Congressional Testimony Highlights IRS Challenges

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In my prior post this week about the status of EITC overclaims and decline in use of commercial preparers among EITC claimants I referred to testimony that Nina Olson gave on February 26 before the Subcommittee on Financial Services and General Government of the Appropriations Committee.  For those interested in tax administration, the hearing is compelling. Ok, not season-ending Downton Abbey cliffhanger compelling, but for me, home nursing a root canal procedure, it is not a bad way to spend a few hours.

The three witnesses before the subcommittee were IRS Commissioner John Koskinen, Treasury Inspector General Russell George, and National Taxpayer Advocate Nina Olson (these links are to their written statements). There is a video stream of the testimony that I link to here.

For those not wishing to spend three hours watching, I will give a snapshot of the hearing, with a focus on IG Russell George and NTA Nina Olson.  With respect to Mr. George, I will summarize his list of major challenges the IRS is facing. With respect to Ms. Olson, I will highlight the four main points she made at the hearing, including her detailed suggestions on ways to reduce EITC overclaims.  I will finish by highlighting parts of Ms. Olson and Mr. George’s testimony on the IRS scandal of the past 9-months, including an almost 13-minute exchange between Representative Jose Serrano, the ranking Democrat on the Subcommittee, and Mr. George.

One note on the scandal. It has been covered (some might say smothered) elsewhere.  We have decided to avoid most coverage of the issue, in part because others are hitting it hard and it does not directly impact many aspects of tax procedure.  I highlight it here because it is the major issue of the day when it comes to how Congress and the public view the IRS, and as I discuss later, it does also dovetail with some earlier posts we have on IRS rulemaking. As the scandal plays out, it will continue to have a major impact on tax administration. The Serrano/George exchange in particular highlights how partisanship or even perceptions of partisanship can poison the delicate balance of trust that should exist among the IRS, Congress and the public.

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Commissioner Koskinen

Before turning to IG George and NTA Olson, let me briefly summarize the Commissioner’s testimony. The first 2 hours and 17 minutes feature Commissioner Koskinen, who became the 48th IRS Commissioner in December of last year—not an easy time to take charge. After members get through some preening, he does an admirable job fielding questions from the subcommittee members on topics as diverse as general customer service, a detailed review of the scandal surrounding review of tax exempt organizations, the ruling process relating to Treasury’s issuing proposed regulations attempting to define political activity, and the IRS’s use of social media and reviewing personal emails, among other topics. The impression I get of the Commissioner is that he is someone deeply interested in ensuring that the culture of the IRS is one that the employees can deliver bad as well as good news to management. He comes across as smart and willing to take personal responsibility for ensuring a more responsive agency that has a long way to go to rebuild trust with many in Congress and the public generally.

TIGTA: Testimony of Russell George

At the 2 hours 18 minutes mark the hearing turns to the introductory statement of Russell George. Mr. George continues until about 2:26. He delivers a sobering view of problems the IRS is facing.  For example, he talks about the following:

  1. Telephone customer service: IRS performance has declined significantly, with excessive wait times and many taxpayers’ calls going unanswered
  2. Walk-in help: material reduction in service over the past year at IRS customer service walk in centers
  3. Correspondence delays: IRS’s declining ability to process correspondence—rise in overage inventory of correspondence  from 593,000  in 2012   as compared to 1.2 million  in 2013
  4. Improper payments reporting: in addition to EITC overclaims, he (as I suggested in a prior post OMB and Improper Payments) talks about how IRS should also more specifically report on improper payments in other areas like refund errors relating to identity theft
  5. Identity theft: As to identity theft, he talks about how the IRS is improving in this area but last year how there were still 1.1 million undetected returns with fraudulent refunds of about $3.6 billion
  6. Tax gap: he talks about how the underreporting tax gap last year is about $376 billion
  7. ACA implementation: he talks about how the IRS is not geared up to detect improper payments relating to premium credits and how TIGTA will be monitoring  this issue carefully

NTA: Testimony of Nina Olson

Starting at about the 2 hour 27 minute mark NTA Olson makes four main points:

  1. Taxpayer bill of rights—she urges Congress to pass a comprehensive taxpayer bill of rights provision; she connects her proposal to the tax exempt organization processing scandal, noting that if the bill of rights she has proposed had been in place (and followed) the scandal would not have occurred
  2. Decline in ability to provide customer service—here, NTA Olson presents sobering information about IRS performance: with phone calls, the IRS was unable to answer 2 out of 5 calls; the calls that got through had over 17 minutes of hold time.  Making matters worse, Olson notes that IRS will only answer questions on tax law until April 15. Here, Olson makes the critical point (after all this is the Appropriations Committee)that a lack of funding punishes not just the IRS but the public which is generally trying their best to comply. She connects the relationship between poor service and compliance.
  3. Identity theft victims need better assistance—NTA Olson makes a number of practical suggestions, including repeating her suggestion that IRS should “stop dithering” and designate a single employee to serve as a sole contact for victims.
  4. Detailed analysis of sources of EITC errors with practical proposals to reduce the overclaim rate– NTA Olson makes suggestions that she thinks will reduce refundable credit overclaims:
  • Personal contacts with people getting correspondence audits
  • Regulation of preparers
  • Impose penalties on preparers who have failed to meet their due diligence obligations
  • Use a third party affidavit form for residence of qualifying child proof
  • Accelerating third party information reports to better associate information with returns before paying refunds

The IRS Scandal

At the 2 hr 32 minute mark Subcommittee Chair Ander Crenshaw asks George and Olson how IRS is doing in implementing  TIGTA and TAS recommendations regarding IRS review of organizations’ applications for tax exempt status.  George notes that IRS has reported that it is implementing TIGTA’s prior recommendations and TIGTA is currently examining the implementation.

At about 2:35 Olson talks about NTA review of process regarding exempt organization applications, and the TAS role in prompting timely IRS review. Here, Olson makes the point that a lack of guidance to front line employees who sought help contributed to the IRS’s problems.

For those interested in the current status of IRS and Treasury proposed regulations attempting to define political activity at around 2:37 Olson discusses the regulations and how the regulations take a more objective approach to the issue as to what is political activity.  As came up earlier in the hearing the exchange notes that IRS has received almost 100,000 comments in connection with the  reg project. This aspect of the hearing and its focus on rulemaking is fascinating. We have in prior posts looked at IRS guidance under Obamacare and information reporting for interest paid to nonresidents and have discussed the recent trend where courts have allowed legal challenges to the adequacy of IRS guidance as soon as that guidance is issued. (See for example my post discussing challenges to IRS guidance under the ACA). No doubt that legal issue will be relevant when IRS does finalize these rules, though Commissioner Koskinen in an earlier exchange with Chair Crenshaw suggested that it was unlikely final regs would be issued anytime soon.

Finally, for those interested in allegations that the initial revelations about IRS tax exempt organization review were mainly partisan, I commend the exchange between Representative Serrano and IG George starting at about the 2:38 point.  At 2:43 George explains why the initial TIGTA revelations did not focus on how IRS had also placed progressive potential tax exempt groups on the infamous “Be on the Lookout” lists (BOLO lists).  The exchange provides a snapshot of how the perception of partisanship when it comes to tax administration can trigger all sorts of problems: for example, it colors legitimate concerns about how IRS is performing its multiple responsibilities, it engenders mistrust in taxpayers who may believe that their political affiliations are triggering what should be unrelated income tax audits, and for the IRS, forced to go in crisis mode, it makes its difficult job in administering the laws that much more challenging.  That latter point is sobering, unless of course you do not believe that parts of the law IRS has on its plate (e.g., the Affordable Care Act) should be administered in the first place.  But I will not go there, as I cling to my beliefs that tax administration is not the place to pitch partisan battles.

 

 

 

Leslie Book About Leslie Book

Professor Book is a Professor of Law at the Villanova University School of Law.

Comments

  1. Thank you Professor for the inside update

  2. Thank you for this wonderful summary.

  3. Bob Kamman says:

    Congress is not going to find out that IRS is clueless by asking IRS and Treasury executives to testify.

    IRS can’t keep up with its correspondence? Most taxpayers don’t write IRS sua sponte. They are replying to IRS correspondence. The solution is for IRS to send fewer letters. Take, for example, my client who has filed a joint return with the same husband from the same address for 20 years. On February 11, IRS sent her a letter telling her that they had received another 2012 return wth her name and SSN, but they had resolved the problem and she need not respond, but might want to monitor her credit reports for identity theft. On February 25, IRS sent her a letter stating that they had not received a 2012 return from her and demanding she file one by March 7.

    IRS keeps people on hold? Spend less taxpayer money on phone lines, more on staff. Level the call volume. They’ll call back at a better time. Given the IRS inaccuracy rate, fewer questions answered means fewer taxpayers filing inaccurate returns anyway. Social Security, when its phone system is overloaded, takes voice-mail messages with a callback number. That system is not perfect because the automated dialers sometimes fail to connect the caller with an available representative, but at least they are trying.

    IRS can’t deal with peak volumes? Let’s look at how they compressed tax season. Investors used to get their 1099-DIV and 1099-B reports by January 31. Then IRS changed the due date to February 15 (automatically, for sales reports; by requested extension, for dividend reports). Tax season was shortened from ten weeks to eight weeks, for the convenience of Wall Street. Why not extend the return due date to April 30? This mostly would allow the Treasury to hang on to refunds longer.

    IRS has a problem auditing EIC returns because a year after the fact, it’s sometimes difficult to prove where a toddler lived? Require certification in real time. If someone wants to claim a child on a 2014 return, have them file a one-page “Notice of Claim” by July 31, 2014. Audit a sample of these. Consider exempting taxpayers claiming their own child, since much of the EIC problem involves nieces and nephews and cousins and grandchildren. Consider limiting the requirement only to first-time EIC claimants for the identified child.

    • Thanks Bob. I think the suggestions you raise for altering tax season and your ideas for pushing verification in EITC are very interesting. They are also similar to ones the NTA has raised over the years. I do think it is time to push additional verification on self-prepared EITC returns, and the idea of different requirements for different types of family members (or maybe first time claimants or first time claiming a particular qualifying child) I think is quite clever. There are some structural issues that Congress has presented that incentivize noncompliance.

  4. Bob Kamman says:

    Speaking of my client who received (her name only) a letter from IRS saying they had received two 2012 returns from her — followed two weeks later by a letter (her name only) from IRS saying they had not received any 2012 return from her, and demanding that she file one within 10 days — my local Taxpayer Advocate just left a message telling me that they could not help because I submitted a Form 2848 from her, but not from her husband with whom she filed a joint 2012 return (except, of course, IRS claims she did not file any return).

    This mostly just verifies my operational assumption that the Taxpayer Advocate office is what John Nance Garner called the Vice Presidency (although that’s not really what he said was in the bucket). But I will elevate the problem to the National Taxpayer Advocate office, without really expecting a response.

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