitious objective, we must make it not
only technologically possible, but also attractive for
practitioners and taxpayers to make a permanent change to
electronic filing. Cost to the taxpayer has been a barrier to
further e-file growth. For years the IRS and the tax community
would grapple with this issue and had very little success
resolving it. That has changed dramatically with Free File.
Free File's roots can be found in the President's fiscal
year 2002 management agenda, which championed e-government
services. We were also guided by two principles; that is, no
one should have to pay to file, and secondly, the IRS should
not get into the software business. Through Free File,
America's taxpayers can now access free online tax preparation
and electronic filing services through irs.gov, or
firstgov.gov. Free File will be available this year through
April 15, and some companies will also offer free services
through October 15 for taxpayers needing an extension.
The partnership agreement requires that the Alliance as a
whole provide free tax preparation and filing to at least 60
percent of individual taxpayers, or approximately 78 million
Americans. Many are taxpayers who prepare their own taxes and
still file paper returns.
Initial Free File reports are very encouraging. As of
February 5, Alliance Members have processed and transmitted
almost 639,000 tax returns. This represents approximately 23
percent of the total 2.9-million-e-filed returns.
Mr. Chairman, we are also absolutely committed to
protecting taxpayers privacy and confidentiality. Taxpayer
information and data will be protected, and the Alliance
members must adhere to IRS' strict privacy standards. We even
required each participating company to obtain both a privacy
and security seal certification.
We also took into consideration taxpayers who do not have
access to a computer. Low income should never be a barrier to
quality service, including free electronic filing. Free tax
preparation and e-file are available in many communities at our
Volunteer Income Tax Assistance and Tax Counseling for the
Elderly sites. Volunteers there help prepare basic tax returns
for low-income taxpayers, the disabled, the elderly and non-
English speakers. Individual taxpayers with incomes of $35,000
or less can also receive free income tax return preparation and
e-file help at IRS tax assistance centers around the country.
We extend this courtesy return preparation to all taxpayers
also qualifying for the earned income tax credit (EITC).
Mr. Chairman, I also would like to stress that taxpayers
are under no obligation to purchase any product from the
software company or to use refund anticipation loans. Obtaining
a fee-based product is a decision left to the individual
taxpayer. The Internal Revenue Service as well as many of the
Alliance company Web sites also reminds taxpayers that those
who e-file and use direct deposit often receive their refunds
in 10 days or less.
Mr. Chairman, in conclusion, Free File is a breakthrough
for America's taxpayers. We are putting e-file within reach of
millions more taxpayers and delivering on our President's
commitment to put the needs of citizens first. This new program
may be called Free File, but what it gives to millions of
taxpayers and our government is invaluable. Thank you.
[The prepared statement of Mr. Wenzel follows:]
Statement of the Honorable Robert E. Wenzel, Acting Commissioner,
Internal Revenue Service
INTRODUCTION
Mr. Chairman, and distinguished Members of the Subcommittee, thank
you for this opportunity to discuss the joint IRS-private sector ``Free
File'' initiative. Accompanying me today is Mr. Terry Lutes, IRS'
Director of Electronic Tax Administration.
Before I begin my formal testimony, let me thank you, Mr. Chairman,
for your leadership and efforts to promote electronic filing and make
it available to more taxpayers. Working closely with you, the
Subcommittee, the Administration and the private sector, we are making
steady progress to achieve congressionally mandated e-file goals and to
provide service to taxpayers on a par with the very best private sector
companies. Free File is a big step in that direction.
BACKGROUND
On January 16, 2003, the Treasury Department, the Office of
Management and Budget (OMB) and the IRS launched a free on-line tax
preparation and filing service called Free File. It was made possible
through a partnership agreement between the IRS and the Free File
Alliance, LLC--a private sector consortium of tax software companies.
It could not have come a minute too soon.
The IRS Restructuring and Reform Act of 1998 (RRA 98) mandated that
at least 80 percent of individual tax returns be filed electronically
by 2007. Electronic filing's benefits are clear and compelling.
Taxpayers and the IRS find it more convenient and economical and less
time consuming to do business electronically rather than sending paper
through the mail. Moreover, the government saves money, but the real
benefits are conveyed to the taxpayer. They include reduced preparation
time, faster refunds, accuracy of returns and acknowledgment of return
receipt.
We have certainly come a long way from e-file's humble beginnings.
It began as a pilot program in 1986 in three metropolitan areas with 25
thousand returns filed electronically--a miniscule .02 percent of all
returns filed. However, e-file's growth literally exploded, and last
year, 35.6 percent of returns were e-filed. This year, we expect that
over 40 percent of all individual returns will be filed electronically.
Taxpayers can now e-file from their home computers or by using an
authorized provider. For those eligible, TeleFile, the IRS file-by-
telephone system, is the easiest way to go. To attract potential e-
filers, we have added new features and enhancements, such as direct
deposit of refunds and payments by credit cards or electronic funds
withdrawal. Taxpayers in 37 States and the District of Columbia can e-
file their Federal and State tax return in one transmission to the IRS.
Taxpayers who need a filing extension can get one automatically by
making a simple telephone call. We are systematically removing the last
few barriers to e-file to open up eligibility to almost every taxpayer.
For example, we recently published final regulations replacing the
temporary ones published last year, enabling virtually all 1040 forms
and schedules to be filed electronically, without any paper signature
document.
Mr. Chairman, I also want to note that the IRS is making progress
to better serve the business community's electronic tax administration
(ETA) needs. During FY 2002, over $1.6 trillion came in electronically
through the Electronic Federal Tax Payment System, which now includes
an online option. In FY 2002, we received more than 3.16 million 941 e-
file program returns (Employer's Quarterly Federal Tax Return) and
863,000 returns for 941 TeleFile and On-Line Filing Programs. In FY
2002, over 320,000 businesses used the 940 e-file Program (Employers
Annual Federal Unemployment Tax Return), and more than 21,000
partnerships chose 1065 e-file (U.S. Return of Partnership Income) in
FY 2002.
We are also working on new initiatives to develop and mature other
additional electronic products and services for this important taxpayer
segment. For example, later this spring, businesses will be able to
apply for an Employer Identification Number online through irs.gov. We
are also building a new e-file system that will grow and serve
taxpayers for years to come. Scheduled to start in 2004, it will
address the current system's limitation. For example, it will accept
complex business returns, such as 1120s (corporate income tax returns),
eliminate software barriers and resolve standardization issues, such as
reject code and validations.
Clearly, we have made considerable progress towards RRA 98's ETA
goals. In addition, improved electronic exchange of information with
taxpayers and practitioners also advances all three of the IRS'
strategic goals: service to each taxpayer, service to all taxpayers and
productivity through a quality work environment. In its December 2002
report to you on the 2002 Filing Season, the General Accounting Office
stated:
``The number of individual tax returns filed electronically
grew from about 40.2 million in 2001 to about 46.9 million in
2002, an increase of about 16.5 percent, and the percentage of
individual tax returns filed electronically reached 35.9
percent. This 16.5-percent increase over the number of returns
received electronically in 2001 was more than the IRS's goal of
15 percent and continued the upward trend in the number of
returns filed electronically since 1995. IRS took some positive
steps, including an increased focus on taxpayers and tax
practitioners who prepare returns on computer but file on
paper, that helped it achieve that increase and that could lead
to further increases in the future.''
Nevertheless, even with a 16 percent annual growth rate, the IRS
would fall short of Congress' extremely challenging 80-percent goal. To
meet this ambitious objective, we must make it not only technologically
possible, but also attractive to both practitioners and taxpayers to
make a permanent change from paper to electronic filing. For example,
to build practitioner interest, the IRS will offer later this year a
suite of electronic services, such as disclosure authorization,
transcript delivery and account resolution, to tax practitioners who
file a certain number of returns electronically. The Electronic Tax
Administration Advisory Committee (ETAAC) observed in its 2002 report
to Congress that these types of e-services are a major incentive for
practitioners to e-file their clients returns. The Administration also
undertook several initiatives to build taxpayer interest. For example,
in addition to Free File, the President proposed a major incentive in
his FY 2004 budget that would extend to April 30 the due date for
returns filed and paid electronically.
However, e-file cost was a far more complex problem. IRS research
and GAO reports identified cost as an impediment to further e-file
growth. Notwithstanding the many advantages of preparing and filing a
tax return electronically, some taxpayers are deterred by cost, or find
it prohibitive. For years, the IRS and the tax community would grapple
with this issue and had little success resolving it. That changed
dramatically with Free File.
Free File's roots can be found in the President's FY 2002
Management Agenda. It contained five Government-wide initiatives, one
of which was to expand electronic government. The overarching goal was
to ``champion citizen-centered electronic government that will result
in major improvement in the Federal Government's value to the
citizen.''
Subsequently, in November 2001, OMB's Quicksilver Task Force
established 24 e-government initiatives as part of the President's
Management Agenda. These initiatives were designed to improve
government-to-government, government-to-business, and government-to-
citizen electronic capabilities.
One initiative instructed the IRS to provide free online tax return
preparation and filing services to taxpayers. In accordance with this
OMB directive, the IRS began working in partnership with the tax
software industry to develop a solution. Two principles would guide its
development: no one should be forced to pay extra to file his or her
return and the IRS should not get into the software business.
The IRS believes that private industry, given its established
expertise and experience in the field of electronic tax preparation,
has a proven track record in providing the best technology and services
available. Rather than entering the tax software business, IRS'
partnership with private industry will: (1) provide taxpayers with
higher quality services by using the existing private sector expertise;
(2) maximize consumer choice; (3) promote competition within the
marketplace; and (4) meet these objectives at the least cost to
taxpayers.
DELIVERING FOR TAXPAYERS
The President stated in the preface to his Management Agenda that
``good beginnings are not the measure of success. What matters in the
end is completion. . . . Not just making promises, but making good on
promises.'' That is exactly what the Free File partnership did--it made
good on its commitment and delivered for taxpayers.
Through the Free File Alliance, LLC (the Alliance), America's
taxpayers can now access free, online tax preparation and electronic
filing services through our redesigned Web site at www.irs.gov, which
received 3.2 billion hits last year, or by going to www.firstgov.gov.
These free services will be available this year through April 15, 2003.
Some companies will also offer free services through October 15, 2003
to accommodate taxpayers who may need an extension.
The partnership agreement requires that the Alliance as a whole
provide free tax preparation and filing to at least 60 percent, or
approximately 78 million American taxpayers. The primary candidates for
Free File are those taxpayers who prepare their own taxes and still
file paper returns. Last filing season, the IRS received nearly 85
million paper returns and nearly 47 million e-filed returns.
Each participating software company sets its own eligibility
requirements. Generally, these requirements may be one, or any
combination of the following: (1) age; (2) Tax Year 2002 Adjusted Gross
Income; (3) eligibility to file Form 1040EZ; (4) eligibility to claim
the Earned Income Credit; (5) State residency; and (6) active duty
military status (if applicable). Unless noted, if the taxpayer is
married and filing jointly, only one taxpayer must meet the eligibility
requirement.
Initial Free File reports are most encouraging. As of February 5,
Alliance members have processed and transmitted almost 639,000 tax
returns. This represents approximately 23 percent of the total 2.8
million on-line e-filed returns. The Alliance partners will report the
number of Free File returns to us on a monthly basis.
Mr. Chairman, I want to stress that Free File differs markedly from
the free e-filing that some companies offered to select taxpayer groups
for several years. It is far better in a number of key areas.
First, it is a multi-year agreement between the IRS and the Free
File Alliance that provides free services to millions more taxpayers.
Previously, free offers were not consistently available and were
subject to modification or discontinuation from year to year.
Second, taxpayers will have easier access. The Free File Web page
hosted on irs.gov provides in a single location a list of all free
offerings.
Third, Alliance members will offer both free preparation and e-file
service. The taxpayer will incur no cost. Previously, some companies
charged for preparation (filling out forms and tax calculations) while
offering the transmission free, or provided the preparation free while
charging for transmission, or some variation thereof. Under the Free
File Agreement, both are free to eligible taxpayers.
Fourth, there will be oversight. The Alliance will be managed by
the Council for the Electronic Revenue Communication Advancement
(CERCA). The IRS will also monitor the progress of each Alliance
member. Should any problems develop, the members are required to alert
the IRS. If appropriate, the IRS will remove the company from the
online listing until the problem is resolved.
HOW DOES FREE FILE WORK
Before I discuss the actual workings of Free File, I want to
reemphasize that the IRS does not formally or tacitly endorse any of
the products or services that any of the Alliance companies may offer
taxpayers. This is a private matter between the companies and
taxpayers. Moreover, using Free File is not contingent on a taxpayer
accepting any of these offers. The key word in Free File is ``free.''
Upon arrival to the Free File page within irs.gov, the taxpayer
must determine eligibility for using a particular company's free
service. This can be done two ways. First, the taxpayer may browse the
complete listing of Alliance members and their free services. Or, a
taxpayer can use a ``questionnaire'' application (the Free File Wizard)
designed to assist the taxpayer to identify those free services for
which he or she may qualify.
Each Alliance member will identify its company name and will have a
simple description of the criteria for using its free service. Each
Alliance member's company or product name will also be linked to
additional information about the company and/or services. Not all
taxpayers will be eligible for these free services.
Upon determining eligibility, the taxpayer can link directly to
that Alliance member's free service by clicking their ``Start Now''
link. Upon doing so, taxpayers will be notified they are leaving the
irs.gov Web site and are entering the Alliance member's Web site.
The company's software will prepare and e-file the taxpayer's
returns using proprietary processes and systems. The company will then
transmit the electronically-filed return to the IRS using the
established e-file system, which uses secure telephone lines. Lastly,
the company will e-mail the taxpayer an acknowledgment file, notifying
the taxpayer that the return has been either accepted or rejected.
As part of the Agreement, Alliance members will provide appropriate
customer service to their clients. Taxpayers who have service questions
or are experiencing problems with the services being offered by a
particular Alliance member's software should contact the customer
service function of that particular company. In the event a taxpayer
contacts the IRS first, our customer service representatives will have
contact information for each Alliance member and if necessary, will
refer accordingly.
Mr. Chairman, I want to underscore that Free File's benefits are
identical to those of e-file. They bear repeating: (1) reduced tax
return preparation time; (2) faster refunds; (3) accuracy of returns;
and (4) acknowledgement of return receipt. In other words, the use of
free tax preparation software is comparable to the Alliance members'
paid products.
TAXPAYER SECURITY AND PRIVACY
Mr. Chairman, privacy and security are paramount considerations in
all of IRS' electronic services, including Free File. We are absolutely
committed to protecting taxpayer privacy and confidentiality. Taxpayer
information and data will be protected and the Alliance members must
adhere to IRS' strict privacy standards. To ensure taxpayer data
safety, we required each participating company to obtain both a privacy
and security seal certification.
These programs, administered by third party providers, certify that
taxpayer return information will be protected from unauthorized access
during the tax preparation process. We also encourage taxpayers to
visit the company's privacy and security policy located on their
commercial Web site.
Indeed, taxpayer security and privacy are woven throughout the Free
File process. Tax return preparation is accomplished using proprietary
software approved by the IRS. Transmittal is through the established
IRS e-file system. As I mentioned, each Alliance member must obtain a
third party privacy and security certification. Alliance members must
also comply with all Federal rules and regulations on taxpayer privacy
for paying and free customers. These rules prohibit use of tax return
data for purposes not specifically authorized by the taxpayer.
Finally, the information taxpayers provide through the Free File
Wizard will be used solely to help taxpayers select a free service;
thereafter it will be deleted. The IRS only retains the officially-
filed return information.
TAXPAYERS WITHOUT HOME COMPUTERS
Mr. Chairman, as I previously discussed, Free File is premised in
part on the principle that no one should have to pay to file a return.
That includes taxpayers who do not have access to a computer. Low
income should never be a barrier to quality service, including free
electronic filing.
Free tax preparation and e-file are available in many communities
through the Volunteer Income Tax Assistance (VITA) and Tax Counseling
for the Elderly (TCE) programs. Volunteers help prepare basic tax
returns for low-income taxpayers, persons with disabilities, the
elderly, and non-English speaking people. Taxpayers can call 1-800-829-
1040 to find their nearest VITA or TCE site. They may also call AARP--
the largest TCE participant--at 1-877-227-7669 to see if there is a Tax
Aide site in their community.
However, Free File will not normally be used at VITA sites for a
number of reasons. First, we train our thousands of volunteers to use
one standard software package, versus the many different ones offered
by the Alliance companies. This consistency is both cost efficient and
produces a much higher accuracy rate in the volunteers' preparation of
taxpayer returns. In fact, we currently enjoy a 98 percent accuracy
rate at the VITA sites. Second, we transmit large batches of e-file
returns at VITA sites; usually 50-100 at a time. Free File is oriented
towards the individual taxpayer and was not intended for such high
volume use. Third, some VITA sites do not have access to the Internet
so Free File is not an option.
Individual taxpayers with incomes of $35,000 or less can also
receive free income tax return preparation and e-file help at IRS Tax
Assistance Centers (TACs). We extend this courtesy return preparation
service to all taxpayers qualifying for the Earned Income Tax Credit,
without placing the government in competition with private industry.
All of these returns are e-filed; we do not deal with paper individual
returns. Taxpayers whose income or preparation needs exceed the basic
service will receive service options, such as referrals to local
volunteer organizations.
To better serve low-income taxpayers, the IRS' Stakeholder
Partnership, Education and Communication (SPEC) organization is
establishing extensive partnerships with external groups such as local
governments, non-profit organizations, private for-profit businesses,
and others to create community coalitions. We are focusing our limited
resources on providing technical expertise and training while
encouraging the community partners to supply resources such as
volunteers, space and computer equipment. This business model has
rapidly gained national recognition and acceptance.
Our goal is to make our partners as self-sufficient as possible and
to identify those organizations that could make available needed
resources. This new approach allows the IRS to expand access to low-
income taxpayers, provide greater free tax return preparation and
filing, and sustain these services over time.
Mr. Chairman, as previously noted, taxpayers are under no
obligation to purchase any product from the software company (some
participating companies do not offer such services) or to use Refund
Anticipation Loans. Obtaining a fee-based product is a decision left to
the individual taxpayer. The IRS, as well as many of the Alliance
company Web sites, also remind taxpayers that those who e-file and use
direct deposit often receive their refunds in 10 days or less.
CONCLUSION
Mr. Chairman, in conclusion, Free File is a breakthrough for
America's taxpayers. We are putting e-file within reach of millions
more taxpayers and delivering on the President's commitment to put the
needs of citizens first. In addition, we are following up on our
commitment to provide taxpayers with top quality service. And we are
making the best use of the taxpayers' dollars by processing returns
faster and at a lower cost. This new program may be called Free File,
but what it gives to millions of taxpayers and our government is
invaluable. Thank you.
Chairman HOUGHTON. Thank you very much, Mr. Commissioner.
Just a couple of comments here. First of all, we are going to
have to push this thing along a little bit because we have
three panels. The first is you, Mr. Commissioner, and then I
think we have probably a series of votes coming up. Then
second, if I understand correctly, there is an IRS Web site
that is to be shown; is that right?
Mr. WENZEL. Yes. With your permission, we would like to
give you a brief demonstration of our site.
Chairman HOUGHTON. All right.
Mr. LUTES. Okay. Thank you. What I am going to do is just
walk you through it. I think there were screen prints made,
copies were made available, of what I am going to show. First
of all, during--throughout the filing season when you go to
www.irs.gov, a site which got over 3\1/2\ billion hits last
filing season, and we expect that to grow this year, on the
front page folks are going to see the link to the Free Filing
offering.
By clicking on the Free Filing offering, you go to what we
call the Free File splash page. I am not going to go through
this page in detail; however, there are a number of links here
about the information you need before you start preparing a
return, things you should know. There is a one, two, three as
to what the steps are of the electronic filing process, to help
folks understand, and then there is a series of frequently
asked questions around privacy, security, the nature of the
contract and the agreement we have with the industry and so
forth.
When you are ready to prepare the return you click start,
and it will take you to this page, and you have a couple of
choices here as to how to use it.
What I am going to take you to first is the ``guide me to a
service.'' There are 17 companies that have agreements with the
Free File Alliance to provide services for this filing season.
How do taxpayers sort through those companies to determine
those that they are eligible for, because each company
determines on its own which taxpayers it wants to cover with
its offering? By going to ``guide me to a service,'' there is a
series of six questions the taxpayer would answer, and if they
answered those questions correctly, and then clicked the submit
button, it will then list the offers that they are eligible to
use, and then they can click on the company and begin the
return. I will show you how that happens in just a moment.
The other way to do this, you can either scroll down the
page and see the listing of companies, or if you click ``browse
all the services,'' you lose the top part, and it is easier to
browse, and then you look at the companies, and you can read
about the companies, who they are covering. You can bring up
just a longer description of the companies. When you have
selected the company you want to use, either from the wizard or
from this list, you click start now, and an important thing I
want to illustrate is you get a disclaimer that makes it clear
to the taxpayer that you are no longer going to be in a
government site. These are commercial products. The same
commercial products that millions of people paid to use last
year are being made available for free, but it is through the
commercial providers. We want taxpayers to understand. Then
they click to leave the IRS site, and then they go to the
company site.
Basically, that is the way the process works, and we just
wanted to illustrate that we think we have designed this in a
way that makes it easy for taxpayers to use and understand how
the process will work. Thank you.
Chairman HOUGHTON. Thank you very much, Mr. Lutes. That is
great.
Now, let me just ask a quick question, and then I want to
pass it along to the others. Why did you choose 2007 to get the
80 percent? What are the factors that are now impeding you from
reaching that goal?
Mr. WENZEL. That is a good question because I think that
when that was part of the restructuring format of 1998, there
was a lot of discussion with the Congress and the IRS. The
thinking was that might be a realistic year to achieve that
kind of percentage. Back then it was our best thinking that
while it was a very, very ambitious goal, and we certainly, at
this point in time, see it as a real stretch for us to reach
that number. We felt it was the right thing to achieve, and by
that year.
Chairman HOUGHTON. Well, it is always good to shoot high,
and obviously that is what you did, but, why not 75 percent, or
why not 50 percent or something? What led you to believe that
in that 10-year period you could do this?
Mr. WENZEL. I think that when we looked at what we
experienced--e-file started in the IRS in the filing season
calendar year 1986. That first year there was approximately
26,000 returns that were filed. Then we started to see the
growth and the acceptance by the public through--from that year
forward. We looked at the opportunities that we had with
additional incentives that we thought we could put out in terms
of encouraging people to convert from the paper filing to
electronic filing. The goal, as you know, is also for business
returns, so it is all types of tax returns filed with the IRS.
Our best feeling was, at the time, that 80 percent, four out of
five returns by that year would be filed electronically.
We have--as I mentioned, in terms of what our current track
is, in terms of reaching that goal, if it stayed the way it is,
with what we expect this year, again we expect a significant
growth, we are predicting about 54-million individual returns
will be filed electronically as compared to 47 million last
year. So, that is another significant growth. We still will not
reach the 80 percent, and we continue to work with the industry
to find new and, innovative ways to reach our 80-percent goal.
For example, in the President's fiscal year 2004 budget,
there is a provision that would extend the filing season from
April 15 to April 30 for any individual who would file their
tax return with us electronically. We predict, if that should
pass, that would provide a significant incentive for people
that still file on paper to file electronically. Of note,
approximately 132 million form 1040s, individual tax returns,
will be filed that calendar year, and when you look at when
those returns are filed, of significance is that a very high
percentage, almost half, are coming around April 15. Both
refund returns and also, of course, the balance due tax returns
are there. We feel that with--the additional 2 weeks from April
15 to April 30, we will reach that group of taxpayers that wait
until the end of the due date or near the end of the due date.
That will encourage them to maybe file electronically and help
us along toward that 80-percent goal.
Chairman HOUGHTON. Thanks very much.
Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman.
I want to echo my friend Rob Portman's comments about this
being a good thing and commending you for establishing these
partnerships that basically facilitate greater access of the
American public to e-filing; the greatest benefit, internal
math checking to make certain a return is filed correctly, and
sparing the time and disruption that an incorrect return would
result, as well as quickly accelerating the receipt of the tax
return.
What can an e-filer expect by way of time line on a tax
return?
Mr. WENZEL. If an e-filer files a tax return with us and
also opts to use the direct deposit provision, and they are
entitled to a refund, they will probably receive that refund
check--I should say not the check, but the refund deposit in
their bank account within 10 days.
Mr. POMEROY. I think that is terrific.
Now, I used to be an insurance commissioner, so policing
marketplace activity is something that comes naturally to me,
and I don't mean in any way to impugn any untoward business
practice on your partners, your private sector partners who
have done so much to advance this service, but there are some
oversight questions appropriately directed at their marketplace
activities. Are you aware of whether or not loans are being
made, loan services are being made relative to the return by
any of your participating partners?
Mr. WENZEL. Yes, there are several that are offering that
service. If an individual opts to use that service--it is not
required, it is still a free service to file the return.
Mr. POMEROY. Mr. Commissioner, I note that you indicate on
page 5 of your testimony that the IRS does not formally or
tacitly endorse any of the products or services that any of the
Alliance companies may offer taxpayers. I will agree with you
on formally, but I don't agree with you on tacitly. As a
taxpayer, if I, through the IRS Web site, find myself
essentially in a private product of preparing my tax return as
a part of a public-private partnership, I do think that there
is a tacit acknowledgment by the IRS that the services sold in
conjunction with the private partner are acceptable for public
consumption.
It is my view that loan activity for the dependency of a
return that at maximum is 10 days is highly suspect. If this
was an insurance product put before me, I would say, uh-uh. You
don't sell this unless there is confusion in the marketplace,
because no one would reasonably conclude that they need that
loan for that period of time.
Have you scrubbed the products, Mr. Commissioner, to make
sure that they pass the smell test for the American consumer?
Mr. WENZEL. Congressman, the refund anticipation loan has
been part of this e-file program for some time, and, our view
of that is that we emphasize as much as we can as how quick a
refund check could come back if you use direct deposit.
Mr. POMEROY. I think you are turning the refund around so
quickly that you just really wouldn't need one of those.
Mr. WENZEL. That is the emphasis that we continue to try to
make everyone aware of. Our experience has been that the
consumer, our taxpayer, still has opted to use the----
Mr. POMEROY. Well, consumers can be confused Mr.
Commissioner. Have you ever sat down with your vendors and
said, what is the compelling market need for a product of this
nature?
Mr. WENZEL. In terms of me personally, in the acting
capacity that I have been in, I have not done that.
Mr. POMEROY. I would like the Service to do that due
diligence. In my opinion, the marketplace is owed a wide
variety of products, and consumers can make their choice. On
the other hand, if something on its face really looks as though
it probably doesn't serve a valuable purpose to the consumer,
we can draw a conclusion that this is sold only by consumer
confusion, and we ought not allow products of that nature.
For example, in insurance, I would refuse to approve for
the marketplace illusory policies, policies that appeared to
provide something, but took it all away with loopholes. This,
in my opinion, is kind of an illusory policy. It looks like you
are getting a loan, but, heck, you are going to get your refund
in 10 days. You probably won't get your loan proceeds until 5,
6, 7 days, so you are spending some money for just a very
short, literally maybe a weekend's worth of time, and it just
isn't worth it.
What I would like the Service to do--I see I am out of
time, and I would just submit for you--I know we want to move
this hearing along--several specific items where I would like
the Service at the end of this tax year to survey its vendors
and get us the information. We would like to find out, for
example, the number of people that have purchased these refund
anticipation loans from the vendors and such other services as
the vendors are marketing.
I just think it is important to keep an eye on this
activity. Again, I don't mean to impugn anything on the
valuable private partners to this initiative. We just want to,
as part of our due diligence, make sure the products are
appropriate for the American public. Thank you very much.
Mr. WENZEL. Congressman, we look forward to providing you
with the information that you requested.
[The information follows:]
Internal Revenue Service
Washington, DC 20224
Answer: First, we should make it clear that companies involved in the
Free File alliance are not our ``vendors.'' Rather, we have an
agreement with them that is not contractual in nature. This is a
partnership agreement intended to provide the opportunity for free
filing of Federal income tax returns over the Internet to as many
people as possible. The nature of the agreement was to take the same
product that millions of people have paid for and to make those
products available for free.
Taxpayers who use tax preparation software generally want to
receive their refunds as quickly as possible. We have made strides over
the past several years to accelerate the delivery of tax refunds
through the electronic filing system. However, some taxpayers have
traditionally sought refund anticipation loans as a way to get their
refunds even faster. The practice of using tax refunds as loan
collateral goes back many years, predating the advent of electronic
filing. We anticipate that with the rollout of the Customer Account
Data Engine over the next several years taxpayers will be able to
receive refunds in a week or less, thus, reducing the demand for refund
anticipation loans.
Chairman HOUGHTON. Okay. Thank you very much, Mr. Pomeroy.
Mr. Portman.
Mr. PORTMAN. Thank you, Mr. Chairman. Commissioner Wenzel,
you were rather generous in your response to our earlier
question about how the IRS came up with this 80 percent,
because we came up with it for you. He was pretty nice to you
actually, Amo, on that one. We came up with it not so much in
the legislation, but it came out of the Commission's work,
again, 2 years of studying this and trying to set an ambitious
but, we thought, realistic goal.
We are disappointed we are not further along, because we
think electronic filing is both good for the tax system and
also very good for the taxpayer. We also did not put in place
any penalties for the IRS not achieving that goal. We
established it as a goal, not a mandate, and we thought it was
appropriate to encourage it.
One of the sticking points had been this notion of getting
folks who have relatively simple returns particularly into the
electronic system in a free way, and the cost, which I think
only averaged last year about $12 or $13, but that cost alone
kept people from filing electronically. Instead they went
through the paper route with all the error associated with that
on their part and the IRS part, and all the additional costs,
all the additional costs to you to have additional people to
open those forms and work through the system, and all the
downstream costs we talked about earlier to the taxpayer where
the taxpayer ends up getting, because of a mathematical error
or some other error, a phone call from the IRS or a letter from
the IRS. It begins sometimes a string of back-and-forth that
sometimes our congressional offices get involved with, which is
enormously frustrating to taxpayers and to the system, and
costly.
So, it is a good thing, and the question is how are we
going to do that? I know the private sector was very concerned,
as was I, frankly, about the IRS competing with the private
sector, that you are not really in the software business, and
you are not likely to be as successful, frankly, or as
innovative as the private sector in coming up with new ways to
encourage people to file electronically.
So, again, I commend you for working out an arrangement
with the private sector where they are going to offer this as a
free service at least to folks who are up to the 60th
percentile on income. I think it will be a major push if we
advertise it properly, and that is what I love about your Web
site, which has been very successful, and I think both the
private sector and you ought to redouble our efforts in term of
letting people know how this is simpler, easier and better for
them.
A couple of questions, if I might. First on the error rate.
What is the error rate now on paper returns?
Mr. WENZEL. The error rate on the paper returns continues
to run as high as 22 percent as you previously mentioned, and
it really hasn't changed that much in years. It still could
vary.
Mr. PORTMAN. Roughly of that 22-percent error, which is an
enormously high number, roughly half of that is attributable to
the taxpayer; is that correct?
Mr. WENZEL. What has generally been the trend is taxpayer
error return, third-party preparation error, or the IRS making
the mistakes.
Mr. PORTMAN. A lot of it is transposing the numbers by your
folks.
Mr. WENZEL. Transposition of the numbers.
Mr. PORTMAN. Hit return. You are then putting it into the
computer rather than having it come straight through on an
electronic form.
Mr. WENZEL. That is correct, Congressman. It is the key
entry that has a tendency to make a mistake.
Mr. PORTMAN. How about the error rate on the electronic
filing?
Mr. WENZEL. The electronic error rate, again, the numbers
that you mention are right on in terms of somewhere--1 percent
or less. It is a very, very low rate.
Mr. PORTMAN. It is an incredible savings and difference.
On the refund anticipation loans, that is one issue out
there the private sector is now going to have an opportunity to
have people go through your site through and then to a free
service to file, and the notion that my colleague from North
Dakota mentioned, which I agree with, is you don't want to have
people who are going to get a quick refund on average 10 to 14
days be pressured into getting into these refund anticipation
loans, which is not necessarily good for the taxpayer. On the
other hand, I am not sure it is as big a problem as we are
making it out to be, because I don't think many people do that.
Do you have any data on how many folks who file
electronically actually seek a refund anticipation loan?
Mr. WENZEL. I don't have that in front of me. Do you?
Mr. LUTES. Yes. I can address it in general terms. What we
capture is information about financial products related to the
return. There is an financial product indicator that comes to
us electronically. However, financial products include a
variety of services, not only refund anticipation loans. For
refund anticipation loans, we do know is that the majority of
those are by taxpayers who go to a tax professional. The refund
anticipation loans on online products, which these are offering
online Web products, according to the industry is less than 1
percent.
The other thing I would say in response to the question is,
if you go to the sites and you look to the 17 sites, they vary.
They are commercial sites; they vary. Some will have a line
item on the front page that talks about the fact that you can
get a quick loan. However, many of the sites, if you look at
their front page, three levels down, emphasize you are
electronically filing; you are going to get your refund much
faster as a result of the electronic filing. They really
emphasize that. For those taxpayers who then do want it faster,
they offer the service. I think there is going to continue to
be some demand until we are able to deliver our modernization
so we can deliver refunds even faster than the 10 days.
Mr. PORTMAN. So, you think that 1 percent figure is
accurate, that only 1 percent of taxpayers who file
electronically actually seek a refund anticipation loan?
Mr. LUTES. It is 1 percent who file electronically using
the online, using Web or the shrink wrap products. Those who
file electronically using a practitioner, the number is higher.
Mr. PORTMAN. My time is up, but certainly more information
as to the speed at which someone can get a refund is going to
affect that, and I assume that that is something that you can
communicate. Again, I commend you for this program, and I yield
back my time, Mr. Chairman.
Chairman HOUGHTON. Thanks.
Mr. Kleczka.
Mr. KLECZKA. Thank you, Mr. Chairman. Mr. Lutes, one quick
follow-up question to the whole issue of tax refund loans. What
is the average charge for these loans? Let's say I did a paper
return. Do you know what that firm might be charging, because
the refund might be a heck of a lot longer than the electronic?
Mr. LUTES. It varies very widely if you are using a tax
professional, depending upon the complexity of the return if
you are looking at the entire charge. Usually the refund
anticipation loans typically--and I don't know that this is 100
percent the rule--but typically there is a flat fee that is
charged, and I have seen some in the range of $60, $50, but
usually I think it would be safe to say that $50 to $70 range
would be the charge.
Mr. KLECZKA. Have you seen any higher or done on a
percentage?
Mr. LUTES. I really can't answer that question because I
haven't gone through and looked at all the pricing, because one
of the things to remember is the idea of using a tax refund as
collateral for a loan predates electronic filing. It has been
around for years. What we actually see, we can see on the on-
line sites, if we go and look site by site at what is there. In
the practitioner office we don't have any real system for
collecting that data. What we do, though, is emphasize in our
guidelines for electronic filing originators they have to apply
be approved, and we can suspend them.
One of the things that we monitor is people who are
implying that what folks are getting is a faster refund. We
make it clear that they have to communicate clearly to the
taxpayer it is a loan, and there is a fee. This is not IRS
doing this. This is a bank.
Mr. KLECZKA. I think it would be wise for the Service to
look at not only the fee being charged for the electronic file,
but all firms charging a fee, just to make sure that our
taxpayers aren't being gouged. Thanks.
Chairman HOUGHTON. Okay. Mr. Johnson is not here. Ms. Tubbs
Jones.
Ms. TUBBS JONES. When you are new, you can't even find the
microphone, but I am going to get it together here.
I think also it might be interesting to kind of take a look
at the agreements with the companies to--or I would like to
have a copy of the agreement. I am not saying in terms of
review. I don't want to tarry on that part of the conversation.
I am sure that a number of my colleagues have asked enough
questions. I guess what I would be interested in knowing is you
said that there will be--there are locations where taxpayers
can get volunteers to help them with these services. How is
that set up?
Mr. WENZEL. We have had a voluntary income tax preparation
activity for many years, I would say, approximately 30 years,
throughout the country. The AARP is one of the principal
organizations that assist us, retired accountants or just
volunteers that belong to that organization come in and we
train them. There are college students, a whole range of
individuals that this time of year realize how important it is
to meet one's financial responsibility to our country and want
to offer assistance. Those sites are staffed by these
volunteers evening hours, during the day, during the week, but
especially on Saturdays.
Ms. TUBBS JONES. How do--say, for example, if I wanted to
know who was doing volunteer IRS, filing or assistance with
filing in my congressional district, who could give me that
information?
Mr. WENZEL. We try to publicize that through our own
www.irs.gov Web site in terms of where the locations are. We
solicit the support of the volunteer organizations to reach out
and also publicize that. The media is very cooperative in
publicizing locations, times and dates.
Ms. TUBBS JONES. What else did I have? I probably had some
more questions, but since we are near the end of the time, I am
just going to pass on that so that they can be gone since
everybody else is gone. Okay.
Mr. PORTMAN. [Presiding.] I thank my colleague from
Cleveland, and, Mr. Wenzel, we appreciate your testimony. Thank
you, Mr. Lutes. Appreciate your testimony, and the program will
now go to the next panel.
Kevin Belden will come forward; Michael Cavanagh.
Gentlemen, thank you very much. Chairman Houghton has gone to
vote so he can come back and be with us toward the end of this
panel. We do have another panel: Ms. Olson, who is going to be
joining us for the third panel. We have a vote now, which will
be separated by about a 20-minute period until the next vote,
which is a motion to recommit, so we thought it would be best
to try to keep this moving.
Mr. Belden, thank you very much for being here. Mr. Kevin
Belden is Chairman of the Electronic Tax Administration
Advisory Committee (ETAAC). Then Mr. Michael Cavanagh. Thank
you for being here. Mr. Cavanagh is the manager of the Free
File Alliance.
I would like to remind the witnesses that we have a 5-
minute rule on testimony; however, we might be a little
generous with that since Members have all gone to vote. If you
could please direct your testimony to me, and, again, Mr.
Houghton should be returning shortly. Mr. Belden.
STATEMENT OF KEVIN BELDEN, CHAIRMAN, ELECTRONIC TAX
ADMINISTRATION ADVISORY COMMITTEE, AVERILL PARK, NEW YORK
Mr. BELDEN. Mr. Chairman, Members of the Subcommittee and
distinguished guests, my name is Kevin Belden. I am honored to
serve again this year as Chairman of the IRS's Electronic Tax
Administration Advisory Committee. Other panelists are
presenting detailed information this afternoon about the
genesis, the characteristics and benefits of the Free File
initiative. My remarks will focus more on addressing Free File
in the larger context of congressional goals for electronic
filing.
We are approaching the midpoint between 1998, when those
goals were established, and 2007, when the target was to be
achieved. The goals have been powerful motivators for focusing
IRS resources on electronic filing initiatives. While the IRS
has made considerable progress at the current rate of adoption,
electronic filing rates will fall short of the target.
Initial IRS efforts focused on expanding the availability
of electronic filing particularly for individuals. Those were
necessary first steps, but we have since learned that offering
electronic filing options does not by itself lead to their use.
The vast majority of individual tax filers are able to file
electronically, yet just under 36 percent of all individual
returns were electronically filed this past year.
The key challenge to increasing electronic filing is to
stimulate demand by taxpayers and by tax preparers. To do so
the IRS will need to overcome increasingly challenging barriers
to adoption. Those barriers include cost of electronic filing,
the continued preference for paper filing, lack of awareness of
electronic filing alternatives, and concern about privacy and
security. Some of these barriers can be addressed through
education and marketing, but the bottom line is that the
benefits offered today by electronic filing are not
sufficiently compelling for all taxpayer and practitioner
segments. More needs to be done to increase the value of
electronic filing for these segments.
There are approximately 52-million individual tax returns
filed each year by taxpayers who prepare and file their own tax
returns. The new Free File Alliance initiative primarily
targets this group of taxpayers. This innovative approach
allows each of the players in the tax administration value
chain to focus on what they do best. The IRS will receive more
electronic returns while avoiding the cost of developing its
own online filing product. The IRS can then focus its efforts
on modernizing its back-end systems and electronic filing
platforms to provide greater value and increased electronic
services, each of which will increase and stimulate the demand
for service. The initiative preserves and strengthens
government and industry cooperative relations, which have led
in large part to the electronic filing gains achieved to date.
However, the Free File Alliance initiative alone will not
solve the problem of attaining the 80-percent electronic filing
target by 2007, in the opinion of the ETAAC. Cost is only one
of the inhibitors to electronic filing, and access to a
computer and the Internet is an impediment for many of the
target population. In addition, many in that segment are
comfortable with manual preparation and may be resistant to
change.
Product offerings in future years will need to incorporate
free State filing. Since a number of States are offering free
online income tax filing of State tax returns, the Free File
Alliance members view them as competitors and are not inclined
to cooperate in offering free combined filing of Federal and
State returns in those States.
Addressing this challenge will lead to greater use of Free
File Alliance products in the future. Many of the essential
elements for rapidly expanding electronic filing participation
are falling into place.
Mr. PORTMAN. Mr. Belden.
Mr. BELDEN. Yes.
Mr. PORTMAN. I am sorry to interrupt you. We had hoped that
Mr. Houghton would be back. He is not as fast a sprinter as we
thought. I am going to sprint over and vote, and we will be
back. If you could stop there at your testimony, and then we
can pick up when you come back. We will be recessing just for a
short period of time until Mr. Houghton comes back.
Mr. BELDEN. Be glad to. Thank you.
[Recess.]
Chairman HOUGHTON. [Presiding.] Okay. Let's continue the
hearing. Mr. Belden, good to see you, and I am sorry we weren't
here earlier. Anyway, we are delighted to have you here, and
maybe you want to continue your statement.
Mr. BELDEN. Yes, Mr. Chairman. I was just making the point
that while ETAAC is extremely supportive of the Free File
Alliance, that it in and of itself is not going to completely
solve the 80 percent--the problem of achieving the 80-percent
goal. Cost is only one of the inhibitors to electronic filing,
and access to a computer and the Internet is an impediment for
many in the target population segment. In addition, many in
that segment are comfortable with manual preparation and may be
resistant to change.
Product offerings in future years will need to incorporate
free State online filing since a number of States are offering
free online income tax filing of State tax returns. The Free
File Alliance members view them as competitors and are not
inclined to cooperate in offering free combined filing of
Federal and State returns in those States.
Addressing this challenge will lead to greater future use
of Free File Alliance products. Many of the essential elements
for rapidly expanding electronic filing participation are
falling into place. The IRS is modernizing its core tax
administration systems to make them more capable, flexible and
responsive. New electronic service delivery channels are being
implemented, including secure Web portals for access to
electronic services, and taxpayer account information by IRS
employees and trusted third parties.
E-services are highly anticipated and will be much
appreciated by the professional tax community. The IRS is also
implementing the first of a series of modernized electronic
filing platforms. These modern new electronic filing platforms
are based on industry-accepted standards for data-sharing and
communication, making them cost-effective for the IRS and
attractive for the software developers and the tax
practitioners.
The growth of the Internet and the development of new
business models have prompted a change in the way we think
about tax administration. The new view, which you might think
of as end-to-end electronic tax administration, acknowledges
that third parties in the tax business are the IRS's partners
in serving a common customer, the taxpayer. In this vision
taxpayers would have multiple choices in terms of how they
interact with the IRS and what value-added services they choose
to use. They would not be e-filers, but e-customers.
Tax practitioners would choose from a variety of third-
party software products offering highly interactive e-services
made possible through online communication with IRS systems. A
full range of these services would be available, allowing each
practitioner to make a clean break from their paper process.
Employers and financial institutions would file withholding
information returns electronically, providing electronic copies
to taxpayers and their designated representatives. Financial
institutions may integrate tax account information with other
customer financial information into an electronic financial
portfolio, allowing online account inquiry, customized
financial advice, tax filing and payment reminders, and
electronic tax payments.
The IRS would act as an integrator of this network of tax
administration service providers. Its own electronic tax
administration processes and systems would be designed to
facilitate the smooth interaction of its internal functions
with the specialized functions of its third-party partners and
taxpayers while protecting the security and confidentiality of
taxpayer information.
As has happened with the Free File Alliance, in this
environment the existing tax administration service providers
would likely create new and innovative offerings, and new
providers would undoubtedly enter the market with fresh ideas
and new business models. Taxpayers will be the ultimate
beneficiaries.
Thank you, Mr. Chairman, for the opportunity to provide
ETAAC's views on electronic filing.
[The prepared statement of Mr. Belden follows:]
Statement of Kevin Belden, Chairman, Electronic Tax Administration
Advisory Committee, Averill Park, New York
Mr. Chairman, Members of the Subcommittee and distinguished guests,
my name is Kevin Belden and I'm honored to serve again this year as
Chairman of the Internal Revenue Service's Electronic Tax
Administration Advisory Committee (ETAAC). Thank you, on behalf of the
Committee, for the opportunity to share our views on the progress and
future direction of electronic filing. ETAAC was established to provide
continued input to the development and implementation of the IRS
strategy for electronic tax administration. Members of ETAAC represent
a diverse cross-section of IRS partners, customers and stakeholders,
whose interests and insights are critical to the overall attainment of
electronic filing goals.
The Progress of Electronic Filing
We're approaching the midpoint between enactment of the
Restructuring and Reform Act of 1998--which set goals for electronic
tax administration--and the year 2007 when those goals were targeted to
be achieved. The goals Congress has set for electronic filing have been
powerful motivators for focusing IRS resources on electronic filing
initiatives. However, while the IRS has made considerable progress, at
the current rate of adoption electronic filing rates will fall short of
the goals. Initial IRS efforts focused on expanding the availability of
electronic filing, particularly for individuals. While those were
necessary first steps, we've since learned that offering electronic
filing options doesn't, by itself, lead to their use. The vast majority
of individual tax filers are able to file electronically, but just
fewer than 35% (46.3 million) of all individual returns were
electronically filed this past year.
Business electronic filing initiatives to date have been limited,
but well received. Business returns are generally more complex than
individual returns, as are the filing, authentication and signature
processes. Work is underway, as part of a comprehensive strategy, to
develop and market additional opportunities for business e-filing that
add value for businesses while improving IRS internal operations.
Taxpayers and government tax agencies are not the only players in
the tax administration life cycle. Third party tax practitioners and
tax software developers are key links in the value chain. Tax
practitioners file 60% of all individual returns and at least 85% of
all business returns using tax software acquired from commercial
developers. Many of the returns prepared and filed by taxpayers
themselves are prepared using private sector tax software. The key
challenge to increasing electronic filing is to stimulate demand by
taxpayers and tax preparers. That, in turn, is dependent on increasing
the value of electronic filing for taxpayers and the IRS' third party
partners in tax administration.
To improve the growth rate of electronic filing, the IRS will need
to overcome increasingly challenging barriers to adoption. Research
indicates that those barriers include a continued preference by
taxpayers for paper filing, lack of awareness of e-filing and how to do
it and concern about privacy, security and the role of third parties in
the process. Some of these barriers can be addressed through education
about the advantages of electronic filing--faster refunds, electronic
receipts that offer proof of filing, convenience, accuracy and reduced
likelihood of receiving a notice from the IRS. But the benefits offered
today by electronic filing are not compelling for all taxpayer and
practitioner segments. More needs to be done to increase the value of
electronic filing for these segments. It needs to become part of a
routine way of doing business.
Free File Alliance--An Innovative Approach to No-Cost Online Filing
There are approximately 52 million individual tax returns filed
each year by taxpayers who prepare and file their own tax returns. At
least 30 million of these returns are prepared on a computer, but then
printed and mailed to the IRS. The new Free File Alliance initiative
primarily targets this group of taxpayers. The Free File Alliance
eliminates cost as an obstacle for a potential target segment of at
least 60% of individual taxpayers. This innovative approach allows each
of the players in the tax administration value chain to focus on what
they do best. The IRS will receive more electronic returns, while
avoiding the cost of developing its own online filing product. The IRS
can then focus its efforts on modernizing its backend systems and
electronic filing platforms to provide greater value and increased
electronic services. The initiative preserves and strengthens
government/industry cooperative relations which have led, in large
part, to the electronic filing gains achieved to date. Taxpayers have a
choice of service providers, each offering unique value in a virtual
marketplace.
However, the Free File Alliance initiative alone will not solve the
problem of attaining the 80% electronic filing target by 2007. Cost is
only one of the inhibitors to electronic filing. Demonstrating the
value of electronic filing will continue to be a challenge. Many in the
target segment are comfortable with manual preparation and may be
resistant to change. Free File Alliance products will need to prove
their value by saving time, adding convenience, improving accuracy and
contributing to expedited refunds. To do so, the product offerings in
future years will need to incorporate free State online filing.
Lack of access to a computer and the Internet will likely be a
roadblock for many in this group. The IRS will need to identify and
encourage public access to computers and the Internet in such places as
IRS and other government offices, community colleges, public schools,
libraries and post offices. Additionally, tax preparation companies may
realize significant client development benefits from providing free
Internet access in their offices.
A Foundation for Future Growth
Many of the essential elements for rapidly expanding electronic
filing participation are falling into place. The IRS is modernizing its
core tax administration systems to make them more capable, flexible and
responsive. New electronic service delivery channels are being
implemented, including secure Web ``portals'' for access to internal
information resources, services and taxpayer account information by IRS
employees and trusted external customers, including taxpayers'
authorized representatives.
The IRS is beginning to offer electronic services, like the ability
to register as a trusted external customer and for a new business to
obtain an Employer Identification Number (EIN) online. These e-services
are highly anticipated and will be much appreciated by the professional
tax community. The IRS is also implementing the first of a series of
modernized electronic filing platforms, beginning with the Employment
Tax e-Filing System earlier this month, to be followed by Corporation
Income Tax (1120 and related forms) e-Filing in January 2004. These
modern new electronic filing platforms will be based on industry-
accepted standards for data sharing and communication, making them
cost-effective for the IRS and attractive to software developers and
tax practitioners.
ETAAC encourages the IRS to continue the current efforts and to
expand them rapidly to include a broader range of e-services and to
encompass modernization of the 1040 e-filing platform, as well as other
business tax return types. While these new e-services and modernized e-
filing platforms require an upfront investment of resources, ETAAC
firmly believes that the costs will be more than offset by the
benefits, including significantly increased electronic filing by those
practitioners who still file computer-prepared individual income tax
returns on paper (30 million such ``V-code'' returns were filed by
practitioners last year) and a substantial increase in the percentage
of e-filed business tax returns.
A Future Vision of ``End to End'' Electronic Tax Administration
As has happened in the private sector, the growth of the Internet
and the development of new ``networked'' supply chain business models
have prompted a change in the way we think about tax administration.
The new view--which you might think of as ``end to end electronic tax
administration''--acknowledges that third parties in the tax business
are also the IRS' partners in serving a common customer--the taxpayer.
In the private sector, new end to end business models--driven by
innovative thinking and enabled by new technologies--are emerging in
industries with characteristics similar to the tax administration
environment. Those characteristics include a diverse customer base,
complex and highly-specialized functions, seasonal peaks and valleys
and a high level of dependency on value-adding intermediaries. Highly-
competitive businesses have responded to new market challenges and
opportunities by shifting their view from streamlining internal
processes and systems to integrating internal and external service
providers in a seamless, end to end service delivery value network.
That view takes into account business partner capabilities and needs,
creating a flexible, dynamic environment that allows each partner to
perfect its own specialized processes, reduce costs, enhance value and
respond quickly to customer needs.
For the IRS to achieve the electronic tax administration goals of
RRA 98, it needs to promote an end to end vision of tax administration
with these characteristics:
Taxpayers would have multiple choices in terms of how they interact
with the IRS (e.g., directly or through an authorized representative;
electronically, by phone or by mail) and what value-added services they
choose to use (e.g., online preparation and filing services from a
variety of competing vendors). In this vision, taxpayers would not only
be e-filers, but e-customers. They could decide among a variety of
options how they would like to view their own IRS account information,
perhaps choosing traditional paper correspondence, maybe through a
secure session at irs.gov, or potentially as part of an electronic
financial portfolio offered securely by a private sector financial
institution. Taxpayers would be able to retain their books and records
electronically, a particular benefit to large corporations.
Tax Software Developers would continue to be active participants
with the IRS in defining new services that would be beneficial to
mutual customers. The IRS would define changes requiring software
investments in ways that minimize costs and maximize value for the tax
software companies. The IRS would also provide electronic services and
secure account access in ways that would integrate securely with
private sector software. For example, the tax software used by a
practitioner would automatically validate taxpayer identification
information in near real time and securely pre-populate account
information, such as Estimated Tax payments, reducing costs for the
practitioner and increasing accuracy for the taxpayer and the IRS. Tax
software companies, in turn, would be prompted by competitive market
pressures to enhance other features of their software, such as
providing direct links into IRS tax research knowledge bases.
Online Filing Providers similarly would have access to electronic
services that they could incorporate into their tax preparation and e-
filing offerings. Their services would be easily accessed and
understood by taxpayers. The new Free File Alliance is an excellent
example of how this type of business model could benefit the IRS, its
partners and its customers.
Tax Practitioners, in the end to end vision of tax administration,
would choose from a variety of third party software products offering
highly interactive e-services, made possible through online
communication with the IRS' systems. A full range of e-services would
be available, allowing practitioners to make a clean break from their
paper processes. Those services would include the ability to e-file all
form types, research taxpayer account information online or through a
direct software interface, correspond electronically with the IRS,
easily obtain electronic taxpayer signatures and maintain all records
electronically. Information returns would be filed electronically by
employers and financial institutions (2D bar coding of information
returns would be a helpful interim enhancement), and made available
timely to taxpayers, practitioners and tax agencies.
Other Government Agencies, such as SSA, FMS and State tax agencies,
would exchange information electronically with the IRS to improve
compliance, taxpayer service and processing accuracy. Federal and State
filing obligations would be addressed in a single transaction.
Employers and Financial Institutions would file withholding and
information returns electronically, providing electronic copies to
taxpayers and their designated representatives. Financial institutions
may integrate tax account information with other customer financial
information into an electronic financial portfolio, allowing online
account inquiry, customized financial advice, tax filing and payment
reminders and electronic tax payments. As an incentive to customers,
financial institutions and other third parties may offer free online
tax preparation and filing, provided by a specialized online filing
provider.
Achieving the Future Vision
The IRS would act as an integrator of this network of tax
administration service providers. Its own electronic tax administration
processes and systems would be designed to facilitate the smooth
interaction of its internal functions with the specialized functions of
its third party partners and taxpayers. The focus of its electronic tax
administration initiatives would be to increase value and reduce costs
for all the participants in the tax administration service network,
while protecting the security and confidentiality of taxpayer
information.
Those initiatives would enhance timely processing of returns and
refunds and speedy resolution of issues, standardize interface and data
transfer protocols, provide simple and comprehensive views of taxpayer
account information and facilitate the ability of third parties to
dynamically tailor services to the needs of individual customers. Key
enablers of this future vision, led by the IRS, would be the creation
of ``natural integration points,'' such as an electronic means for
designating, tracking, updating and authenticating authorized
representatives, definition of open standards such as XML for data
exchange and development of simple but effective data encryption and
electronic signature mechanisms.
In this environment, existing tax administration service providers
would likely innovate with new and creative electronic service
offerings and new providers would undoubtedly enter the market with
fresh ideas and new business models. Taxpayers will be the ultimate
beneficiaries.
That concludes my remarks to the Oversight Subcommittee. Thank you
for the opportunity to comment on the future direction of electronic
filing.
Chairman HOUGHTON. Thank you very much, Mr. Belden. Now Mr.
Cavanagh, who is the manager of the Free File Alliance in
Alexandria. Please submit your testimony.
STATEMENT OF MICHAEL F. CAVANAGH, MANAGER, FREE FILE ALLIANCE,
ALEXANDRIA, VIRGINIA
Mr. CAVANAGH. Good afternoon, Mr. Chairman, Mr. Pomeroy. My
name is Michael Cavanagh, and I serve as the industry manager
of Free File Alliance.
Chairman HOUGHTON. Could you put the microphone a little
closer to you?
Mr. CAVANAGH. Is that better?
Chairman HOUGHTON. Yes. Much better.
Mr. CAVANAGH. Okay. Pardon me. I am accompanied by Stephen
Ryan, General Counsel to the Alliance, and a partner in the
Manatt law firm.
The Free File Alliance was launched last month on January
16, at a press conference conducted by the Acting Treasury
Secretary, the Office of Management and Budget Director, and
Acting IRS Commissioner Wenzel. Currently, 17 industry
companies offer free services to taxpayers.
We can now report, as you heard from the IRS, that as of
last week almost 650,000 free returns already had been
processed, transmitted and accepted by the IRS. Further, we
know that 20 percent of the total traffic of visitors to the
IRS site is going to the Free File page, and that the total
number of hits at the site is very significant. The total
number of individuals who will return to file their taxes
through the program before April 15 remains to be seen, but we
fully anticipate that the figure will represent a very large
addition to the 650,000 returns that have already been filed.
We believe that this is a truly unique public-private
partnership that offers American taxpayers significant
benefits. It is a far better public policy approach than the
idea that has been suggested in some quarters that the
government should spend tens of millions of dollars to enter
the tax preparation marketplace, thus stifling competition and
dampening the innovation that has been so notable in the
products and services emanating from this industry over the
past several decades. Despite some calls for government
intervention in the marketplace, we have not heard anyone
suggest that government software could possibly display the
quality, diversity and continuous innovation so readily visible
in the competitive marketplace.
Mr. Chairman, this initiative obviously provides tens of
millions of Americans with the option of preparing and filing
their taxes electronically online for free. Clearly we cannot
say yet how many taxpayers will take advantage of this offer.
We look forward to answering your specific questions about
the Alliance and its operations.
[The prepared statement of Mr. Cavanagh follows:]
Statement of Michael F. Cavanagh, Manager, Free File Alliance,
Alexandria, Virginia
Good afternoon, Mr. Chairman, and distinguished Members of the
Subcommittee. My name is Michael F. Cavanagh and I serve as the
industry Manager of the Free File Alliance LLC. I am accompanied by
Stephen Ryan, General Counsel to the Alliance and a partner in the
Manatt law firm.
The Free File Alliance was launched last month, on January 16, at a
press conference conducted by the Acting Treasury Secretary, the OMB
Director and the Acting IRS Commissioner. Currently, seventeen industry
companies offer free services to taxpayers, each serving at least 10%
of American taxpayers, and many considerably more.
We can now report to you that the initial response to the Free File
initiative has been very, very strong. As of last week, almost 650,000
free returns already had been processed, transmitted, and accepted by
the IRS. Further, we know that 20% of the total traffic of visitors to
the IRS site is going to the Free File page, and that the total number
of hits at the site is very significant. The total number of
individuals who will return to file their taxes through the program
before April 15 remains to be seen, but we fully expect that the figure
will represent a very large addition to the number of returns already
filed.
We believe that this is a truly unique public-private partnership
that offers American taxpayers significant benefits. It is a far better
public policy approach than the idea suggested in some quarters that
the government should spend tens of millions of dollars to enter the
tax preparation marketplace, thus stifling competition and dampening
the innovation that has been so notable in the products and services
emanating from this industry over the past several decades. Despite
some calls for government intervention in the marketplace, we have not
heard anyone suggest that government software could possibly display
the quality, diversity or continuous-innovation so readily visible in
the competitive marketplace.
Mr. Chairman, this initiative obviously provides tens of millions
of Americans with the option of preparing and filing their taxes
electronically online for free. Clearly, we now can say that many
taxpayers are taking advantage of this offer.
Bringing the program to fruition has taken an intense amount of
work over the past year. First, I would like to acknowledge support
that we have received from a number of Members of Congress.
We would also like to thank the Bush Administration, and within the
Administration, the Department of Treasury, the Internal Revenue
Service, and even the Department of Justice (which provided clearance
and review). On a personal level, we would like to thank former IRS
Commissioner Charles Rossotti and IRS Director of Electronic Tax
Administration Terry Lutes. Since November, Acting IRS Commissioner Bob
Wenzel has taken up the leadership of the program. At the Treasury
Department, Christopher Smith, Counselor to the Secretary, and George
Wolfe, Deputy General Counsel, played a critical role in achieving the
Agreement.
For industry, there is an important philanthropic basis to the
services donated under this program, but there is also a practical side
to the Agreement. It permits stability in the marketplace of providing
tax preparation services and, again, fundamentally the continuation of
a successful competitive marketplace without government competition.
The Alliance companies are offering readily available commercial
products, the same as are being offered with paid preparation. The
members of the Free File Alliance look forward to working with this
Subcommittee and others in the Congress to ensure that this program
serves the American taxpayer to the maximum extent possible.
We look forward to answering your specific questions about the
Alliance and its operations.
Chairman HOUGHTON. Thank you very much. I am just going to
ask one question, and then I will turn it over to you. I guess
one of the things that comes to mind is what is going to happen
if the Alliance members fail to meet their side of the bargain
to allow 60 percent of the taxpayers to file online
electronically?
Mr. CAVANAGH. Mr. Chairman, one of the questions as this
entire project was being discussed over the course of the last
year was would, in fact, there be participants among the
private sector who would partner with the government, and would
they, in fact represent 60 percent of total tax-paying public,
would those offers total that. There was some question.
We had the question answered as we moved into this filing
season. There is well over 60 percent that has been provided
with free service should they choose to use the Free File
option. The agreement calls for, if there were ever to be a dip
below 60 percent, that the government would go to the private
sector and say that the private sector is not living up to its
side of the bargain in maintaining the 60 percent. At that
time, the industry would make an effort to within a period of
some months, within 6 months, regain the 60-percent threshold.
Again, that has not turned out to be an issue as we see
things operating today, but there would be that process that
has been outlined in the operating agreement.
Chairman HOUGHTON. Okay. Thanks. How about you, Mr. Belden?
Do you have any comments?
Mr. BELDEN. No, nothing to add to what Mr. Cavanagh had to
say on that point, sir.
Chairman HOUGHTON. Good. Fine. Mr. Pomeroy.
Mr. POMEROY. Thank you, Mr. Chairman.
As I understand it, the IRS has--first of all, let me
commend you, Mr. Cavanagh, and the members of your association.
It is exciting for us to see this kind of public-private
partnership, and the response looks pretty promising so far
this tax season.
As I understand it, there are not particular standards
relative to participating companies? What is the core deal that
has to be offered?
Mr. CAVANAGH. Oh, yes, there are specific standards. Each
of the participants has to agree to the details in the
operating agreement, and some of those were outlined by the
Commissioner. They must obtain security and privacy seals. They
must, of course, go through a testing with the IRS, and they
must agree to live by a variety of elements of the operating
agreement. We have supplied to the Chairman the operating
agreement. So, there is a whole framework of requirements that
each of these companies has agreed to comply with in order to
participate in this Alliance.
Mr. POMEROY. What about the--obviously, with the brave new
world of the Internet, there has been a lot of business models
that have rolled out that have not been so successful. We are
looking, and there is a hope here that there will be a business
opportunity for, on the one hand, free filing; on the other
hand, there is a business relationship that can be established
which will make it pay for the private partner participants.
Is there any review by the IRS of what services are offered
that represent the business plan for how this works with the
company?
Mr. CAVANAGH. Well, the principle has been that during this
long discussion we began with former IRS Commissioner Rossotti
back January a year ago, and the concept evolved into what this
would be. One of the real concerns was that industry players
might suggest that they would offer dumbed-down versions to the
American public of software and whatever. The commitment was
that there must be commercial services that are offered to the
public would be the ones that would be part of the Free File
Alliance.
Now, within that--within those commercial products, there
in many instances are various add-ons. You were talking about
one before. There are a whole range of different things that
the public can get, and there never was any sense that in the
Alliance process that there should be any element of service
being taken away. The core tax product must be free, and there
must be absolutely no quid pro quo.
Mr. POMEROY. What worries me is basically we are--a basic
fee for filing might be easier and more of a straight-up method
to have this paid for than unbundled services that are--that
involve a variety of costs and maybe--purchased by people that
aren't quite sure whether they need them or not. That is the
source of my concern.
Again, I have heard no complaints of untoward market
activity. I am just trying to look at this going forward. So, I
certainly, again, salute your Members. I don't mean to impugn
anything inappropriate on their behalf.
Do you think there should be some dialog with the IRS or
some review by the--in terms of where these products fall?
Obviously as an association you can't really do it. It would
seem to be antitrust activity if you did. Is there an area
where this Committee ought to have some concern?
Mr. CAVANAGH. Well, Congressman, you were referring to one
particular set of products, which the Commissioner and the ETA
Director made the point that indeed that product is primarily
offered and primarily used by millions of Americans not in the
online arena, but in other arenas. Certainly any product like
that is, of course, appropriate for your oversight. It doesn't
have anything to do with the Free File Alliance.
Mr. POMEROY. What are people buying, the 600,000 that have
filed this year; do you know?
Mr. CAVANAGH. Pardon me?
Mr. POMEROY. I see that my time is expired. I will just
close with what--have you surveyed your members, and what are
taxpayers purchasing by way of add-on services of the 600,000?
Mr. CAVANAGH. No, we are not surveying them on that
question.
Mr. POMEROY. Perhaps after the tax year we could. It would
be very interesting to see what kind of commercial activity is
taking place.
Mr. CAVANAGH. Yes, Mr. Congressman, yes. Thank you.
Chairman HOUGHTON. There are only two of us here, if you
want to continue asking the questions.
Mr. POMEROY. I think I pretty well got through it. I am
interested in when the Commissioner said there is no express or
implicit endorsement of products, the fact that there is a
public-private partnership and you can access these vendors
through the IRS Web site leaves me a little concerned that
there may be an implicit statement by the IRS that these are
appropriate products, and yet there does not seem to be an
active review of whether the products are indeed appropriate.
So, maybe we can install that going forward.
Mr. CAVANAGH. Congressman, but I would just note these
companies are not vendors to the Federal Government. This is
the www.irs.gov Web site. These companies are not contracting
with the--through the IRS to do anything. So, vendors--that is
not the relationship they have.
Mr. POMEROY. If I refer someone to someone else, I want to
make sure that what they are selling is legit, and I think the
same is true about the United States.
Mr. CAVANAGH. Sure.
Mr. POMEROY. If we refer we want to feel good about the
product sold. By the way, I believe absolutely there are
appropriate business opportunities for companies providing a
service for products that taxpayers need. So, I don't impugn
this. This isn't something--a marketplace that I think is
judged guilty before proven innocent. I think it is a fine
opportunity. I just want to know what activity is taking place
in this marketplace. Thank you very much.
Chairman HOUGHTON. I think that is about all. The only
other question I might have is about the EITC and those people
who were involved in that, how do you reach them?
Mr. CAVANAGH. Well, Mr. Chairman, they are provided--there
are a number of offers that would cover them and would cover
the--those schedules, and so that is certainly included in the
program. Absolutely.
Chairman HOUGHTON. All right.
Mr. CAVANAGH. Even as I think--as I saw here today the IRS
was actually showing some the screens that the IRS has
developed for information for EITC. So, that is absolutely an
area that is--that is available as part of this Free File
Alliance, Mr. Chairman.
Chairman HOUGHTON. Okay. Well, thank you very much. I am
sorry this has been sort of a truncated type of thing, but we
are victims of the flow of votes. So, thank you very much
gentlemen for being with us. Now, Ms. Olson, if you could step
up here, and we will see what we can do.
Ms. Olson, what I thought we would do is if you could give
your testimony, and that would fit into our timeframe, then we
will break, and then we will come back for questions afterward.
Is that all right with you?
Ms. OLSON. That sounds wonderful, sir.
Chairman HOUGHTON. All right. Let me give you a chance to
pour yourself a little water. Thank you very much for being so
patient here.
Ms. OLSON. Oh sure.
Chairman HOUGHTON. Thanks again, gentlemen, for being part
of this program. All right. Ms. Olson, who is the NTA of the
Internal Revenue Service. Ms. Olson, we are delighted to have
you here again.
STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER ADVOCATE,
INTERNAL REVENUE SERVICE
Ms. OLSON. Thank you. Okay. Mr. Chairman and Members of the
Committee, thank you for inviting me to appear before you today
to discuss my 2002 annual report to Congress. I appreciate your
and the Committee's interest in the Taxpayer Advocate Service
(TAS) and your work on tax simplification and taxpayer rights.
I also wish to acknowledge here the efforts and talents of the
many TAS employees who contributed to this report.
Last year I came before you to discuss some of our
legislative recommendations for tax simplification, most
notably the uniform definition of a qualifying child and the
alternative minimum tax. This year we focus on the difficulty
facing the IRS to fairly administer an enormous tax system
while respecting taxpayer rights and providing customer
service. The size and scope of the U.S. tax system makes
achieving this balance a challenge.
Our theme this year is taxpayer rights. Taxpayer rights
includes the taxpayer's right to expect to be treated promptly
and courteously and to be provided accurate information, the
right to receive adequate notice of any disagreement the IRS
has with the taxpayer and the reasons for that disagreement,
and the right to an adequate opportunity to dispute the IRS
position before the taxpayer is required to pay any additional
tax. These rights must be available to the taxpayer without
causing the taxpayer undue burden in obtaining them. We are,
after all, asking taxpayers to voluntarily pay over their taxes
to us. We should not make it difficult for them to do so.
I believe that the next serious challenge to tax
administration in the 21st century will not revolve around the
balance between enforcement and taxpayer rights or customer
service. Rather it will involve the balance between taxpayer
rights, including customer service, and the drive toward
efficiencies as a consequence of the sheer size and complexity
of the U.S. tax system.
Over and over in the report's Most Serious Problems
section, we highlight the difficult choices the IRS must make
in its struggle to provide taxpayers with the services they are
requesting. Take offer in compromise, for example. We
understand the basis for the Service's decision to centralize
the processing of offers; however, we believe that centralizing
offers does not mean that offers should be rejected without
contact or discussion with the taxpayer. It may be with a phone
call that some apparently unacceptable offers might turn into
valid ones. There might be some vital information or some
special circumstance left off the form, or with one follow-up
phone call the taxpayer might be willing to enter into an
installment agreement. Thus the taxpayer might not get the
offer he or she wants, but he will get closure of some sort and
a fresh start toward compliance. Yet direct phone contact with
the taxpayers is the exception, not the norm, in centralized
sites.
This emphasis on efficient processing of offers can lead to
rework of the case by Appeals or the Taxpayer Advocate Service
or, more importantly, to a lost opportunity to collect the tax.
The IRS simply does not know what happens to offers after they
are rejected. We do not know if we collect another dime on
those rejected offers. Moreover, the program's own quality
measures indicate that much can be done to improve the IRS's
computation of the taxpayer's ability to pay or the correct
offer amount.
In addition to the right to communicate with the IRS, the
taxpayer has the right to be advised clearly and specifically
about any proposed changes on his or her income tax return. For
example, under math error authority, the IRS sends a notice to
the taxpayer telling him that it has changed the tax due on the
taxpayer's return. Unless the taxpayer timely requests an
abatement of tax, the taxpayer cannot petition the U.S. Tax
Court, which is the only forum in which a taxpayer can litigate
a tax before it is assessed and becomes collectible. When
Congress expanded math error authority in 1976, it clearly told
the IRS to send taxpayers detailed, itemized, line-by-line
explanations of the error so that taxpayers could timely
respond with an abatement request. Yet math error notices today
do not set out the adjustments line by line, and a sample of
tax cases indicates that taxpayers do not know what is being
adjusted and cannot reach someone in the IRS to explain the
adjustment of the item, so they miss the opportunity to request
abatement.
In 2001, Congress expanded math error authority, effective
in 2004, to the use of the Federal Case Registry of Child
Support Orders. This 2001 expansion applies math error
authority to a question that is inherently factual and not
ascertainable from the face of the tax return. It is our
recommendation that Congress repeal the expansion of math error
authority it enacted in 2001 and limit expansion of math error
to quantitative, not qualitative, items.
In addition to math error authority, we have identified
several key legislative recommendations in our reports,
including the tax treatment of attorneys' fees in nonphysical
personal injury cases and a system of registering, testing and
certifying Federal income tax return preparers who are not
already attorneys, certified public accountants or enrolled
agents.
We are also proposing that a husband and wife who jointly
own an unincorporated business and who file a joint Federal
income tax return be permitted to elect out of the partnership
provisions of the Code and instead file a joint sole
proprietorship or farm schedule and report each spouse's share
of self-employment income.
We submit a proposal relating to the taxation of children's
income, also known as the kiddie tax. This proposal goes to tax
simplification and the reduction of taxpayer burden. As you
know, if children under 14 have more than $1,500 in unearned
income, their tax must be computed at the parent's top marginal
rate. Further, the parent can elect to include the child's
unearned income on his or her return. Because these options
lead to different tax results, a parent must calculate three
returns in order to determine what is the best tax outcome.
This process must be repeated for each additional child. Add to
this the possibility of triggering a child's alternative
minimum tax, and the difficulty of obtaining tax information
from an estranged spouse, and you have a needlessly complex
provision.
We propose that the calculation of tax on children's income
be severed from the parents' tax computation or tax rate. The
concern that taxpayers might shift income-producing assets to
children and thereby take advantage of lower tax rates can be
addressed by establishing an appropriate tax rate on the
children's income.
In the interest of simplification, we also propose that
Congress establish a set standard deduction for dependents
rather than the current floating deduction amount.
Our last proposal addresses the operation of the Office of
Taxpayer Advocate. We are recommending six revisions to our
authorizing statute. All of these revisions derive from the
fundamental premise reaffirmed in 1998 that the Office of the
Taxpayer Advocate must be independent, and yet function within
the IRS.
We first propose that the NTA be authorized to appoint a
counsel who shall report directly to the Advocate and advise
her on matters pertaining to taxpayer rights.
Chairman HOUGHTON. Ms. Olson, can I just interrupt a
minute? I am going to have to go and vote, and if you wouldn't
mind, we will vote fast, and then come right back. So, you can
finish your testimony, and we will have the questions.
Ms. OLSON. Thank you.
Chairman HOUGHTON. Thank you for your forbearance.
Mr. PORTMAN. [Presiding.] Ms. Olson, a second welcome to
the Subcommittee. I am glad to be with you. We have been tag-
teaming this afternoon, as you know. I understand you had
managed to get through some, but not all, of your oral
testimony. If you would be so kind to continue that, Chairman
Houghton and other Members should be returning shortly.
Ms. OLSON. All right. Let me find my place.
Our last proposal addresses the operation of the Office of
the Taxpayer Advocate. We are recommending six revisions to our
authorizing statute. All of these recommendations derive from
the fundamental premise reaffirmed in 1998 that the Office of
the Taxpayer Advocate must be independent, and yet function
within the IRS.
We first propose that the NTA be authorized to appoint a
counsel to the NTA who shall report directly to the Advocate
and advise her on matters pertaining to taxpayer rights, tax
administration and the Office of the Taxpayer Advocate.
Currently the NTA receives advice from a special counsel
who reports directly to the Chief Counsel of the IRS. Given the
unique role of the NTA to take positions that may be different
from the official position of the IRS, there are times when
this reporting structure creates a serious conflict of interest
and limits the Advocate's access to independent legal advice.
We believe it is important to maintain the counsel to the
Advocate's current ability to participate in the day-to-day
development of guidance and regulation. We also believe it is
important that the TAS continue to receive its legal advice on
substantive tax law matters in specific cases from the IRS
counsel. However, and finally, we believe that the conflict of
interest on taxpayer rights and tax administration would
warrant independent advice from a counsel that directly reports
to the NTA.
We also propose that the Taxpayer Advocate Directive, which
is currently delegated to the Advocate by the Commissioner, and
which authorizes her to act on behalf of groups of taxpayers or
taxpayers at large, be codified to ensure that it cannot be
revoked.
We also propose that the definition of ``significant
hardship,'' which grants taxpayers access to TAS, be expanded
to explicitly include impairment of taxpayer rights as a
grounds for issuance of a Taxpayer Assistance Order or Taxpayer
Advocate Directive.
Finally, we make some recommendations about the ability of
and discretion of the Taxpayer Advocate Service to hold
taxpayer communications confidential both from the IRS and in
Federal courts.
I would like to conclude by acknowledging again the support
your Committee has shown for my office and indeed the entire
IRS. I know that the key subjects of this year's report,
taxpayer rights and making the system simpler and more
accessible so it is easier for taxpayers to comply with their
tax obligations, are of special interest to this Committee. I
hope our report has been of some assistance to your oversight
duties.
Thank you for this opportunity. I also request permission
at this time to submit a written statement for the record.
[The prepared statement of Ms. Olson follows:]
Statement of Nina E. Olson, National Taxpayer Advocate, Internal
Revenue Service
Mr. Chairman and Members of the Committee, thank you for inviting
me to appear before you today to discuss my 2002 Annual Report to
Congress. I appreciate your and the Committee's interest in the
Taxpayer Advocate Service and your work on tax simplification and
taxpayer rights. I also wish to acknowledge the efforts and talents of
the many Taxpayer Advocate Service employees who contributed to this
Report.
Last year I came before you to discuss some of our legislative
recommendations, most notably the uniform definition of a qualifying
child and the alternative minimum tax. Our focus was on tax
simplification. This year, we focus on the difficulty facing the IRS to
fairly administer an enormous tax system. Combined with the complexity
of the tax law--well, one can easily declare this task impossible. And
yet, 98,000 employees each day show up to work, willing to take on this
thankless job and do the best they can at it. Their efforts are
obviously the reason why the Federal tax system runs as well as it
does, despite all the challenges it faces.
The theme of this year's report is taxpayer rights. We do not use
this term narrowly. Although clearly the concepts of sufficient notice
and due process are integral to taxpayer rights, in this year's report
we focused on a broader definition--one that looks at the essential
contract between the government, as represented by its tax
administration agency, and the taxpayer.
The U.S. tax system is, in fact, a voluntary tax system. Although
people may joke about this, we rely on taxpayers to voluntarily file
their tax returns and report the correct income and deductions and
credits and tax. We ask employers to voluntarily submit the earnings
and withholdings of their employees, and we ask the self-employed to
voluntarily report revenue and expenses. And we ask everyone to
voluntarily pay their correct share of the tax burden. Certainly, in
some instances the IRS must take additional steps to secure this
information or payment, but the compliance and enforcement functions of
the IRS are only two of many aspects of tax administration.
The recognition and protection of a taxpayer's rights is a
necessary and quite possibly paramount element of a voluntary tax
system. By taxpayer rights, I mean the taxpayer's right to expect to be
treated promptly and courteously and to be provided accurate
information; the right to receive adequate notice of any disagreement
the tax agency has with the taxpayer's return or position and the
grounds for that disagreement; and the right to an adequate opportunity
to dispute the tax agency's position before the taxpayer is required to
pay any additional tax. These rights must be available to the taxpayer
without causing the taxpayer undue burden in obtaining them. We are,
after all, asking taxpayers to voluntarily pay over their taxes to us.
We should not make it difficult for them to do so.
I believe that the next serious challenge to tax administration in
the 21st century will NOT revolve around the balance between
enforcement and taxpayer rights or customer service. Rather, it will
involve the balance between taxpayer rights, including customer
service, and the drive toward efficiencies as a consequence of the
sheer size and complexity of the U.S. tax system.
Right now, the IRS is trying to identify when taxpayers should be
spoken with in person, when they can receive recorded answers to
questions, when they can be asked to leave a message and receive a
return call. It is trying to determine what should be the core services
delivered at ``Taxpayer Assistance Centers,'' formerly called ``walk-in
sites.'' It is also trying to streamline processing of certain offers
in compromise, correspondence audits of underreporter amounts and the
earned income tax credit, and even the collection of certain tax debts
through the use of private collection agencies.
Taxpayers and practitioners, on the other hand, complain of not
being able to reach the IRS by phone--they cannot find the appropriate
person to speak with or identify the management chain of command, or
they leave messages that are not returned. They miss the geographic
footprint of the IRS and they are unable to identify an IRS employee's
job duties merely from that person's job title. Thus, we identify the
top problem of taxpayers (and IRS employees, I might add) as that of
merely navigating the IRS.
Over and over, in the Report's Top 20 problems section, we
highlight the difficult choices the IRS must make in its struggle to
provide taxpayers with the services they are requesting. Take offer in
compromise, for example. This is a program in which the Office of the
Taxpayer Advocate has been very active. We agree with the IRS that
having Revenue Officers work the vast majority of offers, which present
very simple situations, would be an inefficient use of very valuable
resources. The expertise of Revenue Officers should be reserved for
those offers that present difficult questions of valuation or other
specific circumstances. We also understand the basis for the Service's
decision to centralize the processing of offers, and my office and I
are working with the IRS to improve that aspect of the program.
However, we believe that centralizing offers does not mean that
offers should be processed without contact or discussion with the
taxpayer. We understand that approximately 14 percent of submitted
offers are returned to the taxpayer because the taxpayer's own
financial calculation shows that he or she can fully pay the tax and
does not need a compromise. Yet it may be, with a phone call, that some
of these offers might turn into a valid offer--there might be some
vital information or some special circumstance left off the form. Or,
with one follow-up phone call, the taxpayer might be willing to enter
into an installment agreement. Thus the taxpayer might not get the
offer he or she wanted, but he will get closure of some sort, and a
fresh start toward compliance. Yet direct phone contact with the
taxpayer is the exception, not the norm, in centralized sites.
This emphasis on ``efficient'' processing of offers can lead to re-
work of the case by Appeals or the Taxpayer Advocate Service, or, more
importantly, to a lost opportunity to collect tax. The IRS simply does
not know what happens to offers after they are rejected. We do not know
if we collect another dime on those taxpayer accounts. Moreover, the
program's own quality measures indicate that much can be done to
improve the IRS's computation of the taxpayer's ability to pay, or the
correct offer amount.
In our report we identify what we believe is a serious taxpayer
rights issue--the IRS's increasing use of a notice called a
``combination letter,'' which combines into one letter the notice of
the Service's proposed decision as well as notice of the taxpayer's
appeal rights. This ``combination letter'' pops up in the context of
both offers in compromise and the earned income tax credit. For most
other situations where a taxpayer is offered administrative appeal
rights, including audits, the taxpayer receives two separate letters--
one setting forth the proposed change and offering an opportunity to
present more information, and the other outlining the IRS's decision
and explaining appeal rights. In the EITC ``combo'' letter, however,
the IRS invites the taxpayer to send in additional information if he or
she disagrees with the IRS's proposed position. At the same time, the
taxpayer is advised that he has a right to appeal, which is explained
in an enclosed publication. Yet, that enclosed publication refers the
taxpayer back to the letter for information on how to request an
administrative appeal.
We simply do not believe that the ``combo letter'' format
adequately advises the taxpayer of his or her right to an
administrative appeal. It is poor customer service, leads to rework as
audit reconsiderations and refund claims, and imposes an undue burden
on taxpayers--all in the name of efficiency and minimizing resources.
In addition to the taxpayer's right to be advised, clearly and
specifically, about his or her administrative appeal rights, we believe
the taxpayer has the right to be advised, clearly and specifically,
about any proposed changes on his or her income tax return. As you
know, the IRS has the authority under section 6213 to summarily assess
mathematical and clerical errors that a taxpayer might make on his or
her return. These errors include errors in addition, switching the
digits on a Social Security number, or transcribing the wrong number
from one form to another. If the taxpayer does not agree with the IRS
about the adjustment, then the taxpayer must write the IRS within 60
days and ask it to abate the tax. If the taxpayer misses the 60 days,
the IRS begins collection, and the taxpayer must make a refund claim.
The taxpayer loses the ability to request an administrative appeal or
the ability to go to the United States Tax Court, which is the only
forum in which a taxpayer can litigate a tax before it is assessed and
becomes collectible.
When Congress expanded the summary assessment authority in 1976 to
clerical as well as math errors, it clearly directed the IRS to send
taxpayers detailed, itemized, line-by-line explanations of the math or
clerical error, so that taxpayers could timely respond with an
appropriate abatement request. Yet math error notices today do not set
out the adjustments line-by-line, and a sample of Taxpayer Advocate
Service cases indicates that taxpayers do not know what is being
adjusted and cannot reach someone in the IRS to explain the adjustment
to them, so they miss their opportunity to request abatement.
Today, in the interests of efficiency and driven by concerns about
EITC compliance, Congress has expanded math error authority to include
matching information against external databases, despite Congress's
original concern that the authority should only be used where the error
and inconsistency is apparent from the face of the return. In most of
these expanded provisions, the correct answer is quantitative and not
based on facts and circumstances, and the external database is highly
reliable. However, in 2001, Congress expanded math error authority,
effective in 2004, to the use of the Federal Case Registry of Child
Support Orders. I have grave reservations about the currency and
adequacy of the FCR's data, but these concerns will be expressed in a
report to be issued by the Treasury Department, in consultation with my
office. My point today is that this 2001 expansion applies math error
authority to a question that is inherently factual--whether a child
lived with a taxpayer for more than half the year. I do not believe
this information can accurately be determined from the face of the
return, nor from any existing database. It relies on the specific facts
and circumstances of a taxpayer's situation, it is a qualitative--not
quantitative--analysis, and as such is not the proper subject of a
summary assessment, one that can result in the taxpayer losing the
opportunity to petition the Tax Court.
Thus it is our recommendation that Congress repeal the expansion of
math error authority it enacted in 2001 and impose certain requirements
for any proposed expansion of math error authority--namely, that it
apply only in those situations where inconsistencies can be determined
from the face of the return, where items or schedules are omitted from
the return, and where numerical or quantitative items are reported on
the return and can be verified by a government entity that issues or
calculates those items. We believe this approach to summary math error
authority, coupled with clear and understandable explanations of math
error adjustments, recognizes the IRS's need to process information
expeditiously without violating a taxpayer's right to deficiency
procedures in disputes of a factual nature.
In addition to math error authority, we have identified several key
legislative recommendations in our report, including the tax treatment
of attorney fees in nonphysical personal injury cases, which results in
significantly different tax treatment of Federal taxpayers depending on
the underlying State law. We also propose a system of registering,
testing, and certifying Federal income tax return preparers who are not
already attorneys, CPAs, or enrolled agents. Our proposal is
comprehensive and, we believe, does not require the expenditure of
significant resources once the registration system is established.
We submit a proposal relating to the taxation of children's
income--also known as the ``kiddie tax.'' This proposal goes to tax
simplification and the reduction of taxpayer burden. As you know, if
children under 14 have more than $1,500 in unearned income, their tax
must be computed at the parent's top marginal tax rate. Further, the
parent can elect to include the child's unearned income on his or her
return. Because these options lead to different tax results, a parent
must calculate three returns in order to determine what is the best tax
outcome. This process must be repeated for each additional child. Add
to this the possibility of triggering a child's alternative minimum tax
liability, or the difficulty of obtaining tax information from an
estranged spouse, and you have a needlessly complex provision.
We propose that the calculation of tax on children's income be
severed from the parent's tax computation or tax rate. The concern that
taxpayers might shift income-producing assets to children and thereby
take advantage of lower tax rates can be addressed by establishing an
appropriate tax rate on the children's income. In a related matter, we
note that the dependent's standard deduction is the only deduction that
is not a set, flat amount. A dependent's standard deduction can be any
number between $750 and the single standard deduction amount. In the
interests of simplification, we propose that Congress establish a set
standard deduction for dependents.
As another simplification measure, we have suggested that a husband
and wife who jointly own an unincorporated business and who file a
joint Federal income tax return be permitted to elect out of the
partnership provisions of the Code and instead file a ``joint'' sole
proprietorship or farm schedule and report each spouse's share of self-
employment income. Under today's law, a husband and wife jointly owning
and operating an unincorporated business--say a dairy farm or small
shop or even pet-sitting businesses--should file a partnership return.
In practice, most couples merely report the business' income as a sole
proprietorship, with only one member of the couple receiving credit for
Social Security and Medicare purposes. This can lead to disastrous
consequences if the uncovered spouse becomes disabled or dies. Because
97 percent of all sole proprietorship and farm schedules show income
below the Social Security wage cap and because we propose to make this
provision elective in any event, no couple would experience a tax
increase yet many would clearly benefit from Social Security and
Medicare eligibility. This proposal clarifies and simplifies the status
of husband and wife co-owned businesses and ensures appropriate Social
Security and Medicare coverage for the working couple.
One of our proposals was actually enacted and later repealed, but
we think it is a good idea so we are proposing it again. Today, under
section 3402(i)(1), taxpayers can increase their withholding from
paychecks by a specified amount. They cannot, however, decrease their
withholding by specified amounts. The only way to decrease withholding
is by claiming additional withholding allowances, which requires a
complex set of calculations on various schedules or worksheets. We
propose that taxpayers be able to decrease the amount of their
withholding by discrete amounts, just as they can increase their
withholding. This approach reflects the way taxpayers actually think
about their withholding and, in many instances, eliminates the burden
of having to fill out schedules and forms.
Our last proposal addresses the operation of the Office of the
Taxpayer Advocate. We are recommending six revisions to our authorizing
statute, five of which I will discuss today. Our proposal for amicus
brief authority I will leave to another time. All of these
recommendations derive from the fundamental premise, reaffirmed in
1998, that the Office of the Taxpayer Advocate must be independent and
yet function within the IRS. These recommendations attempt to
strengthen that independence while preserving the Advocate's internal
placement. These proposals also attempt to strengthen the Advocate's
ability to protect taxpayer rights.
We first propose that the National Taxpayer Advocate be authorized
to appoint a Counsel to the National Taxpayer Advocate, who shall
report directly to the Advocate and advise her on matters pertaining to
taxpayer rights, tax administration, and the Office of the Taxpayer
Advocate. Currently, the Advocate receives advice from a special
counsel, who reports directly to the Chief Counsel of the IRS. Given
the unique role of the National Taxpayer Advocate to take a position
that may be different from the official position of the IRS, there are
times when this reporting structure creates a serious conflict of
interest and limits the Advocate's access to legal advice. We believe
it is important to maintain the Counsel to the Advocate's current
ability to participate in the day-to-day development of guidance and
regulations. We also believe that it is important that the Taxpayer
Advocate Service continue to receive its legal advice on substantive
tax law matters in specific taxpayer cases from the Office of Chief
Counsel. Thus, this proposal provides the Office of the Taxpayer
Advocate with dedicated legal counsel on matters specifically related
to its statutory mission, namely taxpayer rights in the context of tax
administration.
The other proposals flow from the recognition of our statutory
mission. We propose that the Taxpayer Advocate Directive, currently
delegated to the National Taxpayer Advocate, be codified to ensure that
it cannot be revoked. The Taxpayer Advocate Directive grants the
National Taxpayer Advocate the authority to direct the IRS to act or
not act with respect to any program or action--actual or proposed--that
may create a significant hardship for a group of taxpayers or for all
taxpayers. We also propose that the definition of significant
hardship--which grants taxpayers access to the Taxpayer Advocate
Service--be expanded to explicitly include ``impairment of taxpayer
rights'' as a grounds for issuance of a Taxpayer Assistance Order or a
Taxpayer Advocate Directive.
Finally, we recommend that the provision relating to the discretion
of the Local Taxpayer Advocate to not disclose to the rest of the IRS
any information obtained from the taxpayer directly be amended to make
clear that this discretion applies notwithstanding any other provision
of the Code. This discretion applies except in clear instances of
criminal acts or civil fraud. Our proposal clarifies the source of
authority for the approach we have adopted. We also recommend that the
confidentiality provisions of the Administrative Dispute Resolution Act
with respect to compelling a ``neutral'' to testify be incorporated
into IRC section 7803(c)(4). These provisions would require a judge to
weigh whether the need for a Taxpayer Advocate Service employee's
testimony outweighs the chilling effect such testimony might have on
future taxpayers seeking our assistance. We believe this neutral, third
party determination will provide some assurance to taxpayers that their
conversations with the Taxpayer Advocate Service, absent some serious
violation or need, will not be disclosed to the IRS or even in open
court, unless necessary to resolve the taxpayer's problem.
I would like to conclude by acknowledging again the support your
Committee has shown for the work of my office, and indeed the entire
IRS. I know that the key subjects of this year's report--taxpayer
rights and making the tax system simpler and more accessible so it is
easier for taxpayers to comply--are of special interest to this
Committee. I hope our report has been of some assistance to your
oversight duties. Thank you for this opportunity to come before you to
discuss these important matters.
Chairman HOUGHTON. [Presiding.] Absolutely. Thank you very
much. You have done a wonderful job. We are honored to have you
here. The fact that you have this job is really because of Mr.
Portman and the structural work which he had done. So, I am
indebted to him as always.
Anyway, at the end you talked about the confidentiality
issue. Do you think that really is working, the ability to
communicate to your office by taxpayers?
Ms. OLSON. We have not yet fully implemented the
confidentiality provisions. We are beginning to, as our new
database system goes online, which enables us to keep
information confidential from the rest of the IRS. In talking
to practitioners and taxpayers in some of our focus groups--we
went out to six different focus groups during the last year--we
found that regardless of income level or language facility, it
mattered to taxpayers that they had someone independent inside
the IRS to speak to and that they could tell us things. Most
people think these things have to do with fraud or something
like that, but they mainly have to do with personal matters.
Taxpayers could tell us things that related to their problems,
they could talk with us, and it wouldn't necessarily need to go
to the IRS. It was irrelevant in a way to the underlying tax
law, but they wanted to have an ear in the IRS that they could
speak to.
So, I think that that provision is very important. Our
employees understand the importance of it.
We have tried to work with the IRS to convince them that we
will be implementing this and not using it as a way to hide
important information from the IRS, but rather to bring
taxpayers into compliance and have them feel comfortable coming
to us on touchy issues and coming into compliance with the
Internal Revenue laws. I think confidentiality is vital to
that.
Chairman HOUGHTON. All right. Well, I am always in awe of
lawyers, but I wonder why you are adding a counsel to your
staff at this particular time.
Ms. OLSON. We have had several issues in which my office
has taken a different position from the direction in which the
IRS has chosen to go. As you know, I do have the ability
through the annual report to Congress and other means to take
positions that are different from the Commissioner. I cannot
override the Commissioner's decision, but I can be on the
record about my position. It places the counsel that I
currently have--who reports to Chief Counsel, who advises the
Commissioner and would advise the Commissioner on his
position--in sort of an untenable conflict position.
I would like to have sound advice if I am going to take a
position. I don't want to be taking a position that is out of
ignorance rather than sound principle or law.
Chairman HOUGHTON. Right. Well, just one final question for
you, then I will ask Mr. Portman to question. Of all the
recommendations you have made, what is the most important?
Ms. OLSON. Oh, dear. That is very difficult to answer
because they are all so different. In terms of taxpayer rights,
I think the math error authority recommendation is the most
important. In terms of tax simplification, I think it is
actually a toss-up between the children's income proposal and
the husband and wife co-owned business proposal. I think both
of them present simplification issues. Probably the children's
income affects many more taxpayers than the husband and wife
proposal.
Chairman HOUGHTON. Okay. Well, thank you very much.
Mr. Portman.
Mr. PORTMAN. Thank you, Mr. Chairman. Although you are
inaccurate in saying that Ms. Olson got her job because of our
work, you probably made her mad at me by saying that, because
she has been in the middle of some very, very tough issues, but
she has done well, and she has managed to do what we had hoped
would happen in the legislation that went through this
Subcommittee, which is to have a truly independent Taxpayer
Advocate and someone who could give us an unvarnished view on
not just Tax Code simplification, which you did well in your
report last year, but also on tax law administration, which you
have focused on more this year. That is extremely important to
this Subcommittee and to our Committee because it gives us the
ability to legislate with better information.
I want to focus on two things, if I could, quickly. One is
the offer in compromise issue. You said that is the number 2
issue for you. There has been a lot of attention focused on
that recently. I know the oversight board met late January and
discussed this issue at some length, and some practitioner
groups have raised concerns with the offer program. On the
other hand, I saw that Dale Hart was recently quoted in the
Wall Street Journal, who is the Deputy Commissioner of the
small business area and self-employed, saying he thought the
offer and compromise program had turned the corner.
So, I am hearing sort of different perspectives on it. We
added under the IRS Restructuring and Reform Act of 1998 (P.L.
105-206) another criteria. You could always do it if there is a
question about liability or collectability, and we added this
relatively broadly defined notion of effective tax
administration. Has that created some of the problems, and
where do you think the offer and compromise program is at this
point?
Ms. OLSON. Well, first let me address why we put it as
number 2, because if you look at it in the context of all the
business that the IRS does, we only get 130,000 offers a year,
and that is a pittance in terms of all the other work that we
do. We put it as number 2 because it has been around for so
long. In fact, 1868 is the first time it showed up in the U.S.
Code, the authority for the revenue officer to compromise tax
debts. We have felt that at least since 1992, the IRS hasn't
gotten it right, so we thought maybe by giving a lot of
attention to it and going carefully through what we thought
were problems with the program, we could lay out some of the
adjustments that needed to be made.
Since we started, maybe since 2001, we have had an analyst
dedicated entirely to that program, and much to the Small
Business and Self Employed Division's great credit, they have
worked closely with us, and I think it is a successful
partnership.
I agree with Deputy Commissioner Hart that the program has
turned the corner. I think that I can live with centralization,
but there are things that we need to do to make the centralized
sites more responsive to taxpayers. It does take some
adjustment, but if we continue to work along some of the lines
that we have identified in the report, we will finally get
there.
Now, effective tax administration--there were three
grounds--economic hardship, equity and public policy. I think
the IRS has understood economic hardship pretty well, but I
think on the grounds of equity and public policy, we have had
some difficulty in trying to decide what those words mean. What
we came up with, what Treasury announced through its recent
regulation that was issued this past summer was, on those two
categories, equity and public policy, we want taxpayers, if
there is some reason other than financial inability to pay, or
you don't think you actually owe the tax, to come in to us and
tell us why it is that you should be cut a break as opposed to
all the other taxpayers in the world who pay their taxes. What
is so different about your facts and circumstances?
We would take a look at those factors, rather than giving a
list to which somebody could say, well, you are not on the
list, so we are not going to listen to you. We would see what
came in. People had to answer that first question, though: What
is so special about you? Can you look at your neighbor and say
to them with a straight face, I am going to get a break, but
you have to pay?
Mr. PORTMAN. It almost becomes a fact and circumstances
test, which again, in the legislation, economic hardship is
easier, it is closer actually to doubt as to collectability,
which is already in the criteria. It is true that equity
probably comes down to a facts and circumstances, more
subjective test. You are saying you have flexibility to do
that. You feel like you are turning the corner.
Just for those who are listening and might not understand
what we are talking about, this is when a taxpayer does not
have to pay the full amount, the full liability owed. The
process of negotiating with the IRS gives them an opportunity
to settle for less than the full amount, which is a very
important way to clear the decks and to help a lot of taxpayers
who do have some specific circumstances that make it difficult
to pay.
I don't have another question, but I will say just briefly,
Mr. Chairman, we appreciate what you do for our taxpayers; also
what you do for us. Keep giving us those simplification ideas.
Mr. Houghton has a bill on simplification that is very
important. I have one, too. We take your ideas seriously, as
you see in our legislation, and this notion of how to tax
children, which is a huge simplification, is an example of what
you need to keep giving us and working with us. So, thank you
for your work.
Ms. OLSON. Thank you very much.
Chairman HOUGHTON. Thanks very much.
Ms. Tubbs Jones.
Ms. TUBBS JONES. I want to pick this Committee. I could be
Chairman soon, right, if I just hang around. I will keep on
moving over here. I am okay. Thanks. Hi, Ms. Olson. How are
you?
Ms. OLSON. I am fine, thank you.
Ms. TUBBS JONES. I am trying to get up on this. I don't
serve on this Subcommittee, but I am glad to be here. I was
just looking at some questions I was going to ask you, and I
lost my place. If you will just give me 1 second. Why don't you
for one moment talk about something, anything you would like to
talk about no one has asked you. Have you already been given
that authority?
Ms. OLSON. Actually I thought one of the things I would
like to talk about is our first problem, which is navigating
the IRS. I wanted to tell a story. When the report came out, we
issued a voice message to all IRS employees and told them that
they could look at the report. I got back a lot of e-mails from
IRS employees from all over the United States, and one e-mail
that I got back was from a woman who said, I used to be--I was
a revenue agent in the examination division before the
reorganization, and people could always find me because if they
knew that they were being audited, even if they didn't know my
job title, they could look up ``exam'' in the phone book and
find me. Today I am called small business self-employment
technical analyst, branch 2, and how can someone find me?
I read that e-mail, and I just sort of slapped my forehead;
naming conventions. We have made it so difficult for people to
communicate with us through all of this reorganization by just
simply removing common-sense names.
Ms. TUBBS JONES. What is your position with regard to the
Free File, if I may ask?
Ms. OLSON. I think that free filing is an important
service. I think that the products we have up there are
excellent. I have expressed my concern during the development
of the products and the consortium negotiations about the
additional products that were present in the software. I do
have a strong feeling that we should not be making available
those products through a government Web site. I am concerned
that the disclaimers are not adequate, in fact, to warn
taxpayers, particularly when you look at the taxpayer
population that is targeted for these products. If you look at
their financial literacy levels, their ability to understand
contracts, over and over and over again you see that these
disclaimers may not be understood.
Ms. TUBBS JONES. That is an area that I was working on
before I came to this Committee. I was on Financial Services,
and the whole issue of predatory lending, and rent to own, and
payday loans and all of those opportunities where people--you
get to the people who are most vulnerable. I am not saying that
there should not be the opportunity, I understand that subprime
lending provides opportunities for those who may not be able to
go in the prime market, but clearly I think there has to be
some way that we can do a few more disclaimers or better notice
in the area.
Let me see what else I would like to ask you. Talk to me
for a moment if you have not already about the taxation of
attorney fee awards, if you would.
Ms. OLSON. Well, what we discovered in looking at the case
law, and this came up through our most litigated issues
section, we found that there was a split in the circuits about
the taxation of attorneys' fees in what is called nonphysical
personal injury suits: race discrimination, sex discrimination,
sexual harassment, age discrimination; and that in some
circuits, depending on the underlying State law, the fees may
be deductible above the line or below line. They trigger
radically different tax results, including the triggering of
the alternative minimum tax. In our report, we gave an example
of a woman who ended up being a successful plaintiff and paying
more in taxes and attorneys' fees than she won in the award.
So, she came out in a negative amount. She would have been
better off not prevailing.
So, we proposed several alternatives. The one that we liked
was putting everything what we call above the line so that you
don't trigger alternative minimum tax, basically netting out
the attorneys' fees and making that uniform across the Nation
and not dependent on underlying State law.
Ms. TUBBS JONES. Ms. Olson, I just ran out of time. I am
looking forward to have the opportunity to get to know you
better and working with you, and hopefully providing some
additional information to the constituents, my constituents in
the 11th Congressional District of Ohio. I thank you very much
for your testimony, though I missed some of it.
Chairman HOUGHTON. Thanks, Ms. Tubbs Jones.
Mr. Pomeroy.t
Mr. POMEROY. Thank you, Mr. Chairman.
Ms. Olson, I suppose right up next to the Commissioner we
put the Taxpayer Advocate as one of the most important if not
the most important position in the IRS. It was established with
bipartisan support. We commend you for your efforts on behalf
of taxpayers. This service is their service, and we want to
make certain that it is fair and equitable in its delivery of
services to the American public.
Several things I want to talk to you about, but time is
short. Let me begin by products. It would seem to me as though
there is a substantial contribution by the private partners in
this private-public partnership delivering free e-filing.
Obviously they are interested in participating with the hope of
some business opportunity. Does that right off the bat strike
you as inappropriate or so far so good depending on what they
are selling?
Ms. OLSON. Right. I think that is an appropriate
arrangement, I do.
Mr. POMEROY. So, you think there needs to be within the
service some due diligence as to appropriateness of services
rendered?
Ms. OLSON. I would like us to develop standards and really
address this issue, yes, I would.
Mr. POMEROY. It seems to me incongruous and unacceptable to
have a very thorough due diligence in terms of whether they
have got the security in place, whether they have the technical
competence to get it all figured right--undoubtedly give each
of the partners a very thorough review relative to the
technical components of their ability to deliver e-filing. Then
to let them offer caveat emptor whatever they may hope to try
to sell, that just doesn't cut it.
We ought to be able to find some happy medium in terms of
appropriate review, again not making the service a regulator as
well as a tax collector, but making sure that those things sold
by its private sector partners pass the smell test to market
suitability. Is that how you would see it?
Ms. OLSON. I would agree with that, and I would also say
that there needs to be appropriate disclaimers directed to the
reading level and the literacy level of the target audience. We
have targeted the Free File to low-income taxpayers.
Mr. POMEROY. Does the Advisory Committee look at this sort
of thing?
Ms. OLSON. The ETAAC?
Mr. POMEROY. Yeah.
Ms. OLSON. I know that they have considered this issue.
That would be an appropriate place, I would think, to start to
develop some recommendations.
Mr. POMEROY. I will direct that inquiry to them. Thank you
for that.
We received from your counterpart in Fargo, North Dakota, a
really fabulous idea that we want to advance, and that is
relative to filing a husband/wife return on a farm, presently,
as I understand it, it has to be either in partnership, which
involves some taxpayer complexity, or basically between the two
of them they have to allocate all of the income to one,
usually, of course, the male.
Ms. OLSON. Legally they are supposed to file a partnership
return.
Mr. POMEROY. Within this partnership return is the revenue
attributed to one spouse or the other, or how does that work?
Ms. OLSON. In a partnership return they can attribute it to
the extent that they agree. It is completely open. What we find
in practice is that most husband and wife co-owned businesses
that aren't incorporated tend to put all the income in one
person's name and report it on a sole proprietorship schedule
or in the farming business, on a Schedule F. So, what ends up
happening is that the other spouse doesn't have any income
reported to them, and the consequence of that is the spouse
doesn't get any Social Security or Medicare credits.
Mr. POMEROY. Precisely. So, what appears to be, while the
easy route in terms of filing the tax return in a given year,
becomes a pattern, and the income is attributed just to one
spouse.
Ms. OLSON. Correct.
Mr. POMEROY. Down the road that might mean the other
spouse, should this marriage end by divorce or death, does not
have the 10 quarters required for purposes of qualifying for
Social Security; is that right?
Ms. OLSON. That is correct.
Mr. POMEROY. The recommendation from the Fargo Taxpayer
Advocate is that this needs to be attended to in ways that
family farmers can avail themselves of simpler tax filings, but
still allocate the income; is that correct?
Ms. OLSON. Right. We recommended that you could use a
Schedule C, for sole proprietorships, or the Schedule F, for
farms and report all the income on one form, but just add two
lines to the form where you could allocate between the husband
and wife at the very bottom of the form what percentage of the
net profit or loss is each person's.
Mr. POMEROY. The Chairman and I each represent farm
families, and this is an idea we think is very interesting. We
will be looking to see whether or not we want to advance a
joint bipartisan legislative proposal directly as a result of
your Fargo, North Dakota, Taxpayer Advocate. I am very proud of
the job----
Ms. OLSON. I am very proud of that person, too.
Mr. POMEROY. Thank you very much.
Chairman HOUGHTON. Thank you. Well, I just have one other
question. You obviously have got a very important job now
between Mr. Rossotti going in and--going out and Mr. Everson
coming in and Mr. Wenzel leaving, lots on your shoulders.
Let me ask you a question. How many people read your
report?
Ms. OLSON. Well, I know----
Chairman HOUGHTON. Or even open it?
Ms. OLSON. Well, let me just say that I know that
Commissioner-designate Everson has read it; not all of it, but
I know that he has read parts of it. It is surprising how many
people read it if you judge by my e-mail and my voice messages
and my mail. We would like more people to read it because we
believe that particularly this year we have shown a spotlight
on the way that the IRS works, and it should actually make
taxpayers feel very good as they read through the top 20
problems--and they see how we identify a problem and the IRS
responds--how much the IRS really is doing about the problems
that it faces.
So, much of what is troubling to the IRS is just a result
of the complexity of the tax system both in terms of the law
and the processing, the Administration, and they are doing an
enormous amount. The report really shows that, and citizens
should feel good about it.
Chairman HOUGHTON. One of my hot buttons has always been
the issue of complexity of the Code, and we sit here and we
pass legislation, we think it is for the good of the country,
and yet it horribly complicates the Code. So, I think it might
be helpful in further meetings that we have that you can sort
of keep us up to date with a scorecard on what we have done,
because it is a two-way street here.
I have one final question. You have this fine report, and
there is a conclusion, section 1 of page 4. What would you like
the conclusion to say next year?
Ms. OLSON. I will have to look at what the conclusion says
this year.
I think I would like to see the IRS having made substantial
progress in the five areas that I outlined in the preface
underlying taxpayer rights; the concept of access to
information, to the IRS, to the Taxpayer Advocate Service, to
representation from low-income taxpayer clinic programs, which
just came under my jurisdiction, and free tax preparation. We
are along the way. I really want to see some progress that we
can report on, and particularly on that number 1 issue,
navigating the IRS. It is in the social contract between the
IRS, the tax administration system, and its taxpayers. We have
to become accessible to them, or else why should they ever pay
their taxes if they can't reach us to talk about their
problems? I want more progress on that. That is really why we
made it number 1.
I would like to conclude that we had made progress. There
are steps to go, but we have made progress.
Chairman HOUGHTON. All right. Well, thank you. You are a
credit to all of us, and thanks so much for your testimony.
Good luck to you.
Ms. OLSON. Thank you, sir.
[Whereupon, at 4:50 p.m., the hearing was adjourned.]
[Submission for the record follows:]
Statement of Grover Norquist, President, Americans for Tax Reform
On July 31, 2002, the Bush Administration announced a Public-
Private Partnership with the high technology industry to increase the
availability of free online tax preparation and e-filing services to
American taxpayers. On October 31, 2002, then-Commissioner of Internal
Revenue, Charles Rossotti, signed this historic agreement in
Washington. This innovative initiative is a constructive and thoughtful
resolution of a long-standing public policy problem.
But it's only the first step. What happened in Washington needs to
be replicated in every State capital in the union. Here's why.
On multiple occasions over the past five years the Internal Revenue
Service has proposed that it should provide electronic tax preparation
and filing services to taxpayers. One year ago, the Office of
Management and Budget revived the idea and pressed to move ahead.
Fortunately, Congress has repeatedly objected to these attempts to have
the Nation's tax collector take on the additional role of also acting
as citizen's tax preparer.
While such an obvious conflict of interest has at times been
advanced by some as representing a new ``service to the citizen,'' it
would in reality have been a significant and intrusive expansion of the
role of government, and a major setback for the American principle of
voluntary compliance in our tax system.
Worst of all, it would have served as a disguised revenue
enhancement strategy--bracket creep through mission creep.
But while Congress rebuffed these attempts to expand the role of
government at the Federal level, there were no similar checks and
balances at the State level, and as a result over the last several
years some 26 State revenue collection agencies instituted the very
programs the Federal Government has so wisely shunned, and in the
process the States collectively expended literally billions of taxpayer
dollars to pay for the design, development and operation of these
government-run online tax preparation systems.
Their national tax collectors union, the Federation of Tax
Administrators (FTA), reported last year that all of these State online
tax systems combined generated 800,000 tax returns in the last tax
season. That's just 1% of State income tax returns, all at a staggering
administrative cost. (With this kind of waste, it's little wonder that
our State governments are now going broke.) So why do they press ahead
with this effort? Indeed, why did they try in the first place?
We know that at least some State revenue agencies designed their
online tax preparation systems with the intent of using them to
increase revenue receipts from taxpayers, and actually financed the
substantial cost of the systems from those projected new revenues. The
Virginia Department of Revenue, for example, has boasted of their
plans, in reports addressed to their Governor, bragging that their new
$125M ``iFile'' online tax preparation system would be financed from
``increased tax revenues attributed to the successful implementation,''
and that the system would assist the tax agency in ``selecting audits
and . . . performing focused, effective, and timely account
collections.''
Just last week, the New Jersey Star-Ledger, The Los Angeles Times
and other newspapers across the Nation reported that State tax agencies
across the Nation are using the modern tools of electronic data
retrieval and examination to do exactly what the Virginia Department of
Revenue described. The Executive Director of the national Federation of
Tax Administrators (FTA), Harley Duncan, is quoted promoting the value
of using ``data mining'' to deeply penetrate electronic taxpayer
records, and how State revenue agencies are now using their modern
computerized tools to dig through citizen data files of personal
financial information.
``It amounts to combing through files that can tell you something
about taxpayers,'' the FTA's Duncan explained. He went on to justify
these new practices by his members in State tax agencies across the
Nation, saying that ``data mining isn't enough, in and of itself, to
bring States through this particular (budget) crisis, but if you're . .
. looking for $25 million to augment a program, and you can pick it up
by better mining your tax base, that's significant.''
This kind of intrusive surveillance, and surreptitious
investigation of taxpayer records and personal financial information,
is deeply disturbing, and is but the latest in the long, sorry history
of abuses of taxpayers by government revenue collection agencies.
However, this is not unexpected; indeed, it is just one of the dangers
that has long been predicted from the conflict of interest created when
tax collectors are put into the role of tax preparers.
The reality is that when a citizen prepares their taxes online in a
State revenue agency computer system, every keystroke, correction,
change and draft created in the course of preparing that tax return is
automatically recorded and stored in the tax agency's data files. That
is the basic nature of server-based online transactional technology.
And when government unwisely decides to provide personal financial
services to citizens, such as tax preparation, the dangers of this
technology are suddenly very real.
In defending its desire to build these systems and begin preparing
citizen's tax returns for them online, the State of California revenue
bureaucrats actually had the temerity to tell the public that ``(We)
will always be beholden to the taxpayers and have the taxpayers' best
interest at heart.''
That is not reassuring, nor is it credible.
Back in a more sensible past, government tax agencies only received
a citizen's final, completed return. And tax agencies only lawfully got
their hands on a citizen's preliminary tax information and other
personal financial data through official investigations, and by court
order in civil and criminal proceedings. But not anymore.
If a citizen is foolish enough to prepare their tax return on a
State revenue agency's online system, they are playing with fire, and,
unwittingly, with potential self-incrimination. If our citizens use the
online tax preparation systems provided and operated by State revenue
agencies, they are effectively serving themselves up to be flagged for
examination, investigation and audits.
The high risk of this threat to our citizenry is a prime example of
why the Bush Administration well deserves the bipartisan support it has
received for instituting its Public-Private Partnership solution, where
those in need can get free online tax services, but from the private
sector, instead of the government. Under this national solution, the
IRS will still only receive a citizen's final, completed tax return.
And that's the way it should be in the voluntary compliance system we
have in the United States.
It has been our consistent view at Americans for Tax Reform that
changes in tax policy should be dealt with openly and with full public
disclosure and debate. Bureaucratic ambitions for stealth tax
increases--enabling government to grow and expand its mission without
oversight or checks and balances--should never be permitted by
policymakers under any circumstances. It is, in reality, a betrayal of
the public trust.
Notwithstanding the vociferous advocacy of these programs by the
Federation of Tax Administrators, as the preferred electronic weapon of
choice for its nationwide membership of professional tax collectors,
the fact is that the per-return cost of these government systems is
astronomical, and, in the end, is serving only to provide employment
security for tax bureaucrats. These initiatives are not ``electronic
government'' or ``citizen service''; they are electronic fraud and
amount to nothing more than citizen deception.
It is little wonder, then, that this same national tax collectors
union has tried mightily to protect its vested self-interests by going
around to newspapers all over the United States attacking the Federal
Free File Alliance initiative. However, the Bush Administration
solution is so cost-effective and even-handed that it puts the lie to
any justification for governments wasting public funds on creating
their own online tax systems.
Some States know better than to pay heed to their tax bureaucrats'
self-interested ambitions, and are instead looking for better answers
that maintain the integrity of their relationship with their citizens.
After the Federal Free File Alliance Agreement was signed on October 31
last year, the States of New York, Massachusetts and Michigan had
already replicated the Federal initiative and launched their own Free
File Alliances by the following January.
But those States that do not choose this sensible approach are
headed down a road to nowhere. This same folly of building government
online tax systems has been attempted elsewhere, and with results
similar to those we've seen in the U.S.--taxpayers shun them.
For example, in the United Kingdom, hundreds of millions of pounds
have been incinerated on these same government online tax systems, but
which collected only 75,000 tax returns last tax year (less than 1% of
total returns, with much of the online filing done by panicked
procrastinators) in a ``service'' that was riddled with errors,
breakdowns and breaches of privacy and security. Polls released just
this week in the United Kingdom have shown that 93% of Britons say they
refuse to even consider using the government online tax system, citing
risks relating to security, reliability and accuracy among other
concerns. A similar system deployed by the Australian government has
been used by only 3% of the taxpayers there.
The decision by the Bush Administration to ultimately reject this
path is not only enlightened, but, most importantly, puts the best
interest of the citizen ahead of that of the bureaucrat. The American
taxpayer simply cannot afford the public waste of government investing
hundreds of millions of dollars for bureaucratic featherbedding,
duplicating the electronic tax systems already invented, developed and
deployed by the private sector e-commerce industry, with services
already available at low-cost and no-cost to taxpayers today. Whether
tax bureaucrats would build or buy such systems and services is
irrelevant. Either way, it would waste precious tax dollars on
expansion of government into a mission that is a gross conflict of
interest, and the taxpayer would end up paying the freight, coming and
going.
The new Public-Private Partnership announced by the Administration
is a precedent-setting innovation that chooses the consumer benefits of
market competition instead of anti-competitive government expansion,
and ensures protection of taxpayer privacy and taxpayer rights over the
threat of government intrusion and conflict of interest.
The Administration's voluntary agreement with industry costs the
public treasury virtually nothing, and encourages continued private
sector investment, competition and innovation, while encouraging the
private sector to provide free services to those who truly need them.
Congress has already legislatively endorsed the Administration's policy
direction. Now the national solution to this issue should be emulated
by all of the Nation's governors and State legislatures.
Asking taxpayers to trust the tax collector is ludicrous. Making
them pay for such folly is unacceptable.
-