[Senate Hearing 117-]
[From the U.S. Government Publishing Office]
FINANCIAL SERVICES AND GENERAL GOVERNMENT APPROPRIATIONS FOR FISCAL
YEAR 2022
----------
WEDNESDAY, MAY 19, 2021
U.S. Senate,
Subcommittee of the Committee on Appropriations,
Washington, DC.
The subcommittee met at 2:01 p.m., in room SD-138, Dirksen
Senate Office Building, Hon. Christopher Van Hollen (Chairman)
presiding.
Present: Senators Van Hollen and Hyde-Smith.
INTERNAL REVENUE SERVICE
opening statement of senator christopher van hollen
Senator Van Hollen. Good afternoon everybody. This hearing
will come to order. And I will be brief because there's lots of
material to cover today. First, I want to welcome Senator Hyde-
Smith. This is our first hearing as Chairman and Ranking Member
of the Financial Services and General Government Appropriations
Subcommittee. And I'm looking forward to working with you,
Senator, as we move forward on the appropriations process this
year. I also want to thank our staff on both sides of the
aisle.
I want to welcome our witnesses. IRS Commissioner Charles
Rettig, Former IRS Commissioner Charles Rossotti, and IRS Tax
Advocate Erin Collins. Thank you all for making the time to be
here in person today.
And I want to give a special shoutout to Commissioner
Rettig for your recent efforts at the helm of IRS to ensure a
quick and efficient roll-out of the expanded child tax credit
benefits so that we're secured in the American Rescue Plan.
Funds will start reaching families as soon as July 15. And that
support will help cut child poverty nearly in half this year.
Today's hearing will focus on two big issues at the IRS.
The first is narrowing America's tax gap, identifying the
components of that gap, and working to close it. The second is
improving taxpayer services. And I believe that these two
issues are deeply linked.
Our tax system runs on the assumption that Americans
voluntarily comply with the Nation's tax laws. Each year,
millions of people pay what they owe, fill out their tax forms,
and send them in to the IRS honestly and on time. And they
trust that others do the same.
But we know that while most people pay what they're
required to under the law, some do not. There is anywhere from
$500 billion to $100 trillion in taxes each year that are owed
and not paid. That is a staggering figure. This is commonly
called the tax gap, but that gap is really a gorge.
The yearly amount of tax dollars owed is more than the
Federal Government spent on Medicaid in 2020. And that is an
insurance program that helps more than 72 million Americans.
These are billions of dollars that are legally due under
current tax law, and which could go toward funding crucial
policies that support everyday Americans.
The first tool in our arsenal to help narrow this gap is
taxpayer services, which help people know what they owe and
when they owe it. And taxpayer services help take the headache
out of tax season at least as much as possible.
Better taxpayer services are also essential for the IRS to
deliver vital programs for American families, such as the
economic impact payments that have gone out during the
pandemic, and the child tax credit payments that will go out
starting in July.
The second tool is to invest in enforcement capabilities.
We need to crack down on those who evade their tax
responsibilities, those who refuse to do their part to help our
country. This does not mean targeting working families who are
already paying their taxes in withholding from each and every
paycheck.
Closing the tax gap and ensuring the IRS has the resources
they need for taxpayer services and enforcement must be top
priorities. And this hearing will help us better understand how
to tackle each of these pressing challenges.
With that, I want to end where I began by thanking all of
you for coming here today to share your perspectives. And
before we begin, I would like to turn to Senator Hyde-Smith for
her opening statement. Senator.
opening statement of senator cindy hyde-smith
Senator Hyde-Smith. Thank you very much Mr. Chairman for
that warm welcome. And it's an honor to be here today as
Ranking Member, I am certainly grateful for this opportunity on
this important subcommittee, and looking forward to crafting
very responsible legislation for fiscal year 2022.
I also want to welcome the IRS Commissioner to our hearing
today. We look forward to your testimony this afternoon and to
the testimony of our second panel as well.
While there are significant disagreements in Congress on
what the proper level of taxing and spending should be, there
should be no doubt that taxes legally owed to the government
should be paid. The so-called tax gap is a serious issue, and I
appreciate the Chairman calling this hearing today to draw
attention to this topic.
In recent years, we have heard wildly varying estimates
from the IRS on what the tax gap actually is. And I just look
forward to hearing from the Commissioner today about the issue
and his proposed solutions. I also look forward to hearing from
the witnesses on our second panel today about their
perspectives on both the tax gap and how the IRS can improve
the quality of services that it provides to the taxpayers.
Today, I expect one of the recurring things from our witnesses
to be the need of more resources at the IRS.
While more money always seems to be the proposed solution
in Washington, DC, I remain concerned that funding increases
marketed as the solution to the tax gap will instead be
diverted away from enforcement and squandered on IT projects
that have a checkered history of success.
Since 2013, the IRS has transferred $1 billion away from
its tax enforcement account to its operations support account
to address its information technology and systems. Over the
past 14 months, the IRS has received more than $3 billion in
supplemental funding, including $2 billion for its systems and
technology. Unfortunately, the IRS is still planning to divert
more than $200 million away from the enforcement this year, to
yet again address IT cost.
Congress originally designated these funds to beef up the
IRS enforcement ranks. Unfortunately, we have seen the IRS
repeatedly call attention to the tax gap, and then divert the
funds somewhere else. I hope the Commissioner will reconsider
this practice and instead today focus on exploring common
ground on how to increase compliance with our tax laws and to
increase services to the taxpayers.
Mr. Commissioner, I know you have your hands full with
responding to additional responsibilities placed on the agency
and adapting to COVID-19. And I just want to thank you for your
service. And I look very forward to your testimony today. Thank
you, Mr. Chairman.
Senator Van Hollen. Thank you, Senator. Our first witness
today is IRS Commissioner Charles P. Rettig. Prior to his
confirmation in September 2018, Commissioner Rettig worked in
private practice for 36 years, representing thousands of
individuals and businesses before the IRS, the Department of
Justice tax division, Federal and State courts, and State
taxing authorities.
He received his B.A. in Economics from the University of
California at Los Angeles, as well as a J.D from Pepperdine
University, and an L.L.M. in taxation from New York University.
Commissioner, thanks again for being here. You can now
begin your testimony.
STATEMENT OF CHARLES RETTIG, COMMISSIONER, INTERNAL
REVENUE SERVICE
Mr. Rettig. Thank you very much, Chairman Van Hollen,
Ranking Member Hyde-Smith, and Members of the Subcommittee.
Thank you for the opportunity to discuss our efforts to help
taxpayers, especially during the COVID-19 pandemic, and our
ongoing efforts to address the tax gap.
Before I begin, I want to thank Congress for recognizing
the efforts of our employees during the pandemic, and on
working on behalf of the country. Our employees have worked
extremely hard for the last 14 to 16 months to bring about
unprecedented relief to vulnerable taxpayers and to taxpayers
across the system.
We're very proud and privileged to have had that
opportunity. And we're exceptionally proud of the recognition
that we've received from Members of Congress individually and
collectively. We are proud to serve our country. We want to
provide meaningful services of a nature and quality that every
American deserves.
The problems facing tax administration today are not new.
It is not unusual. I'm sitting here with Commissioner Rossotti,
and a lot of the issues that I have faced during my term so
far, he faced during his term and Commissioners prior to
Commissioner Rossotti faced during their term.
It will take time to overcome the challenges of the past.
The agency will continue to struggle to replace more than
50,000 workers lost through attrition over the next 6 years to
expand our workforce, to support implementation of our multi-
year integrated modernization plan, to implement the provisions
of the Taxpayer First Act, and to continue enhancing both
meaningful service and compliance efforts.
Like all Federal agencies, the IRS is best suited to
provide services Americans deserve and appropriately enforce
the tax laws in support of compliant taxpayers when it receives
the resources that it needs to do so.
At a time when the IRS has faced consequential resource
challenges, it has been called upon to take on new
responsibilities. Our response to the unprecedented COVID
challenges illustrates the importance of every American to the
IRS and the importance of the IRS to every American.
During the pandemic, in a bit more than 14 months, IRS and
Treasury employees delivered 472 million payments for EIP 1, 2,
and 3, totaling more than $807 billion, plus 214 million
individual refunds totaling over $573 billion. The total of
those EIP payments and the refunds to date--because it includes
filing season 2020 and 2021--is more than $1.38 trillion during
the pandemic from an agency that I shut down in March of 2020.
We sent our employees home. We closed about 500 facilities,
had to flip into a teleworking virtual environment. I'm
extremely proud of our employees, the efforts that they went
through to be able to accomplish what we have accomplished to
date. I respect the fact that Members of Congress, the Chair,
and Ranking Member have echoed those compliments already.
Turning to the 2021 filing season, this season has gone
smoothly. At the peak, we were receiving 335 submissions per
second. Yesterday, which was the conclusion of filing season
2021, we received a record 15.36 million returns. Through May
14, the IRS has processed more than 124 million individual
returns, including almost 89 million refunds, totaling $253
billion. We have also received, in total, more than 260 million
Federal, State, and business returns and are processing those.
And we're very proud of the volume and our ability to handle
this during the pandemic.
With respect to the unemployment insurance and the change
in the law, which made the first $10,200 excludable for certain
taxpayers, we adjusted the first payments for the people who
filed before the law changed. The first refunds went out last
week. Refunds will continue to go out through the summer, and
the vast majority of those folks will have to take no action.
As to the Advanced Child Tax Credit, we are on track to
issue the first payments on July 15. We have completed over 50
percent of the build of the two separate tools, which will
allow people to go online to check the status and to provide us
with filing information. Individuals will also be able to
interact with us in person and on the phone, with respect to
the 6-month advanced tax credit provisions.
We did not have, nor did most others, a pandemic playbook.
We worked hard with limited resources in a lot of arenas. We
made some mistakes; we tried our best. We think that looking
back, folks will be very proud of the role of the Internal
Revenue Service during the past year.
As I turn it back to you, we should not overlook the fact
that about 96 percent of the gross revenue of the United States
of America flows through the Internal Revenue Service. Our
Agency is important to the country and to the people of the
country, and the fact is that we're reflective of the people of
the country. I'm very proud of the diverse nature of our
workforce and the communities that we have presence in. We are
on the ground in these communities.
We are available for Congress and others to continue
serving the people of this country. We're very proud of our
role. With that, Mr. Chairman, Ranking Member, I turn it back
to you, and am available for questions.
[The statement follows:]
Prepared Statement of Hon. Charles P. Rettig
introduction
Chairman Van Hollen, Ranking Member Hyde-Smith and Members of the
subcommittee, thank you for the opportunity to update you on IRS
operations, especially the work we have been doing to help taxpayers
during the COVID-19 pandemic.
I am pleased to report the 2021 filing season has gone smoothly in
terms of tax return processing and the operation of our information
technology (IT) systems. Through May 7, the IRS received more than
126.7 million individual Federal tax returns and issued more than 84.8
million refunds totaling more than $242.8 billion. A more detailed
discussion of the filing season is provided later in this testimony.
At the same time, the IRS is working closely with the Treasury
Department to implement the American Rescue Plan Act of 2021 (ARP Act)
as quickly as possible to help the Nation's taxpayers. As part of these
efforts, we took immediate steps to begin delivery of the third round
of Economic Impact Payments (EIP) to millions of Americans within days
of the legislation being signed on March 11. Through May 12, we have
disbursed about 165 million payments totaling approximately $388
billion. The IRS is also coordinating with Treasury on another
important provision, which provides periodic advance payments of the
Child Tax Credit (CTC) to eligible Americans. The IRS will be working
hard to deliver this program quickly and efficiently.
Now in my third year as Commissioner, I remain extremely proud to
be working for the IRS and excited about the future of our agency. We
are grateful for the increased and multi-year funding that will allow
the IRS to (i) modernize our systems, (ii) increase our workforce and
their capabilities through a robust recruitment and training program,
(iii) implement the provisions of the Taxpayer First Act, including
improving the taxpayer experience, and (iv) conduct compliance
activities that support our voluntary tax compliance system.
My experiences as Commissioner have strengthened my belief that a
fully functioning IRS is critical to the success of our Nation. In
fiscal year 2019, the IRS collected $3.56 trillion in taxes and
generated almost 96 percent of the funding that supports the Federal
Government's operations. We serve and interact with more Americans than
nearly any other public or private organization.
This unprecedented pandemic illustrates the significant role that
the IRS plays in the overall health of our country. We have been called
to provide economic relief during this national crisis while also
fulfilling our routine responsibilities of tax administration.
I am proud that IRS employees have responded admirably to the
COVID-19 situation by quickly facilitating financial assistance and
administrative relief to hundreds of millions of deserving and needy
Americans--including distributing $800 billion in Economic Impact
Payments since the spring of last year. People at the IRS continually
demonstrate just how much they care, and how important the agency is to
our country, by their heroic response to events over the past year. At
the same time, the IRS remains focused on its core mission, striving to
serve taxpayers in a manner that facilitates voluntary compliance by
providing meaningful guidance and proper levels of staffing and support
at points of significant taxpayer interaction.
Given the events of the past year, we appreciate the $3.1 billion
in additional funding we received from Congress to respond to the
COVID-19 pandemic and implement the EIPs and other tax changes. In
addition, our base fiscal year 2021 funding level (excluding these
additional resources) represents a 3.6 percent increase over fiscal
year 2020. However, it will take time to overcome the challenges of the
past decade, and the agency will continue to struggle to replace
employees lost through attrition and expand our workforce, support
implementation of our multi-year Integrated Modernization Business Plan
as designed, and continue enhancing meaningful service and compliance
efforts that will earn the trust and respect of every American and
improve our working relationships with taxpayers and others in the tax
community.
We respect and proudly serve all taxpayers, none more or less so
than any other. We must operate from their perspective, through their
eyes, enhancing their experiences while striving to provide clear,
meaningful guidance and services, in the language of their choice,
wherever possible. In support of compliant taxpayers, we must
aggressively pursue non-compliant taxpayers by maintaining robust,
visible civil and criminal enforcement efforts. We are making a
difference, and we want to continue to successfully pursue our mission
on behalf of our great country.
investing in the irs to improve tax administration
The President's Fiscal Year 2022 Discretionary Funding Request
The President's Fiscal Year 2022 Discretionary Request advances key
Treasury Department priorities, including ensuring that all Americans
are treated fairly by our tax system. The request provides increased
funding for the IRS to provide additional oversight of high-income and
corporate tax returns, ensuring that the wealthy and well-connected pay
what they owe and play by the same rules as everybody else.
To ensure that all Americans are treated fairly by the Nation's tax
system, including that the wealthy and corporations comply with
existing laws, the discretionary request provides $13.2 billion for the
IRS, an increase of $1.2 billion or 10.4 percent above the 2021 enacted
level.
With this funding, the IRS would: increase oversight of high-income
and corporate tax returns to ensure compliance; provide new and
improved online tools for taxpayers to communicate with the IRS easily
and quickly; and improve telephone and in-person taxpayer customer
service, including outreach and assistance to underserved communities.
In addition to increases for base IRS enforcement funding, the 2022
discretionary request provides an additional increase of $417 million
in discretionary funding through a proposed discretionary cap
adjustment for tax enforcement as part of a multiyear tax initiative
that would increase tax compliance and increase revenues. Altogether,
the 2022 discretionary request would increase resources for tax
enforcement by $900 million.
I would be happy to discuss the request further when we submit our
more detailed Budget Justification later this spring.
The American Families Plan
A robust and sustained investment in the IRS is necessary to ensure
it can do its job of administering a fair and effective tax system. In
the American Families Plan, the President has included a series of
proposals in that overhaul tax administration and provide the IRS the
resources and information it needs to address tax evasion. All told,
these reforms will generate an additional $700 billion in tax revenue
over the course of a decade, net of the investments made. Specifically,
the tax administration reforms will:
--Provide the IRS the resources it needs to stop sophisticated tax
evasion.--The IRS needs additional resources to pursue costly
tax evasion. These cases are not easy to resolve; the average
investigation of a high-wealth individual takes 2 years to
complete and often requires the IRS to commit substantial
resources. Moreover, the lack of adequate investment in
compliance has significant revenue consequences. A key
component of this initiative is the provision of a sustained,
multi-year stream of funding. Altogether, the proposal directs
roughly $80 billion to the IRS over a decade to fund an array
of priorities--including overhauling technology to improve
enforcement efforts, which is more effectively implemented with
the assurance of a consistent funding stream. This investment
will also facilitate the IRS hiring and training auditors to
focus on complex investigations of large corporations,
partnerships, and global high-wealth individuals. The
President's proposal directs that additional resources go
toward enforcement against those with the highest incomes,
rather than Americans with actual income of less than $400,000.
--Provide the IRS with more complete information.--When the IRS has
information from third parties, income is accurately reported,
and taxes are fully paid. However, high-income taxpayers
disproportionately accrue income in opaque sources--like
partnership and proprietorship income--where the IRS struggles
to verify tax filings. This reform aims to provide the IRS
information on account flows so that it has a lens into
investment and business activity--similar to the information
provided on income streams such as wage, pension, and
unemployment income. Importantly, this proposal provides
additional information to the IRS without any increased burden
for taxpayers. Instead, it leverages the information that
financial institutions already know about account holders,
simply requiring that they add to their regular, annual reports
information about aggregate account outflows and inflows.
Providing the IRS this information will help improve audit
selection so it can better target its enforcement activity on
the most suspect evaders, avoiding unnecessary (and costly)
audits of ordinary taxpayers.
--Overhaul outdated technology to help the IRS identify tax
evasion.--Elements of IRS IT systems are antiquated and make it
difficult for the IRS to identify those who are not paying what
they owe and to help those who want to comply. The President's
proposal provides the IRS much-needed resources to modernize
its technological infrastructure. Leveraging 21st century data
analytic tools will enable the IRS make use of new information
about income that accrues to high-earners and will help revenue
agents unpack complex structures, like partnerships, where
income is not easily traced.
--Improve taxpayer service and deliver tax credits.--A well-
functioning tax system requires that taxpayers be able to
interact with the IRS in an efficient and meaningful manner.
Inadequate resources often mean that IRS employees are unable
to provide taxpayers timely answers to their tax questions.
Service enhancement will improve the ability of the IRS to
communicate with taxpayers securely and promptly. Importantly,
the proposal also includes the necessary resources to ensure
that the IRS effectively and efficiently delivers tax credits
to families and workers, including newly expanded Child Tax
Credits and Child and Dependent Care Tax Credits.
--Regulate paid tax preparers.--Taxpayers often make use of
unregulated tax preparers who lack the ability to provide
accurate tax assistance. These preparers submit more tax
returns than all other preparers combined, and they make costly
mistakes that subject their customers to painful audits,
sometimes even intentionally defrauding taxpayers for their own
benefit. The President's plan calls for giving the IRS the
legal authority to implement safeguards in the tax preparation
industry. It also includes stiffer penalties for unscrupulous
preparers who fail to identify themselves on tax returns and
defraud taxpayers (so called ``ghost preparers'').
update on the 2021 filing season
The IRS workforce navigated preparation for the 2021 filing season
while continuing to implement COVID-related relief measures and
delivering an extended 2020 filing season. These circumstances
challenged our ability to make the necessary annual changes for filing
season 2021. Nonetheless, as a result of the ongoing efforts of our
employees, the IRS is on track to deliver a smooth filing season again
this year.
I'm pleased to report the filing season opened successfully on
February 12. To give you an idea of how well our systems performed, the
IRS over that initial weekend received a total of 55 million
submissions, which includes individual Federal returns along with other
items such as State tax returns, amended returns and returns filed by
businesses. At the peak that weekend, our IT systems enabled us to
successfully receive 335 submissions per second.
The February 12 opening of the filing season was slightly later
than in previous years. The delayed start gave the IRS time to do
additional programming and testing of our systems following the
December 27 tax law changes that provided the second round of EIPs and
other benefits. The additional programming and testing ensured that
people would receive their needed tax refunds quickly, and also receive
any remaining stimulus tax credits they might be eligible for as
quickly as possible.
The delay in the start of the filing season did not add any
additional delays to refunds on returns claiming the Earned Income Tax
Credit (EITC) or the Additional Child Tax Credit (ACTC). By law the IRS
cannot issue these refunds before February 15. This filing season, the
IRS was able to issue refunds for EITC and ACTC returns on February 16
and 18, 2021. We expect those refunds were promptly available in
taxpayer bank accounts if they chose direct deposit and there were no
other issues with their tax return. We have encouraged taxpayers to e-
file their returns and to check the Where's My Refund online tool on
IRS.gov or the IRS2Go app to find out their estimated refund date.
On March 17, Treasury and the IRS announced that the deadline for
individuals to file Form 1040 and pay their Federal income tax has been
extended from April 15, 2021 to May 17, 2021. IRS Notice 2021-21
provides details on the additional tax deadlines which have been
postponed until May 17. After carefully considering all the options,
the Department of the Treasury and the IRS determined a limited 2021
filing season deadline extension for individuals filing Form 1040 to
May 17, 2021, was in the best interest of tax administration.
All individuals had the option to obtain an automatic extension of
time to file a Federal income tax return until October 15, 2021.
Taxpayers needed to request the filing extension on or before May 17,
2021. For most, the request only required their name, address and
Social Security number.
While we recognized the desire and importance of requests to
further extend the 2021 filing season deadline or expand the scope of
the extension, doing so would have posed a significant potential risk
to implementing the ARP Act. Additionally, it could have further
delayed delivery of Recovery Rebate Credits (RRCs) and the third round
of EIPs, as well as refunds--including EITC and CTC payments--to the
most vulnerable Americans.
As part of our work on the filing season, the IRS continues to
spread the word about EIPs by reminding people who didn't initially
qualify for a payment--or didn't receive the full amount--that they
should check to see if they qualify to claim the payment as an RRC. The
EIPs represented advance payments of the RRC, and this credit can be
claimed on the 2020 tax return, by taxpayers and by individuals who
don't normally file. The 2020 Instructions for Forms 1040 and 1040-SR
include a worksheet that can be used to calculate the amount of any RRC
for which a taxpayer is eligible. Individuals are encouraged to file
electronically to claim this credit, and most can do so at no cost with
IRS Free File, including those who do not have a filing requirement.
This process should not be a burdensome action for individuals,
including those who normally do not file. We realize that delayed
processing of some 2019 returns could affect the ability of some
taxpayers to claim the RRC, so we are working as quickly as possible to
process outstanding returns.
The IRS also will continue working with groups inside and outside
the tax community to get information directly to people experiencing
homelessness and other groups to help them receive payments in this
latest round of EIPs. Our message to these groups is: For those who
don't normally file a tax return, they will need to file a basic return
with the IRS. Doing so will provide the IRS with the information we
need to deliver an EIP to them. Once that return is processed, the IRS
can quickly send stimulus payments to an address selected by the
eligible individual. People do not need a permanent address or a bank
account, and the IRS will still issue the payment even if they haven't
filed a tax return in years.
Another important filing season reminder involves people who
received unemployment compensation during 2020. We are working to make
sure they understand the tax law governing unemployment benefits they
received pursuant to U.S. law or that of a State. In general, these
payments are taxable and must be reported as income on taxpayers'
Federal returns. These individuals should receive Form 1099-G showing
the amount they were paid, along with any Federal income tax they
elected to have withheld. Since some States do not mail Form 1099-G,
some recipients will need to get the electronic version of the form
from their State's website.
However, the ARP Act exempts the first $10,200 in unemployment
compensation from Federal taxation for individuals with income below
$150,000. For those who received unemployment benefits last year and
have already filed their 2020 tax return, they should not file an
amended return.
As set forth in an IRS news release (IR-2021-71) issued on March
31, 2021, because the change occurred after some people filed their
taxes, the IRS will take steps in the spring and summer to make the
appropriate change to their return which may result in a refund. The
first refunds are expected to be made in May and will continue into the
summer. For those taxpayers who already have filed and figured their
tax based on the full amount of unemployment compensation, the IRS will
determine the correct taxable amount of unemployment compensation and
tax. Any resulting overpayment of tax will be either refunded or
applied to other outstanding taxes owed. For those who have already
filed, the IRS will do these recalculations, in two phases starting
with those taxpayers eligible for the $10,200 exclusion. The IRS will
then adjust returns for those married filing jointly taxpayers who are
eligible for the $20,400 exclusion and others with more complex
returns.
There is no need for taxpayers to file an amended return unless the
calculations make the taxpayer newly eligible for additional Federal
credits and deductions not already included on the original tax return.
For example, the IRS can adjust returns for those taxpayers who claimed
the EITC (or other credits) and, because the exclusion changed the
income level, they may now be eligible for an increase in the EITC
amount which may result in a larger refund. However, taxpayers would
have to file an amended return if they did not originally claim the
EITC but now are eligible because the exclusion changed their income.
These taxpayers may want to review their State tax returns as well.
The IRS is also working to alert taxpayers to an identity theft
scam involving these payments. There have been instances of criminals
using stolen identities to fraudulently apply for and receive
unemployment compensation. For many individuals who did not claim
unemployment compensation last year, this issue came to light when they
began receiving 1099-G forms with amounts they never applied for or
received. We encourage anyone in this situation to file an accurate
return only reporting the taxable funds they actually received, report
this fraud to the state agency that issued the 1099-G, and ask the
agency to issue them a corrected 1099-G showing the correct amount.
They can also go to dol.gov/fraud for more information about how to
reach their State workforce agency and report this type of fraud.
During this filing season, the IRS has continued to emphasize the
safety and health of taxpayers and our employees. For that reason, our
face-to-face operations have been limited to appointment services, with
provision for assisting taxpayers with hardships on a walk-in basis. We
believe that this year, it is more critical than ever for taxpayers and
tax professionals to take advantage of e-filing and online and virtual
services to help them with their taxes. We continue to encourage
taxpayers to use electronic tools to the extent possible, including
IRS.gov, where they will find a wealth of helpful information.
For taxpayers who need help preparing and filing their returns, I'm
pleased to report that the Volunteer Income Tax Assistance (VITA) and
Tax Counseling for the Elderly (TCE) programs supported by the IRS have
again been providing free assistance to eligible individuals. I'm very
proud of the work our VITA and TCE partners do during the filing season
to help taxpayers at approximately 8,000 sites around the country,
including military bases. This year, to ensure the health and safety of
taxpayers and volunteers, many volunteer tax preparation sites have
been offering virtual help to taxpayers, either over the phone or
online. Some sites have still offered in-person tax help, but safety
and social distancing have been emphasized.
Understanding the need to plan for the future and the desire to
maintain a safe operating environment, the IRS will continue operating
under its current posture until further notice, and we will continue to
follow--and where possible, exceed--applicable CDC guidelines for
public health and safety and measures. We will continue to balance
responding to urgent tax administration needs with doing everything
possible to protect taxpayers and our employees.
We appreciate the patience and understanding of taxpayers and tax
professionals as we work to deliver the filing season during this
challenging time. I am confident the IRS will deliver for the Nation,
just as it has during other times of national urgency.
Phone Level of Service During the 2021 Filing Season
An important service delivery channel, during the filing season and
throughout the year, continues to be our toll-free telephone line,
which constitutes one of the world's largest customer service phone
operations. This filing season through April 16 the IRS has handled
approximately 25.4 million taxpayer calls, with nearly one third, or
8.1 million, answered by our Customer Service Representatives (CSRs).
The rest were calls made to lines providing automated messages
containing helpful tax information.
When we were submitting our Congressional Budget Justification
level of service (LOS) estimates for the 2021 filing season last spring
(before the pandemic, EIP1, EIP2, EIP3, partial exclusion of
unemployment compensation, and other tax law changes emanating from
several rounds of legislation), there was no way to predict the
pandemic and the impact it would have on our call volume, filing
season, and hiring. We are still working through the impacts of COVID-
19, which created staffing shortages and closures, and we have been
experiencing a much higher-than-expected call volume coupled with an
increase in call handling time caused by greater call complexity due to
three rounds of EIPs and other tax law changes.
We attempted to mitigate these issues by starting the CSR hiring
process for the 2021 filing season earlier than normal, with the
anticipation that the high unemployment rate throughout the country
might result in larger applicant pools in all locations. However, this
was not the case. We set a CSR hiring goal for fiscal year 2021 of
5,000 CSRs but have encountered significant hiring challenges during
the pandemic, including low applicant pools in some locations, delays
in fingerprinting due to closed facilities, and delays in processing
applicants virtually. As such, the IRS has onboarded approximately
3,800 CSRs (our largest-ever hiring of phone assistors for a filing
season), for a total of approximately 13,760 CSRs. We also expect to
hire an additional 1,000 CSRs to be ready this summer with the funding
provided in the ARP Act for implementation of the child tax credit
changes, to address potential call volume increases.
While we have many CSRs, we also experienced record-breaking and
unprecedented phone demand this year. For example, on March 15, 2021,
we had 8.6 million calls, which is approximately 1,500 calls per
second. That volume was a 600 percent increase compared to normal call
traffic. During a typical filing season, we average 2 to 3 million
calls each day. Our ability to manage telephone demand is constrained
by two factors: the number of assistors available and the capacity of
the telephone routing equipment used to place callers in line for
service. Accordingly, our current LOS for the 2021 filing season is
significantly less than where we want to be, and that may fluctuate
further based on increasing call volumes throughout the summer.
Improving Service to Diverse Communities
We view our efforts through the eyes and experience of those we
proudly serve. An important way the IRS serves taxpayers during the
filing season and throughout the year is by communicating with them in
their most comfortable language. In preparing for the 2021 filing
season, the IRS took important steps to further improve the amount of
service we provide in multiple languages.
Prior to this filing season, the IRS for years had been working to
provide tax information in additional languages. For example, many
pages of IRS.gov are available in Spanish, Vietnamese, Russian, Korean,
Haitian Creole and Chinese (Simplified and Traditional), and basic tax
information is available on the website in 20 languages. And the IRS
continues to expand its efforts to post and link to information
available in multiple languages on social media platforms, including
Twitter and Instagram.
I'm proud to say that this filing season, we are providing the Form
1040 in Spanish for the first time. Also for the first time, the 2020
Form 1040 gives taxpayers the opportunity to indicate whether they wish
to be contacted in a language other than English.
Other recent changes include making Publication 1, Your Rights as a
Taxpayer, available in 20 languages. In addition, we have issued a new,
streamlined version of Publication 17, Your Federal Income Tax, that is
easier to navigate and faster to download than previous versions, and
is now accessible on most personal electronic devices. The new
Publication 17 is available in English, Spanish, Chinese (Traditional
and Simplified), Vietnamese, Russian and Korean.
Additionally, taxpayers who interact with an IRS representative now
have access to over-the-phone interpreter services in more than 350
languages. The IRS has also recently begun inserting information about
translation services and other multilingual options into the high-
volume notices we send out to taxpayers. Our diverse workforce is proud
to be reflective of the diverse communities we serve.
providing relief to taxpayers during the covid-19 pandemic
Delivering Economic Impact Payments
While delivering last year's filing season--which was the longest
in history--and preparing for the 2021 filing season, IRS employees
also worked many long hours to implement major provisions of the
Coronavirus Aid, Relief and Economic Security (CARES) Act, including
developing new tools and meaningful guidance to deliver the first round
of EIPs in record time. In fact, millions of Americans started seeing
EIPs show up in their banking accounts within 14 days after the March
27, 2020 enactment of the CARES Act. IRS employees successfully
disbursed more than 160 million payments of nearly $275 billion in this
first round of EIPs.
The IRS also quickly delivered the second round of EIPs included in
the Tax Relief Act enacted on December 27, 2020. The IRS disbursed
approximately 147 million payments totaling about $142 billion and in
many cases, these payments started posting to bank accounts just 2 days
after the law's enactment. IRS employees worked nonstop through the
holidays to get these payments out, while remaining hard at work
preparing for the 2021 tax filing season. I want to emphasize the
amount of advance preparation our employees did, once it started to
become apparent that a second round of payments would be enacted, in
order for us to achieve such a quick turnaround.
Another factor helping us speed the effort on the second round of
EIPs was our ability to build off and use the data we had accumulated
in delivering the first round. That accumulation of data again helped
us move quickly on delivery of the third round of EIPs that began in
March.
The vast majority of people did not need to take any action to
receive an EIP, either in the first or second round, and we have been
working to ensure the same is true for the third round of EIPs. The IRS
calculated and automatically sent the payments to taxpayers as well as
others eligible, including many people who may not normally need to
file returns, such as senior citizens with modest incomes, others
receiving Social Security retirement, survivors or disability insurance
benefits, and railroad retirees. The IRS also issued EIPs last year to
those whose only income is from Supplemental Security Income (SSI)
benefits and people receiving disability compensation, pension or
survivor benefits from the Department of Veterans Affairs (VA).
In our initial work on EIPs during the spring of 2020, the IRS
worked cooperatively with the Social Security Administration (SSA), the
VA, and other government agencies to pull these agencies' information
into our systems to ensure that we could send payments to these groups
of people without requiring them to file a return or take any other
action. These agencies provided critical help that allowed the IRS to
reduce the burden for these individuals, including reducing the need
for them to seek in-person tax return preparation to file a return.
This effort was a significant step beyond anything the IRS was able to
do during previous stimulus efforts to help taxpayers. For the first
round of EIPs in the spring of 2020, these groups received their
payments in four to six weeks after the CARES Act was signed into law.
Again this year, the IRS began working with the SSA and the VA
early on to help ensure we could deliver the latest round of EIPs as
soon as possible to non-filers who receive Federal benefits such as
those described above. Because information about who receives Federal
benefits changes over time, the IRS needed these agencies to provide
updated 2021 information, and we requested this information as quickly
as possible so we could process the beneficiary data and make these
automatic payments.
For the latest round of EIPs, we have surpassed key milestones in
last year's timeframe, and we will continue working to get these
payments out to Federal beneficiaries as soon as possible. Thus far we
have disbursed more than 19 million EIP3 payments with a total value of
more than $26 billion to Retirement, Survivors, and Disability
Insurance (commonly referred to as ``Social Security'') program
beneficiaries who didn't file a 2020 or 2019 return and who did not use
the Non-Filers tool last year. We have also disbursed more than 3
million payments to SSI beneficiaries with a total value of nearly $5
billion, and nearly 85,000 payments with a total value of more than
$119 million to Railroad Retirement Board beneficiaries. Additionally,
we have disbursed more than 320,000 payments, with a total value of
$450 million, to VA beneficiaries who receive Compensation and Pension
benefit payments but who don't normally file a tax return.
In its efforts last year to quickly deliver EIPs and provide
information to eligible recipients, the IRS provided two new online
tools:
--The Non-Filers tool, which was launched on IRS.gov on April 10,
2020 and available through November 21, 2020 in both English
and Spanish, allowed people who normally don't have a filing
obligation to enter basic information so that they could
receive their payment.
--The Get My Payment tool, which launched on IRS.gov on April 15,
2020 and is available in English and Spanish, allows many
taxpayers to check the status of their payment or enter their
bank account information to receive their payment
electronically, if it was not already provided on a 2019 or
2018 tax return or through the Non-Filers tool.
Since the launch of Get My Payment, nearly 350 million successful
status checks have been made using this tool. And nearly 15 million
people have successfully provided their banking information, meaning
they received their payments much more quickly via direct deposit.
The IRS has taken significant steps to reach all potential EIP
recipients throughout each round of EIPs. We extended our reach far
beyond our normal contacts to many lower-income, military, veterans,
retired, older, limited English proficient, and homeless communities
around the country. In fact, we worked with our partners to distribute
EIP outreach materials in 35 languages within these communities.
We have continued to ask for assistance from hundreds of local
community groups and religious organizations, as well as the national
associations to which they belong, and numerous others to reach into
their respective communities. We worked with thousands of homeless
organizations, including more than 300 organizations that became
``Trusted Partners'' where an unsheltered homeless individual could
designate to receive their payment. We also expanded the authority of
Low-Income Taxpayer Clinics (LITCs) to provide return preparation
assistance for individuals seeking their EIPs. To support these ongoing
efforts, we developed a special online toolkit containing helpful
information for groups to use in identifying and getting the word out
to people who qualify for EIPs. The toolkit, IRS Publication 5420, can
be found on IRS.gov. We also provided information regarding a similar
online toolkit to every Member of Congress.
Also as part of this effort, we mailed a letter in September 2020
to millions of Americans who might be eligible, but hadn't received an
EIP and didn't file a return for either 2018 or 2019. We obtained these
names by performing an extensive internal analysis of records
corresponding to individuals who did not file returns or receive
Federal benefits and were not responsive to other EIP outreach efforts.
These individuals did not typically have a tax return filing
requirement but had received Forms W-2, 1099s and other third-party
statements. We sent letters to these individuals to notify them of
their potential eligibility as we lacked information on: whether they
would qualify; whether they had eligible dependents; or whether an
individual may be ineligible due to being claimed as a dependent by
someone else.
To help these groups, we extended the initial access to the Non-
Filers Tool five weeks to November 21, 2020. This new deadline provided
additional time for individuals to use the tool without adversely
affecting our work on the 2021 filing season. On November 10 we held
National EIP Registration Day (and supported other similar events), to
encourage people who had not received a payment to use the Non-Filers
tool before the November 21 deadline.
Our outreach effort during delivery of this third round of EIPs
includes reminding people who did not receive payments in the first or
second rounds last year that, if they qualify for them, they can
receive those payments by filing a tax return and claiming the RRC. We
are also encouraging these people, when filing their return, to check
to see if they qualify to claim other tax credits, including the EITC
and the CTC.
The IRS has also been providing support to Members of Congress who
have been receiving inquiries from constituents about the payments. To
help provide these answers, the IRS set up a special online ``EIP
Mailbox'' last May to which congressional staffs could send inquiries.
The EIP Mailbox received more emails than we anticipated, with the
number of emails averaging 700 a day at first and reaching 1,000 a day
by the summer. To make sure we helped as many people as possible, we
modified our processes and temporarily reassigned IRS employees to
respond to these inquiries. By the time we closed the mailbox in
December, we had received a total of more than 130,000 inquiries and
resolved an estimated 90 percent of the questions. To accommodate
inquiries related to the second round of EIPs, we reopened the EIP
mailbox on January 11, 2021, and it has remained open since then.
Currently, we are receiving approximately 150 emails a day.
Implementing Business Tax Relief
Along with EIPs for individuals, the IRS has also been working to
make sure businesses know about important tax relief available to them,
and we continue to provide guidance about business tax relief. This
assistance was originally provided in COVID-relief legislation last
year. Two important measures, the Employee Retention Credit and the
Credit for Sick and Family Leave, have already resulted in, as of May
3, 2021, credit amounts claimed on returns of more than $18 billion.
These measures were extended and/or modified by the ARP Act as follows:
--Credit for Sick and Family Leave.--Eligible employers are entitled
to receive a refundable (and advanceable) tax credit for the
qualified sick leave and family leave they provide to employees
dealing with specified health and family issues related to the
coronavirus between April 1, 2020, and September 30, 2021. The
IRS is working to ensure that eligible employers (employers
with fewer than 500 employees and certain governmental
employers) know the ARP Act allows them to claim a tax credit
for providing leave for employees receiving COVID-19
vaccinations and recovering from the vaccines.
--Employee Retention Credit.--This refundable credit is designed to
encourage businesses to keep employees on their payroll. As
amended by the American Rescue Plan, the refundable credit is
70 percent of up to $10,000 in qualified wages per quarter paid
by employers financially affected by COVID-19. Qualifying
wages--including health plan expenses--are those paid after
June 30, 2021 and before January 1, 2022. The credit was
modified to include: eligibility for certain startup
businesses; special rules for ``severely financially distressed
employers'' that experienced a gross receipts reduction of more
than 90 percent; and a 5-year statute of limitations for the
IRS to make an assessment of any amount attributable to the
employee retention credit.
In addition, for the Credit for Sick and Family Leave and the
Employee Retention Credit, the IRS set up a system that allowed
businesses to claim these refundable credits in advance during 2020 and
thus have more funds available to keep their workers employed without
having to wait to claim the credits on tax returns filed in 2021.
Another important area where Congress provided relief involves net
operating losses of businesses. The CARES Act includes a provision
allowing businesses to carry back net operating losses over 5 years and
obtain tax refunds for those years. The IRS issued Revenue Procedures
2020-23 and 2020-24 and Notice 2020-26 to clarify this provision and
help businesses and partnerships take advantage of the relief it
provides.
Providing Administrative Relief and Protecting Taxpayers
Along with implementing the CARES Act, the IRS provided significant
administrative relief in 2020 to ease the burden on taxpayers:
--A postponement of the deadline for individuals to file Federal
returns and pay Federal income tax from April 15, 2020, to July
15, 2020. This relief covered all taxpayers with a tax return
filing deadline or payment due date between April 1, 2020, and
July 15, 2020. As noted above, this year we provided a more
limited extension, applying to individuals filing Form 1040, to
May 17, 2021.
--The IRS People First Initiative, under which we temporarily
adjusted our processes to help people and businesses during
these uncertain times. This included limiting certain
collection and examination activities.
While it has been important to the tax system, and the Nation, for
the IRS to resume its critical tax compliance responsibilities, we
continue to assess the wide-ranging impacts of COVID-19 and other
difficulties people are experiencing.
To that end, the IRS continues to offer a wide range of taxpayer
relief options. We are:
--Doing everything we can under existing rules for immediate, broad-
based relief from unpaid liabilities resulting from COVID-19
issues, including those affected by IRS mail processing and
correspondence delays;
--Removing bureaucratic barriers and expanding flexibilities to all
taxpayers whose financial condition has been affected by COVID-
19; and
--Balancing the relief provided against the need to serve all
taxpayers and uphold the Nation's tax laws.
When appropriate, the IRS can help taxpayers by abating penalties,
extending payment plans, expanding access to installment agreements,
and providing relief for taxpayers having difficulty meeting the terms
of previously accepted offers to settle tax debts.
Our initiatives offer help in a variety of ways. Taxpayers without
income or the ability to pay can request a temporary suspension of
collection activity through the Currently-Not-Collectible program.
Taxpayers with balance due amounts may qualify for installment
agreement options with generous terms and timeframes, and taxpayers
with existing Online Payment Agreements, or Direct Debit Installment
Agreements can propose lower monthly payment amounts and update their
payment due dates. Other penalty relief options include first-time
abatement for reasonable cause.
The IRS has also been diligently working to alert taxpayers and tax
professionals to scams related to COVID-19, especially calls and email
phishing attempts tied to the EIPs. The IRS and its partners throughout
the country have been publicizing these scams.
maintaining irs operations during covid-19
The IRS's initial efforts to provide relief to taxpayers came
during Filing Season 2020 and at a time when the agency had to
temporarily scale back operations to protect the health and safety of
both IRS employees and taxpayers. Even with our reduced operations, the
IRS continued to successfully deliver the 2020 filing season, by
processing electronic tax returns, issuing tax refunds, and accepting
electronic payments.
During COVID-19, the IRS has been using innovative approaches to
make sure our employees can deliver on the agency's mission:
--We have set records for the number of IRS employees teleworking,
thanks to the continued support of our Information Technology
(IT) division;
--Our IT systems continue to perform at a high level. Our internal
networks are supporting nearly 61,000 employees online at the
same time, all in a secure environment;
--IT provided the equipment necessary to allow thousands of our
customer service representatives (CSRs) to telework, which gave
critical help to the IRS in its efforts to resume phone
assistance to taxpayers while maintaining the safety of
employees during the COVID pandemic;
--Our external-facing IT systems also continue to work extremely well
in a time of increased demand, including filing season systems
as well as IRS.gov tools; and
--We have been able to continue bringing on new employees through the
use of a successful virtual onboarding process.
As part of these efforts, the IRS continues to find ways to provide
new virtual services and online tools for practitioners to ensure the
critical work of the agency continues.
Last summer, for example, we moved quickly to shift our Nationwide
Tax Forums for tax professionals into an all-virtual setup rather than
handling these in person at locations across the country. And in our
30th year of offering the forums, I'm proud to report our virtual
version last year still attracted more than 10,000 practitioners from
across the country. This summer, we will again offer the Tax Forums
virtually.
Another great example is our announcement earlier this year that we
are giving tax professionals a new online option to obtain signatures
from individual and business clients and submit authorization forms
electronically. This option applies to Form 2848, Power of Attorney and
Declaration of Representative, and Form 8821, Tax Information
Authorization. This development is an important first step in our
ongoing efforts to expand digital options for tax professionals using
electronic signatures and online uploads.
New options for taxpayers include the launch last year of an
electronic filing option for those who need to amend their income tax
returns. Providing an online filing option for the amended individual
income tax return--also known as Form 1040-X--has been an IRS goal for
many years and is a major milestone for us. Electronically accepting
Form 1040-X posed a number of unique challenges, but we succeeded
thanks to a great deal of hard work by employees across the agency.
Resuming Operations and Answering Taxpayer Needs
Last summer, the IRS began resuming operations for non-portable
services, as more States and local areas also began reopening. As we
have continued our work during this unusual period, we have been aware
of the continuing taxpayer needs and the backlog of work at our campus.
We are investing in our Human Capital Office to ensure that we can hire
the necessary taxpayer service personnel in our priority areas.
One area we have worked hard to improve upon is opening the mail.
Because we had to scale back mail-processing functions last spring due
to the pandemic, we developed a backlog of unprocessed paper returns
and other mail. At one point, the backlog reached more than 20 million
pieces. But since last summer, we have been working through this
backlog, and we are now current.
While working to reduce the paper backlog, we also have provided
relief for taxpayers who sent us mail that was unopened for a period of
time. For example:
--For people who had tax refunds affected by our closure, the IRS has
paid interest on refunds. These payments, which can sometimes
show up as a second deposit, averaged $18 for nearly 14 million
taxpayers.
--For people who made a payment but where there was a delay in when
the mail was opened, we credited people on the date the mail
was received, not the day we processed the payment.
As difficult as these last months have been, we have seen many
examples of how this crisis has brought out the best in people,
including the IRS workforce. I am proud of what our employees have
accomplished during the pandemic. Our employees shared the same health
and safety concerns for themselves and their families as every other
American. However, they not only went the extra mile in doing their
jobs; they also made a difference in their communities.
For example, we saw IRS employees across the country doing some
amazing things: getting out their sewing machines and creating homemade
face masks for family members and friends; donating essentials to
protect first responders on the front lines in their communities; and
delivering ``care packages'' to seniors in nursing homes. During last
summer's Feds Feed Families Campaign, employees at our Memphis Campus
donated a record-breaking 51,800 pounds of food to the Mid-South Food
Bank!
Another good example of providing help during the pandemic involved
our Criminal Investigation division. A group of 12 special agents
deployed to Travis Air Force Base in Fairfield, California, in March
2020. They helped provide security and quarantine enforcement at
hospitals and other locations, such as COVID-19 quarantine sites
operated by the Department of Health and Human Services (the Assistant
Secretary for Preparedness and Response and the Centers for Disease
Control and Prevention).
It is important to note that, in addition to their efforts during
the pandemic, IRS employees routinely deliver in times of need for the
nation when disasters strike. Since 2012, more than 10,000 IRS phone
assistors have stepped up to help take the burden off the Federal
Emergency Management Agency's (FEMA) call centers in the aftermath of
hurricanes and other natural disasters, answering an estimated 1.6
million calls from storm survivors seeking help. We have also had many
agents from our Criminal Investigation division provide their help and
expertise during disasters. For example, in September 2020, a team of
about two dozen special agents deployed to Oregon in support of those
fighting wildfires in that State. More recently IRS phone assistors
were called upon to be ready to help FEMA with respect to the weather-
related difficulties in Texas.
ensuring tax compliance
Enforcement activities of the IRS affect revenues directly, through
the collection of unpaid taxes, and indirectly, by influencing
taxpayers' behavior. Nearly all of the IRS's funds are appropriated
annually by Congress. Appropriations for the IRS fell by about 20
percent (adjusted for inflation) since fiscal year 2010. About 70
percent of the IRS's overall budget is for labor, and thus the decline
in the overall IRS budget resulted in a 15 percent decline in the
number of full-time employees at the agency (since fiscal year 2010)
and a 31 percent decline in the number of full-time employees working
in enforcement roles (since fiscal year 2010). The number of examining
revenue agents, who handle complex enforcement cases, fell by 35
percent, and field collection revenue officers, who manage difficult
collections cases, dropped by 48 percent. The loss of approximately
17,436 enforcement employees since 2010 has resulted in the examination
rate for individual returns falling by about 45 percent; for businesses
with assets equal to or exceeding $10 million, the examination rate
fell by about 72 percent.
Despite these resource challenges, the IRS remains committed to
having a strong, visible, robust tax enforcement presence to support
voluntary compliance. When taxpayers file their returns, they should
feel confident others are doing the right thing too. Enforcement of the
tax laws is critical to ensuring fairness in our tax system. IRS
employees who collect taxes, audit returns and investigate fraud, as
well as tax-related identity theft, work hard throughout the year to
enforce the tax laws while treating taxpayers fairly and respecting
their rights. This commitment is true across our agency--our divisions
that deal with individuals, large businesses, small businesses and
exempt organizations are highly coordinated. In fact, the IRS's Office
of Fraud Enforcement (OFE), which was created in March 2020, is
actively encouraging and ensuring this coordination across IRS,
promoting compliance, strengthening the IRS' response to fraud and
mitigating emerging threats.
Over the past 2 years, we have shifted significant examination
resources and technology to increase our focus on high-income and high-
wealth taxpayers. For example, an IRS initiative announced last year
involves improving tax compliance among high-income taxpayers by
increasing visits to those generally with incomes above $100,000 who
failed to file tax returns in 2018 or previous years. Substantially all
experienced examiners--those who are the most highly trained with
substantial accounting skills--are almost entirely focused on tax
returns that include complex issues, such as high-income taxpayers,
pass-through entities, multi-national taxpayers involving international
tax issues, large pension plans, private foundations and the most
egregious situations.
As reported in the IRS's 2019 Data Book, the exam coverage rate
(closed and in-process) for Tax Year 2015 of taxpayers with income of
$10 million or more was about 8.16 percent (down from almost 23.06
percent in 2010). The rate for taxpayers with income between $5-10
million was 4.39 percent; for those with income between $1-5 million
was about 2.39 percent; for those with income between $500,000-$1
million was about 1.13 percent; and for those with income between
$200,000-$500,000 was about 0.55 percent. The IRS receives more third-
party information (Forms W-2s, Forms 1099, etc.) for taxpayers with
income between $200,000-$1 million than for those above $1 million.
These audit rates are higher than for any other category of individual
filers. We expect to see that trend generally continue with Tax Years
2016, 2017, and 2018.
We also have new compliance programs addressing virtual currency
(non-filers and filers), return preparer non-filers, those who fail to
file Form 8300, Report of Cash Payments Over $10,000, and others. These
programs require experienced, specialized examiners
Along with launching our OFE, where technical advisors provide
fraud policy and operations support to all IRS operations, we also
created an Office of Promoter Investigations (OPI) within the past
year. OPI is focused on taxpayers and the promoters of abusive tax
avoidance transactions, including abusive syndicated conservation
easements and abusive micro-captive insurance arrangements, as well as
the use of virtual currencies, offshore transactions and other
transactions to inappropriately avoid or under-report tax.
Substantially all of these transactions are engaged in by high-income
individuals. OPI coordinates Service-wide enforcement activities, most
often interacting with our Large Business & International division, our
Small Business/Self-Employed division, OFE, the Office of Chief Counsel
and our Criminal Investigation division.
We are also investing in our Human Capital Office to ensure that we
can hire the necessary enforcement and related personnel in our
priority areas, such as the oversight of large corporations,
partnerships and other pass-through entities, and high income/high
wealth taxpayers.
The IRS is committed to pursuing those who would intentionally
evade their tax obligations and commit fraud. We are also pursuing
those who promote and make use of abusive tax shelters, and are
especially concerned about certain variations, including abusive
syndicated conservation easements and micro-captive insurance shelters.
The IRS Office of Chief Counsel, which appointed a National Fraud
Counsel last year, is working closely with IRS compliance officers to
properly and fully develop cases with indicators of fraud across all
operating divisions, in pursuit of a civil fraud penalty where
appropriate, or for the most egregious violations, a criminal fraud
referral. Our Criminal Investigation division also does important work
to uncover tax fraud,
Additionally, the IRS--in particular, the OFE and the National
Fraud Counsel--has been focused on preventing COVID-19-related fraud
and scams, working closely with the Small Business Administration, the
Bureau of Fiscal Service and the Department of Justice to prevent and
stop improper claims for tax credits and see that the unscrupulous
individuals face appropriate civil and criminal sanctions.
Importantly, the IRS is using technology to develop new enforcement
tools. Our advanced data and analytic strategies allow us to catch
instances of tax evasion that would not have been possible just a few
years ago. We also recognize that we must evolve our enforcement
efforts to address new types of tax fraud and criminal behavior. For
example, the IRS has been working to ensure taxpayers with virtual
currency transactions understand the tax laws governing virtual
currency and meet their tax obligations. Our Criminal Investigation
Cyber Crimes Unit has been involved in new complex types of tax
enforcement, including: taking down the largest child exploitation site
operating in the Dark Net utilizing virtual currencies; uncovering
international money laundering operations involving the theft of
virtual currencies; and the seizure of terrorism financing sites
maintained on behalf of al Qaeda, Hamas, and ISIS.
taxpayer first act: update on implementation
Even during this challenging period, the IRS is meeting not only
the immediate needs of taxpayers but is also developing an innovative
approach to the future of tax administration that will better serve
everyone, including those in underserved communities.
The IRS is using its implementation of the Taxpayer First Act
(TFA), to make significant improvements in the way we serve taxpayers,
enforce the tax laws in a fair and impartial manner, and ensure our
workforce collaborates and is well-trained. In January, pursuant to the
statutory requirement, we submitted our TFA Report to Congress. This
report includes strategic recommendations to improve the taxpayer
experience, employee training, and the current agency organizational
structure. The report is the culmination of input and feedback from our
employees, our partners in the tax community, and other stakeholders.
I'm pleased to report that we will have strong, experienced leaders
guiding us in our efforts to improve the taxpayer experience:
--Heather Maloy, a former IRS executive, has returned to the agency
to be the new director of the Taxpayer First Act Office.
Heather held many prominent positions while at the IRS,
including Commissioner of our Large Business and International
Division.
--Just two weeks after issuing the Report to Congress, we announced
the creation of the Chief Taxpayer Experience Officer position
to unify and expand efforts across the agency to serve
taxpayers. We selected Ken Corbin, the Commissioner of our Wage
and Investment Division, for this role. With more than three
decades at the IRS, Ken Corbin is ideally suited to lead our
efforts to improve interactions with the IRS for taxpayers and
the tax professional community.
As we move forward on TFA implementation, our Enterprise Case
Management initiative (ECM) is a major part of our Integrated
Modernization Business plan and is a critical component in the
implementation of long-term TFA changes. ECM will allow us to modernize
key IRS business processes and migrate them to a common case management
platform. This in turn will allow us to decommission as many legacy
components and systems as possible. For our employees, implementing ECM
will mean giving them appropriate access to a 360-degree view of a
taxpayer's account and also support our ability to give taxpayers more
digital options in their interactions with us. The employees who
interact with taxpayers are helping to develop features and services
that will best help their customers, and they have been the key to the
success of ECM thus far.
The Tax Exempt/Government Entities Division's (TE/GE) Exempt
Organizations Correspondence Unit process was the first business
process to migrate to our new ECM platform in 2020. This milestone
transitioned paper-based processes to an electronic format that enabled
the Correspondence Unit to work more efficiently, speeding up the
response time to organizations that interact with TE/GE. The lessons
learned while migrating this business process to ECM will allow us to
build on this initial success and migrate other business processes
quickly and efficiently in the coming years. We are currently working
on migrating the IRS Grants Management program in time to award grants
under the new system in 2021 to organizations participating in the VITA
and TCE programs.
Our progress thus far on implementation of the TFA shows how
committed IRS employees are to serving the Nation. With our TFA Report
guiding us, and with ongoing support and feedback from our employees
and partners in the tax community, we will continue to make
improvements to ensure the IRS can serve the needs of the Nation's
taxpayers well into the future.
conclusion
Chairman Van Hollen, Ranking Member Hyde-Smith and Members of the
subcommittee, thank you again for the opportunity to update you on IRS
operations, especially our responses to the COVID-19 situation. The IRS
is dedicated to improving service to taxpayers, modernizing its systems
and maintaining the integrity of the tax system, while also protecting
the health of its workers and American taxpayers.
We believe we have made great strides over the past year and will
continue this progress with the help of Congress, as we move the agency
into the future. This concludes my statement, and I would be happy to
take your questions.
Senator Van Hollen. I thank you Mr. Commissioner. And I
want to you and the extraordinary work you and the entire team,
all the employees at the IRS, have done during these very
difficult times. And many of those employees are constituents
of mine in the State of Maryland. But of course, you have part
of your team and all over the country.
We're going to do 8-minute rounds because of the, I think,
the nature of this hearing. We really want to drill into some
of the keys issues and identify how we can narrow that tax gap.
Mr. Commissioner, you recently testified that you believe
the tax gap could be as high as $1 trillion every year. Can you
discuss the composition of that tax gap? I realize we don't
have full visibility into it, that's why it is a tax gap. But
if you could help break it down into some of its larger
component parts that would help guide our discussion.
Mr. Rettig. The individual component parts of the tax gap
information that we provide are not overly difficult. Since
2001 we've been providing tax gap estimates, which for the most
part, with respect to individuals, are broken into a non-filing
tax gap, an underreporting tax gap, and an underpayment tax
gap.
The recent testimony that I think you're referring to,
which was supported by more recent testimony in front of the
Senate by the Acting Director of our research group, was the
emphasis and the focus on the fact that our tax gap estimates
are based on actual audit results randomly performed by non-
specialized agents. That's where we have been receiving
information since the first tax gap of 2001, moving into the
present. The most recent tax gap was released in 2019, and it
related to tax years 2011 to 2013.
Being sensitive to the fact that the Agency uses the tax
gap to try to understand where and how to essentially deploy
resources and limited resources, it was not lost on me when I
was on the outside that the importance of this tool is the
importance of the data that we receive and the information that
we provide.
The tax gap information most recently that we provided was
2011 to 2013 and based on actual audit results. The assumption
is that actual audit results are a good measure. In fact,
they're the best measure that we might have, but a good measure
not necessarily so.
When you look at declining audit resources, you look at
declining training. For years the Agency has gone with no in-
person training. We've gone to online training, and just quite
frankly, I don't understand how an individual can learn the
704(b) regulations online or remotely.
Tax is complex. We have our agents on the examination side
put into situations with people who have 20, 30, 40 years
specialized experience, maybe on the inside, but also on the
outside, for minute areas of tax law. We put people into that
room for an examination where, quite frankly, I think the
terminology that I used last time is that we get outgunned, not
for a lack of desire on the part of our people.
I think the comments that you're driving to, which again
were supported by our Director of Research, is what is the
difference between the tax gap information that we publish? The
last published was 2011 to 2013.
When I was asked, what's my feeling as to the accuracy,
essentially, of the information that we publish, it was the
same as when I came onboard. Tax year 2013 is, essentially,
irrelevant in tax year 2021, if you're looking to where to put
your resources when you consider the change in the world from
that period of time.
You look at, just as an agency, the switch from the IRS
going from paper to digital, our more recent switch going into
a virtual environment, but the rest of the world too. I can sit
here today and, on my phone, adjust----
Senator Van Hollen. I'm sorry, Mr. Commissioner, I don't
mean to cut you off, I don't.
Mr. Rettig. I just go on, and I, you know,----
Senator Van Hollen. I just got to get to some more
questions, okay?
Mr. Rettig. I feel passionate about----
Senator Van Hollen. I know, I appreciate that. Even with 8
minutes, I'm going to have to get some more questions in here.
Because what I'm really trying to get at, since we're trying to
focus on how to narrow this gap, is not just the overall size
but what tools you need.
And you and others have said that there's a high degree of
compliance by taxpayers where their money is confirmed by three
third parties, like wage payers, like pensions. But that is not
the case from pass-through entities, like S corporations or
partnerships. The President and others have suggested that the
IRS be given authority to collect additional information from
banks about this other kind of income.
And my question to you is do you agree that that has to be
one of the tools in this arsenal to close the tax gap?
Mr. Rettig. Increased information reporting and increased
electronic receipt by the Internal Revenue Service of
information reporting would be extremely helpful. We also need
legislative changes. We need certain enforcement support. It is
a multifaceted approach. It is not a single approach. I don't
believe that one is maybe more important than the other.
We need to have the appropriate presence. We also need to
have an appropriate balance between enforcement and taxpayer
rights.
Senator Van Hollen. Sure. But I guess my question is--
because I'm going to ask you about your budget request in a
minute. But the budget request in terms of the dollars you need
is not in itself sufficient to close this gap, isn't that
right?
Mr. Rettig. That's correct. We cannot audit----
Senator Van Hollen. Because you would need these other
tools that the President has talked about, right?
Mr. Rettig. That's correct.
Senator Van Hollen. Okay. So, now I want to get to the
money because it's been reported, I think confirmed, that the
request--budget request, will be $80 billion over 10 years. And
that you have projected that with that allocation of money,
combined with these additional tools we just mentioned, that
you could close the tax gap by $700 billion over 10 years. Is
that right?
Mr. Rettig. That's a Treasury Tax Policy figure that was
delivered.
Senator Van Hollen. So, let me ask you this. Because Mr.
Rossotti has estimated that if we gave the IRS the tools they
needed, including that third-party verification of income and
additional resources, that you could potentially get as high as
$1.4 trillion in narrowing the tax gap over 10 years. What do
you think about that estimate?
Mr. Rettig. I believe that if the IRS is given the
appropriate tools and resources, it can take us a little bit of
time to implement. We need to train and upscale. I believe that
the IRS could effectively recover between 10 and 20 percent of
the tax gap. And that's a meaningful figure. I leave it to the
economist to determine what actually those recoveries would be.
Senator Van Hollen. So, I guess, we're anticipating the
budget request of $80 billion. You mentioned the legislative
changes required.
I guess my question then is if we make the legislative
changes, how much--and we could give you as much as you wanted
to close the tax gap--what is your maximum estimate of what
that would be over 10 years if we gave you everything you
needed?
Mr. Rettig. The maximum amount that we could recover?
Senator Van Hollen. Yes, over a 10-year period.
Mr. Rettig. Because I thought you were going to say the
maximum amount we would appreciate receiving. We appreciate
receiving the maximum amount that Congress will allow us to
receive.
Based on the information that I've seen, and I see the
difference, and a lot of different people are analyzing it, I
don't think it's fair for me to comment without having done the
homework on these numbers. They range significantly.
I've seen people say that we could recover $100 billion.
I've seen the tax policy estimate of $700 billion. I know that
those were over 10-year periods, and people also tie in a
succeeding 10-year period. I've seen Commissioner Rossotti's
figures. I have not gone back and done the homework. And I
don't think it'd be fair for me as a tax administrator to
comment on that.
I do know that the information that we're talking about,
the multifaceted approach we're talking about, and I'm quite
respectful to the Ranking Members' comments about the use of
the funds, but I do know it would be a gamechanger for the
country in terms of what the IRS would be able to bring from
amounts lawfully owed to the government.
Senator Van Hollen. Right. Now, we are talking about the
amounts, you know, lawfully owed.
Mr. Rettig. Correct.
Senator Van Hollen. And I appreciate that. Let me it turn
over to the Ranking Member for questions.
Senator Hyde-Smith. Mr. Commissioner, when you testified
last before this subcommittee in 2019, you told Senator John
Kennedy that, ``I am not a believer in shifting funds from
enforcement operations,'' yet the IRS has transferred $295
million away from its enforcement account since you made that
statement.
And you are planning to transfer an additional $208 million
away from the enforcement account this summer. What are you
doing to manage the growing IT maintenance cost at the agency?
And why does the IRS continue to follow a pattern of shining a
light on enforcement and the tax gap when the public is
watching, then transfer the money to IT contracts when it's not
watching?
Mr. Rettig. I stand by my statements to Senator Kennedy. I
am an enforcement person. I was recently asked, I have the same
position, the same thought process that I have on the inside
that I did on the outside, that every dollar that has left the
enforcement side of our house to go on operations support has
been pulled through a very rigorous procedure, and that we do
not have sufficient funds to maintain our operations support.
We have a modernization business plan that we launched in
2019. It was launched as a 6-year plan. We have only received
55 percent of the amount called for in that plan. In order to
keep modernization on schedule, we have had to pull resources
from every part of the service, and we are still not on
schedule. We do not have the funds to take the activities that
we need.
Without appropriate financial support on the operations
support side of the house, we cannot be effective in
enforcement. We have to buy things like laptops. And that comes
out of the operations support.
Senator Hyde-Smith. Are you having any success on the
modernization act that you've implemented so far with the funds
that you have?
Mr. Rettig. We are. We're actually having considerable
success. I would appreciate the opportunity to sit with you or
with your staff and go through where we have been. We're not
where we would want to be, but we've made huge strides in that
area.
Senator Hyde-Smith. And right now, how are we to have
confidence that the requested funding increase for enforcement
will not be transferred to IT at this point?
Mr. Rettig. There is also in the Administration's budget
that I anticipate, or I was told I think is going to be
released this week. You'll see support on the Operations
Support side.
I am exactly where you are in your mindset of saying
Enforcement dollars should stay on the enforcement side of the
house, Operations Support should be on that side of the house.
We are looking at over a $1 billion deficit on Operations
Support by 2026. That's to maintain our systems. We need to
modernize in order to level that curve.
I would appreciate the opportunity to sit with you because
I think that people need to understand that situation.
Senator Hyde-Smith. And I look forward to seeing the
evidence of where and when you are transferring this money, it
is actually benefitting the agency and the taxpayers. Because
you're coming right now with a budget request, I want to see
when you're diverting these funds, that it is accomplishing our
goals on the tax gap?
Mr. Rettig. We share your concerns for that.
Senator Hyde-Smith. And in March, I sent you a letter
urging the IRS to clear a large backlog of 2019 tax returns
before the 2020 tax return deadline. Taxpayers continue to face
financial uncertainty from the pandemic, as we well know, and
this should not be compounded by the Federal Government's
inability to return money lawfully owed to them.
Can you give me an update on what the IRS is doing to work
through the backlog of cases that I wrote you a letter about?
Mr. Rettig. As of yesterday, we have 335,000 tax returns
that were filed during calendar year 2020 to work through.
That's down from about 7 million, give or take, around the turn
of the beginning of this year. We've put our people on
mandatory overtime and weekends. We've pulled people back into
shifts.
As I think people are pretty well aware, we got caught in a
staffing issue, not of our own making. But, as we ask for
funding, we got funded based on a normal year. And the volume
of intake in terms of taxpayer contacts and otherwise is up
about 300 percent.
We've done our best. That's what I was referring to when I
talked about we've worked hard. We've tried to do our best.
We've moved around resources. We've moved around filings. We've
moved around the electronic filings at different campuses based
on pandemic-related and staffing issues. It's been very
difficult.
Senator Hyde-Smith. Do you have an estimated time of how
long it would take to finish up those 335,000 tax returns from
last year?
Mr. Rettig. Given the progress that we've seen and the
numbers that we've seen, I'll give you a conservative
estimate--then I can hear it when I get back to our office. Our
people seem to just say that.
I cannot imagine looking at the curve, it's more than 60
days. I will get back to you with a more appropriate response
on that, but I'm just going from the curve, from the volume we
had and the volume we have today. It might be considerably less
than that.
Senator Hyde-Smith. But you do think 60 days may be a
reasonable guess?
Mr. Rettig. Oh, I do. I said it, and I believe it, but keep
in mind this is for returns that were filed prior to January 1,
2021. They are the 2019----
Senator Hyde-Smith. Correct.
Mr. Rettig [continuing]. Returns.
Senator Hyde-Smith. That's what I am----
Mr. Rettig. And that is----
Senator Hyde-Smith [continuing]: Referring to.
Mr. Rettig [continuing]. The number that I'm referring to.
Senator Hyde-Smith. Yes.
Mr. Rettig. And I should be able to get back to you today,
on a better timeline than that.
Senator Hyde-Smith. The IRS Criminal Division consists of
very talented investigators who have broken up criminal
enterprises across the country. I've read about them. Their
targets include drug rings, human trafficking, money
laundering, and sanction violations at some of the largest
financial institutions. Criminals and tax dodgers, as we call
them, continue to get more and more sophisticated, and yet I'm
worried the Criminal Investigation division of your budget
remains insignificant or insufficient, they're just getting
smarter and smarter every day. Where does this division fit
into your vision for greater expanding funding for enforcement
activities?
Mr. Rettig. In my mindset, IRS Criminal Investigation is
one of the most important functions of the Internal Revenue
Service. It is the law enforcement arm, of the Internal Revenue
Service, that every individual who's thinking about a Title 26
violation should be concerned about. It is the one arm that
makes referrals to the Department of Justice for prosecution,
which leads to incarceration. We have a very close relationship
with the Department of Justice.
If I may, increasing IRS funding without increasing funding
for the Department of Justice--they're the recipients of our
criminal cases. They represent us in district courts and
bankruptcy courts. They need a similar increase in resources,
or we're going to have a bottleneck as we move cases over to
that side. But IRS CI, as you've indicated--we are not looking
in any sense to ever reduce their resources. They've not only
been significant for what I refer to as traditional tax cases,
but they've been significant in terrorism financing cases;
they've been significant in a child exploitation case, the
largest on the planet, operating in the dark net, using virtual
currencies; and we are the only law enforcement agency that has
Title 26 jurisdiction. We also have money-laundering
jurisdiction. And inside our house, it's IRS CI and IRS CI
Cyber Crimes that are really exceptional, and the individuals
there are exceptional.
Senator Hyde-Smith. The thing that concerns me the most is
that the solution is always an increase, and that's very
concerning for me, but my time is up. Thank you, Mr. Chairman.
Mr. Rettig. Thank you.
Senator Van Hollen. Thank you, Senator. And unless there
are other Members right now, we're going to have another round,
between myself and the Ranking Member, of questions, Mr.
Commissioner, and I'm going to focus still on the enforcement
piece and then a couple questions on the service end, and I--
they are related, I think. So, in terms of enforcement, I agree
with the Ranking Member. We do want to see enforcement dollars
spent on enforcement. That's the only way we're going to
address this huge tax gap: people who are not paying taxes that
are owed and cheating the system and cheating the rest of the
country.
Now in your testimony, you indicated that you were often
outgunned. The IRS was often outgunned when it came to the
expertise of tracking down some of these taxpayers. I'm
assuming, based on that and our conversations earlier, you're
talking about individuals who have the capability to hire
sophisticated tax lawyers or people who can set up partnership
structures that are very difficult to track. Is that the case?
As, you know, Willie Sutton said, you know, ``Go to where the
money is.'' And when it comes to unpaid-but-due taxes, we want
to go where the money is. And is that where it is?
Mr. Rettig. Well, I'm also talking about the corporate
arena. We have cases that involve large corporations, billions
and billions of dollars of tax, and if you're a corporation and
you had an $8 billion tax bill, and you're litigating against
the Internal Revenue Service, you're willing to spend maybe a
billion dollars to save $7 billion, and we operate on a $12
billion budget, all across the Agency. And so they will put as
many people as necessary on that, and a large expenditure of
staffing on a large corporate case for us might be in the range
of 15 to 20 to 30 staff, including Counsel Lawyers.
Senator Van Hollen. So, Mr. Commissioner, let me ask you,
in order to close this tax gap, do you need additional
authorities to hire people who are particularly expert in some
of the--in tax laws and some of the shenanigans people use?
Mr. Rettig. We, and I, have already reached outside the
Internal Revenue Service. I'm very respectful of the employees
of the IRS and of giving them career opportunities. I came on
board with that as one of my goals. I don't expect to leave
that, but we are hopeful for a significant hiring at what I
refer to as three different levels: college and graduate school
folks, that's building the future for the Internal Revenue
Service; mid-career folks, I would like to say is myself, but
maybe who are 20 years younger than myself, who have a degree
of experience that might be looking to come on board for
government experience for an amazing agency; and then folks
closer to my age, who are at the end of their career, who
include former IRS employees who want to come back and help.
I will say that in my outreach actions in the communities
that I'm very familiar with, tax practitioner and taxpayer and
others in the industry, we get a lot of people who express an
interest to come on board. The mid-year and more senior folks
are looking at it as a way of giving back to a country that
gave them a lot, which is----
Senator Van Hollen. Good.
Mr. Rettig [continuing]. Exactly why I came on board.
Senator Van Hollen. Thank you. So, you have the authorities
you currently need for this purpose, right?
Mr. Rettig. We have the authorities. We don't have the
funding.
Senator Van Hollen. Got it. That's--okay. The GAO reported
that some third-party data on business income--so, we're
talking K-1s--is provided to the IRS by financial institutions;
however, the GAO also reported that that information is only
matched manually as part of an audit. Is that because you do
not have the technology to do so? The Inspector General of the
Tax Administration identified over 314,000 business taxpayers
with 335-plus billion in Form 1099-K income that appeared to
have a filing obligation but were not identified as non-filers
by the IRS. Can you speak to that issue?
Mr. Rettig. It helps this country, to the extent the IRS
has automated systems that can read information that we
receive. That's significant. Getting more information sooner is
better than getting information later.
If you recall, with respect to W-2s and electronic filing,
there was a 3-year phase-in of a requirement for firms and
entities to do the electronic filing. Would've helped us
significantly if that was just put into play initially. Any
delay in getting information to the IRS creates issues. To the
extent we cannot automate a review of tax return-related
information, it pushes us into an environment where we need to
manually do that. An IRS employee needs to look at something,
whether it's a computer screen or if something comes in paper
form. An IRS employee needs to do that, and we don't have the
employees to do that.
I will say that a change that we made when I came on board
was rather than having no people in certain arenas, we put some
people in every arena. If you've seen what we talk about, we
talk about trying to be in every neighborhood. We cannot do an
effective job everywhere, but we do have responsibilities to
you and the people in this country to be in as many different
areas as possible. We are trying.
Senator Van Hollen. All right. Well, let me--I do want to
turn to the issue the Ranking Member raised, as well, regarding
the 2019 tax returns. I think all of us are hearing from
constituents about that backlog, and we do recognize that
you've taken extraordinary efforts during the pandemic to do
all the other things Congress has asked you to do, but on that
front, I want to make sure I understood you correctly when you
said you thought it would be about 60 days before you could
clear that backlog. Did I understand you correctly?
Mr. Rettig. That's correct. That's the returns that came in
in 2019. There's a separate issue that I believe you want to
talk about, which would include the returns that are in
suspension, where we've received information for some reason,
and a return--other than being automatic filing and going to a
refund within what's typically 21 days--gets pushed out, and we
need manual review of that. In that scenario, there's about 6
million or so.
The majority of the returns that are in suspense are
returns where we have taken a look at the return--and actually
did that, automated, for electronically filed returns--and
there's two huge issues, and I'm sure that the Taxpayer
Advocate is probably going to address this, but two big issues.
The change in the recent legislation giving EITC filers the
ability to trigger the amount of their EITC off of 2019 income,
as opposed to 2020, requires us to manually look at that, to
verify the 2019 number. A significant amount of the returns in
suspense are that.
Then another portion of those are returns where the
Recovery Rebate, the EIP, became part of the return, the
Recovery Rebate amount set forth on a return does not match our
information, and that also requires a manual review. Then on
EITC claims, there's a fairly significant amount that do not
include a particular form that is required to be included.
So, essentially--and I'm giving you round numbers, but I
can get you specific numbers on these for that group, we have
sent out information to taxpayers, asking for a verification of
some sort, and so they're in that process. It's not a situation
we're happy to be in, particularly with respect to the EITC
folks. These folks need their money. They need it quickly, and
we take that to heart.
Senator Van Hollen. I appreciate that.
Mr. Rettig. We're----
Senator Van Hollen. No, I think what--expediting it all--
and my last question, at this point: Can you--I mean, can you
open up returns and quickly determine whether it's a situation
where the IRS owes somebody and prioritize those, so people can
get their money, or do you do that already?
Mr. Rettig. We do that already. We prioritize----
Senator Van Hollen. So, you open all the envelopes, to see
whether it's a case where the IRS is----
Mr. Rettig. Once we open the envelopes, they get that
priority. Keep in mind, we get about a million to a million and
a half pieces of mail a week. We can stay current with that. We
got back because we shut down our facilities, so the physical
mail built up. We had to plow through that. But on the
electronic side and on the paper side, we prioritize 2019 and
2020 refunds, and then we go into the rest----
Senator Van Hollen. Thank you.
Mr. Rettig [continuing]. As I think you would hope we would
do.
Senator Van Hollen. Yes. Thank you. Senator Hyde-Smith?
Senator Hyde-Smith. Thank you. As I've already alluded to,
over the past 14 months the IRS received more than $3 billion
in supplemental funding, in addition to what you had, yet the
IRS has obligated less than one-third of this funding, and it's
actually spent even less. Only 23 percent is what you've spent.
How much do you expect to spend during the remainder of the
year, and how long will it take you to spend $3.1 billion?
Mr. Rettig. The funds we've received were 2-year funds, and
I can get you the specifics as to where all of those funds have
been received, and then the ones that are in suspense, what
they are scheduled for, and I think I would appreciate the
opportunity to do that and to get you that information. I hear
and appreciate the concern, and I share the concern. We look at
the funds as though they're our own. There's a lot of people
involved in this, in terms of trying to do things
appropriately, and I would like to get you the specific
information, rather than me giving you generalities. I think
that you deserve that.
Senator Hyde-Smith. And, of the $1 billion that has been
designated for long-term IT that we've talked about, none of
this $1 billion has been spent, as of last week. Zero. None of
it. Is that correct?
Mr. Rettig. The actual expenditure versus the services I'm
not sure are actually in line, but it has been entirely
allocated in our planning on how to most effectively use these
funds. We have schedules on that. We actually are in a
situation where we need to look at some things that have come
on the radar screen more recently. Child Tax Credit, for
example, where we got funding, but I think you're aware, last
year, with the EIPs, we certainly received funding, but we went
at risk for the Advance Child Tax Credit, I think the number
exceeds $100 million, in order to carry out the mission, and we
have to take a similar look at this because we need to do the
activities before we actually might get supplemental funding on
any of these. I can walk you through those, but the effort
allocation, identification of where funds need to go--we have
that, and I can provide that.
Senator Hyde-Smith. And what I'm hearing from my
constituents, as well, is the calls. And the IRS has only
answered between 7 percent and 14 percent of taxpayer calls
this year, depending on which metric you cite, and more than 30
million dollars in tax returns, or 30 million tax returns have
not been processed. When you last testified before the
subcommittee in 2019, the appropriate level for the IRS was
$11.3 billion. In 2021, the IRS has received $14.3 billion, a
$3 billion increase in the span of 2 years. And again, most of
your proposed solutions say that you need more spending, rather
than instituting, and I would just like for you to respond to
that.
Mr. Rettig. Let me address your comments on the level of
service. The level of service for us, the phone service, is an
appropriated amount. Every 10 percent is approximately $100
million. We put in a request 2 years ago--before there was a
pandemic; before there was EIP 1, 2, or 3; before, you know,
everything that we've all lived through in the last year--for a
75 percent level of service, which would've been about $750
million.
We were appropriated for our phone service at 50 percent
without taking into account the volume that we were going to
receive. The volume of telephone calls we've received to date
is about 151 million calls. Two years ago, that was less than
50 million calls.
We have 13,760 folks who answer the phones. They're our
Customer Service Representatives. We got more recent funding to
add 1,000 CSRs, so we have just under 15,000 CSRs answering
phones. The last thousand, it takes 12 to 14 weeks to train
them. They did not come on board prior to February 15, which is
the high-volume calls. That's the date, pursuant to the PATH
Act, that we're able to issue refunds, and so we get a lot of
calls right around that point in time.
It also ties into the fact that we extended this group
through yesterday, which was the extended filing date, to
remain on the phones for taxpayers. This is the same group
that, once filing season ends, we pivot to help us in our
Submission Processing, the paper processing of returns and
whatnot.
So, it brought us down to, obviously, about 15,000 short of
the submission processing helpers when we could've pivoted
April 15th, that got--we delayed filing season, these folks
stayed on the phones. There's a connection for how the
resources that we had got appropriated or got allocated, and
it's created situations across the board. In 2021, between
automated calls and actual CSR calls--and we use both--we have
answered 31 million calls. During 2020, the average time on a
call is 19 minutes. The average time historically was 14
minutes.
People need to understand that we are the primary contact
for most people, government contact, and with the exception of
possibly VA or SSA, we're probably the only contact. Our
employees who are front line on these phones are listening to
pandemic life stories of people who are calling in. I have
encouraged that, rather than have our people cut people off the
phone and say, you know, ``I've got to go. I've got calls
backed up.''
It's very important. We have people crying on the phone,
not related to anything we're doing, just that we happen to be
their contact person. It's been difficult for our employees,
but when you think that we've increased the call time from 11
minutes last year to 19 minutes this year--we only have, you
know, a little under 15,000 employees. We have 151 million
phone calls coming in. At one time, we were receiving 1,500
phone calls per second, and I'm not sure any organization in
the public or private sector would be able to provide the
service that the people placing those calls deserve.
We really are trying our best within the constraints that
we have, and we are working through this. We appreciate the
patience, understanding of everyone, Members of Congress as
well as taxpayers, and we are sensitive to trying to make it
better. We are advancing. We're improving, but, some of the
volume and the level of service numbers, when you consider that
we shut down our system in March and our CSRs, only 3 percent
of them were telework eligible in March of 2020. Now, 100
percent of them are telework eligible.
Where that becomes important--we had the recent snowstorms
and weather shutdowns at some of our facilities. We didn't miss
a beat. Our CSRs continued to answer the phones from home,
rather than coming in. So, we've had some improvements, but I
share your thoughts, your concerns, and for your constituents,
as well. This has been extremely difficult. It's not without
effort and desire on the part of our employees.
Senator Hyde-Smith. Thank you.
Senator Van Hollen. Senator Boozman.
Senator Boozman. Thank you, Mr. Chairman, and thank you for
holding this really important hearing. I guess the problem that
I have is that all of what you said is true, but we had all
these problems before the pandemic. Part of the problem is,
it's almost impossible to have face-to-face meetings with the
IRS now, so everything is telephone. What percentage of the
calls do you answer?
Mr. Rettig. Like I said, there have been 151 million calls
in calendar year 2021. Between automated and CSR, we've
answered 31.3 million.
Senator Boozman. So, what percentage is that? It's not very
high. Do you still do the courtesy disconnects after people are
on hold for a while?
Mr. Rettig. People can hang up. We actually have----
Senator Boozman. What----
Mr. Rettig [continuing]. Callback, customer----
Senator Boozman. How long does it take to----
Mr. Rettig [continuing]. Callback.
Senator Boozman. If you do answer the phone, how long does
it take to actually--for a person to get with the--another
person? What's the average wait time?
Mr. Rettig. I don't have the average wait time. I'm sure
the Taxpayer Advocate has the average wait time, but I don't
have the average wait time.
Senator Boozman. It's a long time.
Mr. Rettig. It's a lot less than what we seem to read in
the newspapers, but----
Senator Boozman. No----
Mr. Rettig [continuing]. Keep in mind the points I was
making before, and it may have been, sir, before you came into
the room. The amount of people we can put on the phone is a
specific appropriated item. We get a certain amount of funding
for a certain----
Senator Boozman. No, I----
Mr. Rettig [continuing]. Amount of bodies.
Senator Boozman [continuing]. Understand. I understand
totally, and I've been on this subcommittee for several years
now, but it's the same story every year. I don't know why we
would consider going after folks more until we get this problem
straight. So, what you should be advocating is, let's fix this
problem first, and then, in the future, once we do the job that
we're doing regarding people that are having problems now, then
it would be appropriate to go after additional folks.
We have situations all the time. We deal with this, and the
Taxpayer Advocate does a tremendous job, but we're constantly
referring them, people that have problems with the IRS, and
then they have the problem, and they simply can't get through
to have the problem adjudicated. I mean, nobody answers the
phone. So, these are real things. It's not related to the
pandemic. It was going on before the pandemic, and these are
things that we simply have to deal with. It is true that--it is
true, also, that I think it's, again, everything is switching
to non-personal interviews and things, so that's another reason
that you're having problems with the phones, is that there's
simply nobody to talk to at the IRS.
Mr. Rettig. What I am advocating, in terms of the tax gap,
is not a single approach, a multi-faceted approach, which is
service, as well as enforcement. Enforcement supports the
efforts of compliant taxpayers. We, the IRS, need to get timely
understandable guidance out to people. We're very proud that
during the pandemic, last year in September, we announced our
multicultural language project, and I think you're aware that,
for the first time in history, the Form 1040 is in English and
Spanish. People can fill out a Schedule LEP and check one of 20
boxes of different languages they would like us to interact
with them in writing. Our call centers, now have translation
services in more than 350 different languages. We are highly
cited on the underserved communities, which I also include as
visually impaired, hearing impaired, folks in rural
communities. We have lost Taxpayer Assistance Centers in many
of the rural communities as a result of attrition. We had to
flip to having our other taxpayer assistance folks ride a
circuit, essentially: you know, come into town on a Tuesday and
things. We've tried to do what we can do. We've had very
significant difficulty hiring in certain areas where some of
our employees have retired, and, you know, we're--a statistic I
gave earlier--our net attrition rate, over the next 6 years,
for an organization of about 83,000 employees, we have about
52,000 employees who are no longer going to be employed. And
when I say ``net,'' that's the real figure, because the average
statistic is that an employee stays 5 years beyond the time,
they're eligible, so it's the net that I'm referring to. We
need to replace that. That's just to maintain status quo. And
our target level of service is in the 60 percent range, and
there's history in the 60 percent range, but when the phone
call volume goes from 46 to 50 million up to 151 million,
coming on the heels of having shut down the agency, we will
not--when you build in the denominator of the fraction that
you're referring to, we will not make 60 percent. And I am with
you. I was on the outside.
Senator Boozman. I understand.
Mr. Rettig. People here deserve----
Senator Boozman. I understand.
Mr. Rettig [continuing]. A 60 to 80 percent.
Senator Boozman. But if you go back a year ago, before
COVID, you weren't anywhere close to that, then. I appreciate
the fact that you are sending out in Spanish and doing those
things. Those are things we can do. The tax code is very, very
complicated, and it's really difficult once you get that in
whatever language. If you've got a question, there's simply
nobody to go and see to get the question answered, in person,
and then again, you know, you try and make the phone call, now
and in the past, there's nobody to answer. You have an action
against somebody. They try and contact the IRS, and it's
difficult for them to get through while they're trying to get
the action cleared up. So--and don't misunderstand. I'm not----
Mr. Rettig. No, I appreciate it.
Senator Boozman. I'm not saying you or the personnel--in
fact, just the opposite. In us dealing with the IRS, they've
been very responsive. The taxpayer advocates do a great job.
And then again, just the personnel at the IRS, you know, do a
great job. You know, I mean, these are caring individuals that
are--that--it's just the system, the way it is now, it's kind
of a Catch-22 for all of us. So, what I'm interested in doing
is I hope we can work together, I hope the committee, in a very
bipartisan way--and this has been a bipartisan, you know,
through the years--can work with you to really kind of clean up
some problems that are just kind of part of the system. So,
again, like I said, don't misunderstand. I'm not attacking you.
I'm attacking the system. But we've got ourselves in a
situation now where we've got a very complicated tax code. We
do have enforcement going on now, but it gets really difficult,
so we----
Mr. Rettig. And I, and we--myself, our staff--would
appreciate the opportunity. This is well beyond what we can
exchange the information in an 8-minute exchange. We really
want you to understand the situation that we're in, with
detail, with, information.
Senator Boozman. I appreciate it.
Mr. Rettig. We can all get better at this. I didn't come on
board to be defensive, and I hope I don't sound defensive. I
came on board to make a difference for the taxpayers in this
country, tax professionals in this country, and the employees
of the IRS, and everybody. I believe that we can get this
better. Tax administration is the responsibility of everyone,
not just the IRS.
Senator Boozman. All right. Thank you, Mr. Chairman.
Senator Van Hollen. Well, thank you, Senator. And I do
think we have bipartisan agreement on the need to provide the
resources necessary to provide the service, need to get that
up, and on compliance and enforcement, and look forward to
working with the Ranking Member and all the members of the
committee on that. Mr. Commissioner, thank you for your
testimony and your service. And if you could convey our
appreciation to your employees who have been working through
these difficult times. Thank you.
Mr. Rettig. I appreciate it. Appreciate your time, and I am
available for meetings with you or with your staff, as well as
my staff. We do want you to understand the situation we're in,
and we think, working together, we can get this right. I share
your concerns with respect to the enforcement. I'm focused on
the enforcement. I'm not necessarily the operation support
back-room guy. We need to make a difference, and we need to
make a difference in taxpayer service. Those two go hand in
hand. And with your help, I do believe that we can.
Senator Van Hollen. Thank you, Mr. Commissioner. Next,
we're going to turn to our other two distinguished witnesses.
Ms. Collins is the head of Taxpayer Advocate Service, which is
an independent organization at the IRS. She joined the Taxpayer
Advocate Service in March 2020. She has more than 35 years of
experience in tax law, including 15 years at the IRS Office of
General Counsel and with a private accounting firm.
Mr. Rossotti served as the Commissioner of the IRS from
1997 to 2002. He earned his A.B. from Georgetown University and
his M.B.A. from Harvard Business School. In 1970, Mr. Rossotti
founded American Management Systems and served with AMS until
his confirmation as Commissioner in 1997. Thank both of you for
being here, and we will begin, Ms. Collins, with you.
STATEMENT OF ERIN M. COLLINS, NATIONAL TAXPAYER
ADVOCATE, INTERNAL REVENUE SERVICE
Ms. Collins. Thank you. Mr. Chairman, Ranking Member Hyde-
Smith, and Members of the subcommittee: Thank you for inviting
me to testify today about taxpayer service. In 1998, Congress
created my position, the National Taxpayer Advocate, together
with the office I lead, Taxpayer Advocate Service, or
affectionately referred to as TAS, to be the office of and the
voice of taxpayers within the IRS, to advocate for and assist
taxpayers facing IRS problems and to make recommendations to
the IRS and Congress for change.
First, I want to take this opportunity to thank and
recognize our TAS team for their efforts assisting taxpayers
during this difficult time. This past year, our local taxpayer
advocates have helped over 230,000 taxpayers and their
families. Our centralized case intake advocates have assisted
more than 33,000 taxpayers, and currently we have over 68,000
open cases. At the same time, our systemic advocacy employees
have advocated for taxpayers on multiple issues throughout the
year, impacting millions of taxpayers. I'm proud of what all of
our TAS employees have been able to accomplish, and although,
like the IRS, we still are facing challenges with high call
volumes and increased case number. I also want to give a quick
shout-out to our low-income tax clinics and Taxpayer Advocacy
Panel. Together with the VITA and TCE volunteers, they provide
an essential service for taxpayers and tax administration.
Although this hearing addresses narrowing the tax gap,
which is an admirable pursuit by Congress and the IRS, my
testimony will focus on the filing season, improving taxpayer
service, and protecting taxpayer rights, and ensuring a fair
and just tax system that individuals have confidence in and can
trust. And I appreciate your recognition that service is
paramount to a good tax administration.
On a positive note, I do want to commend IRS leadership and
its employees for what they did accomplish this past filing
season. As of last week, the IRS had processed over 116 million
tax returns. They issued over 85 million refunds of about $243
billion and issued three rounds of stimulus payments over the
last year, most without a problem. And then, as the
Commissioner indicated, on May 17th they received a record
number of filed returns, on the last day, of over 15 million
returns.
At the same time, the combination of office closures
required by the pandemic, additional responsibilities to
administer the stimulus and other relief programs, late
legislative changes, the challenges in processing paper
returns, and the reduced staffing has combined together to make
this the IRS's most challenging filing season probably in my
memory, if not history. As of this writing, the IRS is still
trying to struggle and manually processing more than 30 million
individual and business tax returns. Most taxpayers who are
entitled to refunds--they check the IRS tool ``Where's My
Refund?'' but unfortunately it provides little information for
those backlogged, unprocessed, or suspended returns, so
taxpayers take to calling the IRS, which results in more calls
and lower level of service than any prior year.
At the height of the filing season, the IRS has experienced
record-breaking, unprecedented calls and have received
approximately, as the Commissioner just noted, 1,500 calls per
second. I mean, think of that: 1,500 calls per second, which is
a tremendous increase. And I think at one time during the
filing season, their 1040 toll-free line--unfortunately, the
level of service reached a low of about 5 percent. Although
there is no quick fix to eliminate the challenge currently
facing taxpayers, my written statement I offer some
recommendations to improve taxpayer experience and enhance
taxpayer administration during the filing season, especially
for those able to file electronically.
My first recommendation is for Congress. The IRS needs more
resources of helping taxpayers, collecting revenue, and
providing those social programs such as the stimulus payments
and the annual credit. By providing additional funding and
oversight, we can improve IRS capabilities by providing
taxpayers better service while protecting their rights.
Second, the IRS must prioritize an accessible, robust, and
functional online account for practitioners and taxpayers. This
should not be a luxury. This should be a standard tool the IRS
provides all taxpayers.
Third, expand customer calling-back technology for all IRS
toll-free lines and keep moving forward with other
technological options under development. Fourth, reduce the
barriers for e-filing tax returns. Fifth, for future paper
returns that are prepared electronically but submitted through
the mail, IRS should utilize technology for more accurate,
quicker, and cheaper processing.
Six, expand and make permanent the digital acceptance and
electronic transmission of documents and digital signatures,
what you all do every day: use of email, uploading, and
downloading documents in a secure environment. And the last
recommendation is to consider to offer video conferencing
options to taxpayers, even as IRS facilities begin to open.
So, in closing, taxpayer service must continue to improve.
Our citizens deserve a responsive and respectful tax
administration that serves all taxpayers fairly. Closing the
tax gap should not result in reduced taxpayer service or
undermine any taxpayer rights. To the contrary, voluntary
compliance should be rewarded and not a victim of increased
enforcement. And I believe the Congress and the IRS share that
goal of ensuring that the efforts to narrow the tax gap are
consistent with taxpayers' fundamental rights and to encourage
a fair and just tax system.
So, thank you for inviting me here today. I look forward to
continue working with the IRS and Congress to help improve
taxpayer service, and I'll be happy to answer questions.
[The statement follows:]
Prepared Statement of Erin M. Collins, National Taxpayer Advocate
internal revenue service: narrowing the tax gap and improving taxpayer
services
Chairman Van Hollen, Ranking Member Hyde-Smith, and distinguished
Members of this subcommittee:
Thank you for inviting me to testify about taxpayer service issues
at today's hearing titled Internal Revenue Service: Narrowing the Tax
Gap and Improving Taxpayer Services.\1\
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\1\ The views expressed herein are solely those of the National
Taxpayer Advocate. The National Taxpayer Advocate is appointed by the
Secretary of the Treasury and reports to the Commissioner of Internal
Revenue. However, the National Taxpayer Advocate presents an
independent taxpayer perspective that does not necessarily reflect the
position of the IRS, the Treasury Department, or the Office of
Management and Budget. Congressional testimony requested from the
National Taxpayer Advocate is not submitted to the IRS, the Treasury
Department, or the Office of Management and Budget for prior approval.
We have provided courtesy copies of this statement to both the IRS and
the Treasury Department in advance of this hearing.
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Although this hearing also addresses narrowing the tax gap, my
testimony will focus on improving taxpayer service, protecting taxpayer
rights, and ensuring a fair and just tax system for all taxpayers.
Over the past year, taxpayer service at the IRS has been
historically poor. There is no way to sugarcoat it. Refund delays have
been long, telephone assistance has been poor, and taxpayers have not
been receiving help with refunds, stimulus payments, or the information
they need to be compliant. At the same time, IRS statistics show
taxpayers with incomes below $50,000 fail to respond to proposed
adjustments in correspondence audits 45 percent of the time.\2\ These
non- responses, known as ``defaults,'' result in the issuance of
statutory notices of deficiency, requiring taxpayers to file petitions
in the U.S. Tax Court or be assessed the deficiency and left to deal
with collection issues. This high rate of default makes me ask: What is
wrong with this system?
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\2\ The non-response rate includes taxpayers with undelivered IRS
audit notices or statutory notices of deficiency and taxpayers who did
not respond to IRS audit notices.
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Today, most taxpayers are focused on the challenges associated with
the current filing season. Even with IRS employees working long hours
and IRS leadership making efforts to move resources around, the IRS has
struggled to handle a backlog of about 30 million individual and
business income tax returns requiring manual processing for most of the
filing season, including several million 2019 returns that were filed
in 2020. Most taxpayers receive refunds, so when the IRS falls behind
in processing returns, refunds are delayed. This year's delays are
unprecedented.
Even as Congress and the IRS focus on the tax gap, we cannot
overlook the importance of improving taxpayer service, protecting
taxpayer rights, and ensuring the IRS receives sufficient funding to
achieve these critical goals. In 2015, then-Commissioner Koskinen
termed the IRS's customer service ``abysmal.'' \3\ Yet during the 2015
filing season, return processing delays were minimal, the telephone
``Level of Service'' during the filing season was 37 percent, and 15
percent of callers reached an IRS telephone assistor.\4\ If 2015 was
``abysmal,'' I am not sure the English language has a strong enough
word to describe the delays and challenges taxpayers experienced this
recent filing season.
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\3\ Remarks of Commissioner John A. Koskinen Before the National
Press Club (Mar. 31, 2015) (cited in Kevin McCoy, Report: IRS taxpayer
service goes from bad to terrible, USA Today
(July 15, 2015), https://www.usatoday.com/story/money/2015/07/15/irs-
taxpayer-service-2015/30181465).
\4\ IRS, Joint Operations Center (JOC) Snapshot Reports, Accounts
Management (week ending Apr. 18, 2015).
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When taxpayers did not receive timely refunds, many checked the
IRS's Where's My Refund? online tool or IRS2Go app to find out why. But
most of the backlogged returns had not reached a stage in the
processing pipeline where information was available through Where's My
Refund? or IRS2Go. Largely for that reason but also for others,
frustrated taxpayers are calling the IRS for help and information. The
IRS had received more telephone calls by the end of April 2021 than it
had ever received in a full fiscal year.\5\ Although IRS employees have
answered more calls than last year, they have not been able to manage
the flood of calls. Through May 1, the IRS reported a ``Level of
Service'' on its Accounts Management telephone lines of 14 percent,
with only 7 percent of taxpayer calls reaching a telephone assistor.\6\
The most frequently called toll-free number is the ``1040'' line for
individual income tax services. It has logged about 82 million calls,
and only 2.6 percent of callers have reached a customer service
representative (one out of 38).\7\
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\5\ Until this year, the IRS had received its highest number of
telephone calls in fiscal year (FY) 2008 when it logged about 167
million net attempts. As of May 1--with 5 months still left in fiscal
year 2021--the IRS had received 177 million calls. IRS, JOC Snapshot
Reports, Enterprise Total (comparing fiscal year ending Sept. 30, 2008,
with week ending May 1, 2021).
\6\ IRS, JOC Snapshot Reports, Accounts Management (week ending May
1, 2021).
\7\ IRS, JOC Snapshot Reports, Product Line Detail: Individual
Income Tax Services (week ending May 1, 2021).
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Despite the recent challenges, I try to focus on the positive, so I
want to emphasize and acknowledge the following points:
--Most taxpayers this filing season experienced no problems. More
than 90 percent of taxpayers filed their returns
electronically, and most received their refunds within 21
days--many in under a week. Through April 30, the IRS had
processed 110 million returns and issued 81 million refunds,
totaling about $233 billion, without a hitch.\8\
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\8\ IRS, 2021 Filing Season Statistics (week ending Apr. 30, 2021),
https://www.irs.gov/
newsroom/filing-season-statistics-for-week-ending-april-30-2021.
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--Congress authorized three rounds of stimulus payments and most
eligible individuals received their stimulus payments without
problem. Taken together, the IRS has issued more than 470
million payments totaling about $800 billion.\9\
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\9\ The IRS reports it issued 160 million payments worth $270
billion under the Coronavirus Aid, Relief, and Economic Security
(CARES) Act; 147 million payments worth $142 billion under the COVID-
related Tax Relief Act of 2020; and 164 million payments worth $386
billion under the American Rescue Plan Act of 2021. See IRS News
Release, IR-2021-38, As required by law, all first and second Economic
Impact Payments issued; eligible people can claim Recovery Rebate
Credit (Feb. 16, 2021), https://www.irs.gov/newsroom/as-required-by-
law-all-first-and-
second-economic-impact-payments-issued-eligible-people-can-claim-
recovery-rebate-credit; IRS News Release, IR-2021-103, More than 1.1
million additional Economic Impact Payments disbursed under the
American Rescue Plan; payments total approximately 164 million (May 5,
2021), https://www.irs.gov/newsroom/more-than-1-point-1-million-
additional-economic-impact-payments-disbursed-under-the-american-
rescue-plan-payments-total-approximately-164-million.
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--The primary cause of the processing backlogs and phone challenges
was the COVID-19 pandemic. This was literally a once-in-a-
century occurrence that caught most individuals, businesses,
and government agencies off guard and presented challenges that
could not easily be overcome. However, most taxpayers do not
understand the reasons for the delays, causing frustration,
stress and, for many, financial harm. Secondary causes of the
IRS's problems are the reduction in the IRS workforce over the
past decade and congressional directives to issue stimulus
payments and provide other financial relief to mitigate the
impact of the pandemic, which substantially increased the IRS's
workload and the strain on its employees.
--To reduce taxpayer burden, the IRS provided almost complete relief
from enforcement actions during the early part of the pandemic.
Under its ``People First Initiative,'' \10\ it suspended most
collection activities, including the filing of notices of
Federal tax lien, the issuance of summons, and levies, suits,
and seizure actions. It granted extensions to respond to
Collection Due Process notices and appeals of adverse offer in
compromise and Collection Appeal Program decisions. It
suspended installment agreement and offer in compromise payment
requirements. Significant relief was provided with the Taxpayer
Relief Initiative, including expanded installment agreement
options and additional flexibilities for taxpayers to pay
accepted offers in compromise.\11\
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\10\ See IRS, People First Initiative--Providing Relief to
Taxpayers, https://www.irs.gov/
newsroom/people-first-initiative-providing-relief-to-taxpayers.
\11\ See IRS, Taxpayer Relief Initiative aims to help those
financially affected by COVID-19 (updated Apr. 15, 2021), https://
www.irs.gov/newsroom/taxpayer-relief-initiative-aims-to-help-those-
financially-affected-by-covid-19.
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--Over the long run, the lessons learned from the pandemic are
valuable in helping to identify needs for improved tax
administration. The pandemic exposed weaknesses and
vulnerabilities that can be strengthened, it prompted the IRS
to experiment with new approaches to old problems, it led to a
renewed awareness of the impact of cuts to the IRS's budget
over the past decade and its need for additional funding, and
it is causing the IRS and congressional overseers to
collaborate on steps to improve the IRS's performance going
forward.
--The IRS workforce deserves enormous praise for its work over the
past year. Like all Americans, IRS employees have faced
personal challenges, including childcare challenges, financial
challenges for individuals out of work, and the mental health
challenges of being cooped up in a house or an apartment for
the year. Throughout the year, some employees worked in IRS
facilities at personal risk, and unfortunately, some contracted
COVID-19.
I also want to note that I could not be prouder of the
employees in my own function, the Taxpayer Advocate Service,
for their efforts during the past year assisting taxpayers
during this difficult time. Although this year has been and
continues to be challenging for many taxpayers, it is important
for the public to understand the problems in tax administration
over the past year have been situational and would have been
worse if not for the hard work and commitment of the employees
and leadership of the IRS.
In this statement, I will describe some of the challenges taxpayers
have experienced during the filing season and offer my priority
recommendations to improve the experience of U.S. taxpayers in their
dealings with the IRS while trying to comply with their tax return
filing obligations.
i. taxpayers are experiencing significant challenges in their dealings
with the irs due to the impacts of the pandemic and workforce
reductions on irs operations
Between fiscal years 2010 and 2019, the IRS budget was cut by 20.4
percent after adjusting for inflation, and IRS staffing was reduced by
22 percent--from 94,711 to 73,554 full-time equivalent (FTE)
positions.\12\ When COVID-19 began to spread in March 2020, the IRS--
like many entities in the United States and around the world--was
forced to shut down many of its core operations to comply with social
distancing requirements to protect the health and safety of its
employees, taxpayers, and our local communities.
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\12\ Budget data provided by the IRS Office of Chief Financial
Officer (Oct. 2, 2019). FTE data published in IRS, 2019 Data Book 74,
Table 31: Collections, Costs, Personnel, and U.S. Population, fiscal
years 1990-2019 (2020), https://www.irs.gov/pub/irs-pdf/p55b.pdf.
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In March 2020, December 2020, and March 2021, Congress directed and
entrusted the IRS with the responsibility to administer critical
programs designed to provide financial relief to struggling families
and individuals and to boost the U.S. economy generally.\13\ While the
pandemic-induced shutdowns had the largest impact on IRS operations,
the combination of the shutdowns, the addition of three rounds of
stimulus payments, the responsibilities of implementing new
legislation, and a decade of reduced staffing have created a perfect
storm, leading to an extraordinary imbalance between the IRS's workload
and the resources available to manage it for its annual filing season.
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\13\ See CARES Act, Public Law No. 116-136, 134 Stat. 281 (2020);
COVID-related Tax Relief Act of 2020, enacted in Division N of Title II
of the Consolidated Appropriations Act, 2021, Public Law No. 116-260,
134 Stat. 1182, 1965-71 (2020); and American Rescue Plan Act of 2021
(ARPA), Public Law No. 117-2, 135 Stat. 4 (2021).
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The two most significant consequences have been a huge backlog in
the manual processing of tax returns and an inability to keep up with
the unprecedented volume of taxpayer telephone calls the IRS has
received.
A. The IRS has struggled with a backlog of about 30 million individual
and business income tax returns that require manual processing
The IRS has a backlog of about 30 million individual and business
income tax returns that require manual processing--meaning that
employee involvement is generally required before a return can advance
to the next stage in the processing pipeline. Unprocessed paper tax
returns account for almost half the backlog. Returns suspended during
processing, meaning returns set aside because of issues that require
additional review, account for just over half.
These processing backlogs matter greatly because most taxpayers
overpay their tax during the year and are entitled to receive refunds
when they file their returns. In addition to repaying overpayments of
tax, refunds may include Earned Income Tax Credit (EITC) benefits that
can be worth up to $6,660,\14\ Additional Child Tax Credit benefits
that can be worth up to $1,400 per qualifying child \15\ and, this
year, Recovery Rebate Credits (RRCs).\16\ The IRS's backlog of 30
million income tax returns means that most individual taxpayers in this
group and many business taxpayers will not receive their refunds until
the IRS eventually processes their returns.
---------------------------------------------------------------------------
\14\ See IRC Sec. 32.
\15\ See IRC Sec. 24(d)(1).
\16\ See IRC Sec. Sec. 6428, 6428A.
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After the pandemic forced IRS office closures last March, the IRS
over time was able to make a significant amount of its work portable,
and it instructed its field examination and collection employees to
postpone the start of examinations, liens, and levies. Most employees
could perform their jobs from home. To protect the confidentiality and
security of tax return information, however, the IRS could not allow
employees who open and enter data from paper tax returns to take them
home, requiring employees to work in the IRS campuses and only when
necessary gather information from local offices.
The IRS received approximately 17 million individual income tax
returns \17\ and an estimated 50 million other tax returns on paper
last year,\18\ in addition to more than 13 million pieces of
correspondence.\19\ The shutdown of processing operations meant these
returns and letters sat unopened on trucks for months. When IRS
employees slowly returned to their jobs, the backlogs were
overwhelming.
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\17\ IRS, 2020 Filing Season Statistics (week ending Dec. 11,
2020), https://www.irs.gov/
newsroom/filing-season-statistics-for-week-ending-december-11-2020
(reporting that 152.8 million of 169.7 million individual income tax
returns received had been filed electronically).
\18\ IRS Pub. 6186, Calendar Year Projections for the United States
and IRS Campuses: 2027-2027 (2020 Update) 7, Table 2 (Nov. 2020),
https://www.irs.gov/pub/irs-pdf/p6186.pdf.
\19\ IRS, Customer Account Services Accounts Management Paper
Inventory Reports, Receipt Comparison Report (fiscal year 2020).
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As of May 1, the IRS has a backlog of about 12.9 million paper tax
returns waiting to be processed. The backlog includes 2.5 million tax
returns received in 2020 and 10.4 million returns received in 2021.
They are split about evenly between individual returns and business
returns.
In addition, there is a second group of about 15.1 million returns
suspended during processing. These returns generally require employee
review to verify the legitimacy of some aspect of the return. There are
also about 2.5 million amended returns awaiting processing.
The breakdown of the processing backlog is as follows:
FIGURE 1: STATUS OF INVENTORY REQUIRING MANUAL PROCESSING (AS OF MAY 1, 2021) \20\
----------------------------------------------------------------------------------------------------------------
Not
Individual Business Specified Total
----------------------------------------------------------------------------------------------------------------
Paper Returns Awaiting Processing
Calendar Year 2020...................................... 1,000,000 1,500,000 ........... 2,500,000
Calendar Year 2021...................................... 4,900,000 3,700,000 1,800,000 10,400,000
---------------------------------------------------
Total Paper Returns Awaiting Processing............... 5,900,000 5,200,000 1,800,000 12,900,000
Paper and Electronic Returns--Processing Suspended.......... 13,200,000 1,900,000 ........... 15,100,000
Amended Returns Inventory................................... 1,900,000 500,000 ........... 2,500,000
---------------------------------------------------
Total Unprocessed Returns............................. 21,000,000 7,600,000 1,800,000 30,500,000
----------------------------------------------------------------------------------------------------------------
\20\ Data from IRS systems and Wage & Investment Division. Totals are not necessarily exact due to rounding.
The returns suspended during processing consist mostly of e-filed
returns but include some paper returns. The bulk of the suspended
returns have been sent to the IRS's ``Error Resolution System'' (ERS)
for review. This year, the issues that have caused the largest number
of returns to be sent to ERS have been RRC claims that do not match IRS
records and taxpayer elections to use 2019 incomes rather than 2020
incomes to compute the EITC. To date, more than four million returns
contained RRC errors. These have included dependents listed on multiple
returns, missing or invalid Social Security numbers or Individual
Taxpayer Identification Numbers without a military indicator,
individuals who were deceased prior to the tax period, dependents who
exceeded the age limitation, and RRC amounts computed incorrectly.
Beside ERS cases, returns may be suspended if identify theft is
suspected (e.g., if a return comes in with a missing or incorrect
Identity Protection Personal Identification Number), if a return is
rejected for processing (e.g., if a schedule or required signature on a
paper return is missing), or if a return is classified as
``unpostable'' (e.g., if the IRS has a date of death on file that
precedes the current tax year).
Now that the filing season has ended, the good news is that the
stream of new returns entering the processing pipeline will slow
dramatically, at least until we approach the extended filing deadline
of October 15. The bad news is that it will take considerable time for
IRS employees to work through the backlog of about 30 million
individual and business income tax returns. Commissioner Rettig
recently testified that the IRS anticipates completing the processing
of the backlog sometime this summer. But it is a heavy lift to
accomplish this high volume of manual reviews. Moreover, even with a
possible summer completion date, taxpayers will continue to be
frustrated and, in some cases, will experience financial hardships
because they will not receive the refunds to which they are entitled
until the processing of their returns is complete.
B. IRS telephone service this year has been historically poor
The IRS received more telephone calls during this year's filing
season than it has ever received in a previous filing season. Taxpayers
whose returns are caught up in processing backlogs called, and I
suspect many called multiple times, trying to get an answer and to
understand the reason for the delays and what, if anything, they need
to do. Taxpayers who did not receive their stimulus payments when they
expected also called, and most likely called often. The IRS received
more than 150 million calls during the filing season (through May 1).
Employees answered 13.3 million--just nine percent.
The IRS staffs dozens of telephone lines, and some fared better
than others. About 90 percent of calls came in on lines that fit under
the ``Accounts Management'' umbrella. On those lines, fewer than 7
percent of taxpayers reached a telephone assistor. The largest Accounts
Management line is the ``1040'' number. The IRS received about 82
million calls on the 1040 number, and only about 2.6 percent of callers
got through to an employee (one out of 38).\21\
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\21\ IRS, JOC Snapshot Reports, Product Line Detail: Individual
Income Tax Services (week ending May 1, 2021).
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By contrast, the IRS did a better job answering calls from
taxpayers to whom it had sent notices. For example, about five million
taxpayers called the Automated Collection System toll-free lines, and
employees answered about 40 percent of their calls.
Because the IRS toll-free telephone lines were shut down and then
slowly reopened during 2020, a comparison of the current filing season
with the 2019 filing season will provide better context. Overall, the
IRS has received more than three times as many calls this year. It has
answered slightly more calls, but it could not keep pace with the
volume. Figure 2 compares telephone service in the current filing
season with the 2019 filing season.
FIGURE 2: IRS TELEPHONE RESULTS (2021 AND 2019 FILING SEASONS) \22\
----------------------------------------------------------------------------------------------------------------
Calls Not % of
Calls Primary Directed Calls Calls Calls ``CSR Time on
Received Abandons to CSRs Directed Answered Answered Level of Hold (in
\23\ to CSRs by CSRs by CSRs Service'' minutes)
----------------------------------------------------------------------------------------------------------------
Enterprise 2021............... 151 mil 48 mil 28 mil 75 mil 13 mil 9% 18% 20
Enterprise 2019............... 46 mil 12 mil 14 mil 20 mil 11 mil 25% 59% 14
Accounts Management 2021...... 137 mil 46 mil 26 mil 65 mil 9 mil 7% 14% 19
Accounts Management 2019...... 38 mil 11 mil 13 mil 14 mil 9 mil 24% 67% 9
1040 Line 2021................ 82 mil 35 mil 9 mil 38 mil 2 mil 2.6% 5.6% 20
1040 Line 2019................ 8 mil 4 mil 0 mil 0 mil 2 mil 27% 67% 9
Automated Collection System 5 mil 0 mil 0 mil 5 mil 2 mil 40% 43% 22
2021.........................
Automated Collection System 4 mil 0 mil 0 mil 4 mil 1 mil 30% 33% 41
2019.........................
----------------------------------------------------------------------------------------------------------------
\22\ Data for 2021 is through May 1 and data for 2019 is through May 4 and has been rounded to the nearest
million (mil). ``Primary abandons'' reflect taxpayer hang-ups before they respond to all prompts presented by
the phone tree--typically within the first five minutes of a call. ``Percentage of Calls Answered by CSRs''
reflects the number of calls answered by CSRs divided by the number of calls received. ``CSR Level of
Service'' is an IRS performance measure that reflects the number of calls answered by CSRs divided by the
number of calls directed to CSRs (i.e., it excludes primary abandons, taxpayers who encounter busy signals or
are disconnected, and calls routed for automated responses).
As Figure 2 shows, the challenges taxpayers have experienced while
navigating this difficult filing season show up in the surge of calls
the IRS has received. Because the IRS does not yet offer robust online
accounts and mail processing is significantly delayed, the toll-free
lines remain the best or only option for most taxpayers who need to
communicate with the IRS or are seeking answers regarding delays in
their refunds or stimulus payments.
While there are no magic bullets to improve telephone service this
year, it is anticipated that the volume of calls will decrease now that
the filing season has ended and substantially all of the third round of
stimulus payments have been issued. However, with the much-anticipated
start of Advance Child Tax Credit payments in July and the opening of
the associated portal, I have concerns about the likely increase in
calls from affected taxpayers searching for advice and answers. I
strongly recommend the IRS provide complete guidance on its website and
through its outreach programs. I further recommend the IRS leverage its
many partnerships with tax organizations, particularly those in
underserved communities, and even encourage Members of Congress to
provide relevant information on their webpages. I would also remind
taxpayers of the standard advice the IRS provides: Call early or call
late--the IRS toll-free lines are open Monday through Friday from 7
a.m. to 7 p.m. in each time zone--and it's best to call midweek. Even
so, there is no guarantee that taxpayers will be successful in reaching
a customer service representative or that wait times will not be long.
C. Taxpayers have faced an array of other challenges this filing season
While the processing backlog and phone service difficulties have
affected the largest number of taxpayers, numerous other challenges
have arisen. A few examples:
--Additional effects of unprocessed tax year (TY) 2019 individual
income tax returns.--The adverse impact of the IRS's failure to
process TY 2019 paper tax returns extends beyond refund delays.
Taxpayers seeking to e-file their TY 2020 tax returns generally
must verify their identities by providing either (i) their TY
2019 adjusted gross income (AGI) or (ii) a prior year Self-
Select PIN. If a taxpayer used the same commercial software to
prepare the prior year return, the software will typically
populate the prior- year AGI. Otherwise, taxpayers enter the
information themselves.\24\ The AGI amount the taxpayer enters
must match the AGI amount reflected on the IRS's systems.
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\24\ IRS, Validating Your Electronically Filed Tax Return, https://
www.irs.gov/individuals/
electronic-filing-pin-request (last visited May 12, 2021).
---------------------------------------------------------------------------
Where the IRS has not processed a TY 2019 return, a taxpayer
entering his or her TY 2019 AGI will be prevented from e-filing
a TY 2020 return. Although the IRS provided guidance that
taxpayers with unprocessed returns could enter ``0'' as their
TY 2019 AGI, many practitioners and taxpayers were unaware of
the guidance and ended up filing TY 2020 paper returns. The
processing of paper returns will take considerably longer.
Similarly, mortgage and other lenders generally require
applicants to supply prior-year tax returns to evaluate their
creditworthiness. We understand some taxpayers whose TY 2019
returns have not yet been processed have encountered
difficulties qualifying for mortgages and other needed loans.
--Effects of mid-filing season change to Advance Premium Tax Credit
repayment requirement.--Taxpayers with household incomes
between 100 percent and 400 percent of the Federal Poverty
Level are entitled to receive tax credits if they purchase
health insurance through a Federal or State Health Insurance
Marketplace.\25\ Eligible taxpayers may choose to receive these
``advance premium tax credits'' in monthly installments paid
directly to the taxpayer's insurance provider. At the end of
the year, taxpayers are required to ``reconcile'' the amount of
advance premium tax credits they received with the amounts to
which they are ultimately entitled, as computed on their tax
returns. Taxpayers who received a larger advance credit than
the allowable amount generally must pay back the excess. ARPA
suspended the repayment requirement for TY 2020. However, the
Act was signed into law on March 17--after almost half of all
taxpayers had filed their returns. Therefore, some taxpayers
had already filed returns including a repayment of excess
credit amounts. This has caused confusion and concern for
taxpayers. The good news is that the IRS will automatically
reimburse taxpayers who have already made a repayment.\26\
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\25\ See IRC Sec. 36B.
\26\ See IRS News Release, IR-2021-106, IRS offers overview of tax
provisions in American Rescue Plan; retroactive tax benefits help many
people now preparing 2020 returns (May 11, 2021), https://www.irs.gov/
newsroom/irs-offers-overview-of-tax-provisions-in-american-rescue-plan-
retroactive-tax-benefits-help-many-people-now-preparing-2020-returns.
---------------------------------------------------------------------------
--Effects of mid-filing season change to taxation of unemployment
insurance benefits.--Unemployment insurance benefits are
generally taxable, as they are viewed as a replacement for
wages. ARPA contained a provision that excludes up to $10,200
in benefits from fiscal year 2020 taxation ($20,400 for joint
filers when each receives benefits) if the taxpayer's modified
AGI is less than $150,000. Clearly, this was a welcome change
for millions of taxpayers who otherwise would have had a larger
tax bill due to their increased unemployment benefits. As with
the advance premium tax credit repayment relief provision,
however, this relief was not enacted until March 17.
Understandably, this change caused confusion and concern that
potentially 10 million taxpayers or more might have to file
amended tax returns to claim the exclusion. Fortunately, the
IRS has been able to program its systems to recalculate the
AGI, reducing the tax due or increasing the refund owed to
taxpayers in most cases. The IRS anticipates it will begin
issuing refunds of overpayments by the end of May and will
continue until all payments are made.\27\
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\27\ Id.
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If the IRS has the taxpayer's banking information, the
overpayment will be made by direct deposit. This will expedite
the additional refunds and is notable because IRS systems
historically have been programmed to make subsequent refund
payments via check. In rare circumstances, the reduction in
income may make a taxpayer eligible for a credit that was not
claimed on the filed tax return. Any taxpayer who falls into
this bucket must file an amended tax return to claim the credit
except for the childless worker EITC, for which the IRS has
said an election will be made on the taxpayer's behalf.\28\
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\28\ Erin M. Collins, 2021 Filing Season Bumps in the Road: Part
II, National Taxpayer Advocate Blog (Apr. 27, 2021), https://
www.taxpayeradvocate.irs.gov/news/nta-blog-2021-filing-
season-bumps-in-the-road-part-ii.
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--Potential impact of unemployment insurance fraud on victims.--
Sadly, when Congress authorized higher unemployment insurance
benefits as part of the CARES Act, fraud ``exploded,'' \29\ and
many innocent taxpayers are now bearing the brunt of this
fraud. As States must report unemployment insurance benefit
amounts to the IRS and the recipients on a Form 1099-G, Certain
Government Payments, many individuals received Forms 1099-G in
January reporting unemployment insurance benefits they had
neither claimed nor received. Even though these individuals
generally were victims of fraud perpetrated by identity thieves
who were able to falsely claim and receive benefits in their
names, they will now have to persuade their State unemployment
divisions to issue corrected Forms 1099-G.
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\29\ Office of Inspector General, Department of Labor, DOL-OIG
Oversight of the Unemployment Insurance Program (updated Mar. 31,
2021).
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If they do not, the IRS is likely to send them notices
seeking tax and interest (and potentially penalties) on the
purportedly unreported amounts. Starting in late summer, fall,
or early winter, taxpayers will begin to receive IRS notices
proposing tax adjustments based on inconsistencies between
Forms 1099-G and their filed returns. My office is continuing
to work with the IRS and recommending that it delay the
issuance of notices to provide taxpayers and the States with
additional time to correct inaccurate Forms 1099-G.
--Impact of mistaken enforcement actions.--In general, the IRS has
substantially scaled back its enforcement activities during the
pandemic. Initially, it announced its ``People First
Initiative'' under which it provided almost complete relief
from enforcement actions during the early part of the pandemic.
While examination and collection activity has resumed since
that time, the IRS is continuing to show forbearance in several
areas. Due to the mail processing backlog, for example, it has
temporarily waived any requirements to secure 2019 tax returns
to qualify for an installment agreement, an offer in
compromise, or currently-not-collectible-hardship status.\30\
However, the IRS has sent taxpayers collection and other
notices with response dates that have passed. In addition,
although the IRS granted relief by offering filing extensions,
programming errors caused it to incorrectly assess and collect
the failure-to-pay penalty in some cases.\31\
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\30\ See IRM 5.19.1.4.4.1(4) (Mar. 19, 2021) (granting an exception
to secure an installment agreement without a 2019 tax return through
June 30, 2021); IRM 5.16.1.2.9(12) (Apr. 13, 2021) (granting
authorization to place accounts into CNC status even with one or more
unfiled tax returns).
\31\ See IRC Sec. 6651(a)(2).
These are just a sampling of the additional challenges taxpayers
have faced during this unprecedented filing season. I do not believe
there are quick fixes this year. But there are steps the IRS can take
over the next few years that will improve the taxpayer experience,
protect taxpayer rights, and provide more cushioning if a disaster of
this nature strikes in the future.
ii. recommendations to improve the taxpayer experience
We have recommended several steps Congress and the IRS can take to
improve the taxpayer experience and enhance tax administration. Key
recommendations are as follows:
A. Provide sufficient funding for the IRS to meet taxpayers' needs
There has been considerable discussion in recent months about
increasing IRS funding over a sustained period to help close the tax
gap. While the goal of requiring taxpayers to pay their fair share is
laudable, I want to emphasize that more funding is also needed to
improve taxpayer service and ensure the protection of taxpayer rights.
In fiscal year 2020, the IRS received 100.5 million telephone
calls. Its employees answered only 24 percent of those calls, with hold
times averaging 18 minutes.\32\ In fiscal year 2019, before the
pandemic struck, the results were similar. The IRS received 99.4
million calls and employees answered 29 percent.\33\
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\32\ IRS, JOC Snapshot Reports: Enterprise Total (fiscal year
ending Sept. 30, 2020).
\33\ IRS, JOC Snapshot Reports: Enterprise Total (fiscal year
ending Sept. 30, 2019).
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The President's Management Agenda emphasizes the importance of
high-quality customer service as measured by the American Customer
Satisfaction Index (ACSI) and the Forrester U.S. Federal Customer
Experience Index.TM \34\ By these measures, the IRS performs
poorly. The ACSI report for 2019 ranked the Treasury Department 11th
out of 12 Federal departments and said that ``[m]ost IRS programs score
. . . in line with the overall rating for the Treasury Department.''
\35\ The 2019 Forrester report ranked the IRS 13th out of 15 Federal
agencies and characterized the IRS's score as ``very poor'' \36\--and
that was before the pandemic.
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\34\ Office of Management and Budget, President's Management Agenda
7, 28 (2018), https://www.performance.gov/PMA/
Presidents_Management_Agenda.pdf.
\35\ American Customer Satisfaction Index, ACSI Federal Government
Report 2019, at 4 (2020).
\36\ Forrester Research, Inc., The US Federal Customer Experience
Index, 2019, at 15-16 (June 11, 2019).
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To underscore its concerns about taxpayer service, Congress enacted
the Taxpayer First Act (TFA) in 2019 but did not provide additional
funding to implement changes.\37\ The TFA directed the IRS to develop
comprehensive multiyear plans to improve taxpayer services and
modernize its information technology (IT) systems.\38\ The IRS
submitted its TFA plans in January 2021.\39\ These plans will require
significant additional funding to implement. In the National Taxpayer
Advocate 2021 Purple Book, I made the following specific
recommendations:
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\37\ Public Law No. 116-25, 133 Stat. 981 (2019).
\38\ Id. at Sec. Sec. 1101 & 2101(a), 133 Stat. at 985, 1008.
\39\ IRS Pub. 5426, Taxpayer First Act Report to Congress (Jan.
2021), https://www.irs.gov/pub/irs-pdf/p5426.pdf.
--Provide multiyear sustained funding for the IRS to finalize
implementation of its Integrated Modernization Business Plan so
it can replace its 1960s IT systems, create an integrated case
management system, and offer robust online accounts for
taxpayers and practitioners.\40\
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\40\ The IRS's IT challenges are discussed in more detail in the
Most Serious Problems section of the National Taxpayer Advocate 2020
Annual Report to Congress. See Most Serious Problem: Information
Technology Modernization: Antiquated Technology Jeopardizes Current and
Future Tax Administration, Impairing Both Taxpayer Service and
Enforcement Efforts; Most Serious Problem: Online Records Access: Lack
of Electronic Access to Taxpayer Records Through an Online Account
Makes Problem Resolution Difficult for Taxpayers and Results in
Inefficient Tax Administration; Most Serious Problem: Refund Delays:
Taxpayers Whose Legitimate Returns Are Flagged by IRS Fraud Filters
Experience Excessive Delays and Frustration in Receiving Their Refunds.
---------------------------------------------------------------------------
--Provide sufficient funding for the IRS to implement the TFA, which
will change how the IRS engages with taxpayers and increase
digital interactions.\41\
---------------------------------------------------------------------------
\41\ The IRS's funding needs to implement the TFA are discussed in
more detail in the Most Serious Problems section of the National
Taxpayer Advocate 2020 Annual Report to Congress. See Most Serious
Problem: Digital Communications: Limited Digital Communications With
the IRS Make Problem Resolution Unnecessarily Difficult for Taxpayers.
---------------------------------------------------------------------------
--Replace the IRS budget structure with a new structure that better
reflects how the IRS operates and gives the IRS more
flexibility to move funds among its accounts so it can pay for
the full costs associated with its programs and initiatives
(e.g., the overhead and downstream taxpayer service costs
associated with compliance initiatives).
--If Congress retains the current budget structure, ensure the IRS
receives balanced funding by considering the interactive
effects of changing the funding level for one IRS account on
other IRS accounts, including the downstream increase in
telephone calls and TAS cases likely to result from increased
enforcement funding.\42\
---------------------------------------------------------------------------
\42\ The importance of balanced funding among the IRS's budget
accounts is discussed in more detail in the Most Serious Problems
section of the National Taxpayer Advocate 2020 Annual Report to
Congress. See Most Serious Problem: Information Technology
Modernization: Antiquated Technology Jeopardizes Current and Future Tax
Administration, Impairing Both Taxpayer Service and Enforcement
Efforts.
The recent increase in customer service representatives will begin
to help later this year, but I also urge Congress to provide additional
funding for the IRS to continue to increase staffing on its toll-free
telephone lines. Ideally, I would like to see the IRS answer every
taxpayer's call. One hundred percent of calls answered in a timely
fashion is a worthy goal and one to which taxpayers are entitled. Given
that call volumes wax and wane, I understand that funding the IRS to
answer every call would mean that customer service representatives
would sometimes be underutilized. For that reason, my recommendation is
that the IRS be staffed to answer at least 85 percent of taxpayer
calls. As discussed below, customer callback technology could be
utilized to ensure the needs of all taxpayers are met, even during peak
call periods.
B. Prioritize the development of accessible, robust, and functional
online taxpayer accounts
The IRS offers an online account option for individual taxpayers,
but its usefulness is limited in two respects. First, most taxpayers
who try to establish online accounts cannot do so because they cannot
pass the e-authentication requirements.\43\ Second, the functionality
of the accounts is very limited.
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\43\ IRS, Office of Privacy, Governmental Liaison and Disclosure
response to TAS information request (Oct. 13, 2020) (stating that the
authentication rate for IRS online applications requiring the highest
level of assurance authentication, including online taxpayer accounts,
was 42 percent in fiscal year 2020).
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For the majority of taxpayers who have been doing their banking
online for two decades or more, the contrast between their online bank
accounts and an online IRS account is stark. Most bank customers can
pay their bills online, deposit checks online, and withdraw cash from
the nearest ATM. They rarely need to speak with a bank representative.
Because online accounts substantially reduce call volumes, customers
who require personal service typically experience short hold times.
Taxpayers who manage to establish online accounts on IRS.gov can
view only limited information. They cannot view most relevant account
information, including correspondence and account status, and they
cannot conduct numerous transactions online. With the existing online
account, for example, taxpayers cannot view images of the tax returns
they have filed or information returns filed by third parties; view
most notices (including the statutory notice of deficiency, the
collection due process notice, and the notice of claim disallowance);
update their contact information; file documents; submit an offer in
compromise; access employee contact information for open examination,
collection, or Appeals cases; view the status of compliance actions; or
utilize secure messaging to communicate with an IRS employee. This
functionality should not be considered a luxury for taxpayers; rather,
these should be standard services the IRS provides for all taxpayers.
Of the IRS's many technology needs, the development of robust,
secure online accounts should be at the top of the list. This tool
would be a game changer in how practitioners and taxpayers can
communicate and work with the IRS. My version of a robust online
account would allow taxpayers the ability to view all relevant
information and conduct transactions through their online accounts,
with strong security using two-factor authentication or similar
safeguards. This would be the single most significant step the IRS can
take to improve the taxpayer experience for the vast majority of
taxpayers. Another key benefit of a robust online account would be the
ability to free up IRS employees to assist taxpayers who are not able
or not comfortable utilizing online accounts. This portion of the
taxpayer population would greatly benefit from having immediate access
to IRS employees through phone service or in person at Taxpayer
Assistance Centers (TACs). Over time, robust online accounts will
produce cost savings for the IRS, as the demand for IRS telephone
service will substantially decline.\44\
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\44\ For additional background, see National Taxpayer Advocate 2020
Annual Report to Congress 44-59 (Most Serious Problem: Online Records
Access: Limited Electronic Access to Taxpayer Records Through an Online
Account Makes Problem Resolution Difficult for Taxpayers and Results in
Inefficient Tax Administration).
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C. Expand customer callback technology to all IRS toll-free telephone
lines
Many large businesses and Federal agencies with telephone call
centers offer customers the option of receiving a callback when the
wait time to speak with a customer service representative is long. The
IRS offers this option on a few of its telephone lines, but the option
is not yet offered on most lines, including the high-volume lines.
Providing that option would reduce the time taxpayers spend waiting on
hold and serve as a workload management tool for the IRS. When call
volumes are low, telephone assistors can answer calls quickly. When
call volumes are high, telephone assistors can call back taxpayers in
the order in which their calls are received.\45\
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\45\ For additional background, see National Taxpayer 2020 Annual
Report to Congress 28-43 (Most Serious Problem: Telephone and In-Person
Service: Taxpayers Face Significant Difficulty Reaching IRS
Representatives Due to Outdated Information Technology and Insufficient
Staffing).
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D. Reduce barriers to e-filing tax returns
One of the biggest challenges the IRS has faced over the past year
has been processing paper returns. Although more than 90 percent of
individual taxpayers now e-file their returns, about 10 percent still
mail them in on paper. Many of these taxpayers would prefer to file
electronically but are prevented from doing so by IRS e-filing
limitations. There are three principal limitations: (i) taxpayers
sometimes are required to submit statements or other substantiation
with their returns, and these attachments generally cannot be e-filed;
(ii) some tax forms used by limited numbers of taxpayers are not
accepted electronically; and (iii) taxpayers sometimes need to override
default entries when preparing their returns with tax software, and
some of these overrides make returns ineligible for e-filing. The IRS
should address these limitations to allow all taxpayers the option of
e-filing their returns.\46\
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\46\ For additional background, see National Taxpayer 2020 Annual
Report to Congress 75-83 (Most Serious Problem: E-Filing and
Digitalization Technology: Failure to Expand Digitalization Technology
Leaves Millions of Taxpayers Without Access to Electronic Filing and
Wastes IRS Resources).
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E. Utilize scanning technology for individual income tax returns
prepared electronically but submitted on paper
When taxpayers file returns on paper, IRS employees must manually
transcribe the data line-by- line into IRS systems. Manually entering
data from 17 million individual income tax returns is an enormous task,
and transcription errors are common, particularly on longer returns.
Transcription errors result in notices to taxpayers, taxpayer telephone
calls, and taxpayer correspondence that must be reviewed and evaluated.
Technology is available that would allow the IRS to machine read
paper returns and avoid the need for manual data entry. One option is
2-D barcoding. To utilize it, tax software companies would generate and
imprint a horizontal or vertical barcode containing all the information
on the return, and an IRS machine would read the barcode. (This is
similar to the barcodes on items in supermarkets and other retail
stores.) Many States have been using 2-D barcoding for paper-based
income tax returns for more than a decade. A second option is optical
character recognition software. This software has the advantage of
reading handwritten returns as well as returns prepared with software,
so it could eliminate the need to transcribe any individual income tax
returns. With handwritten returns, however, sloppy handwriting could
lead to errors.
We understand the IRS is exploring the implementation of one of
these forms of scanning technology. I encourage the IRS to move
quickly. Scanning technology will improve accuracy and reduce costs,
and it should be relatively easy to implement.\47\
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\47\ For additional background, see National Taxpayer Advocate 2021
Purple Book 14 (Legislative Recommendation: Require the IRS to Work
with Tax Software Companies to Incorporate Scanning Technology for
Individual Income Tax Returns Prepared Electronically But Filed on
Paper).
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F. Expand digital acceptance and transmission of documents and digital
signatures
The March 2020 closure of IRS offices and mail facilities made it
impossible for IRS employees to receive paper documents from taxpayers.
As a workaround, the IRS issued temporary guidance that authorizes
employees to accept and transmit documents related to the determination
or collection of a tax liability by email using an established secured
messaging system.\48\ Employees are also permitted to accept images of
signatures (scanned or photographed) and digital signatures on
documents related to the determination or collection of a tax
liability. I strongly recommend the IRS make these temporary solutions
permanent. In addition, the TFA requires the IRS to develop guidance to
establish uniform standards and procedures for the acceptance of
taxpayers' electronic signatures for powers of attorney (Form 2848) and
tax information authorizations (Form 8821).\49\ It is my understanding
that the first version of this tool is anticipated to go live this
summer, and I hope the IRS will stick to that schedule.
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\48\ See Memorandum from Sunita B. Lough, Deputy Commissioner,
Services and Enforcement, for All Services and Enforcement Employees,
Control Number: NHQ-01-1120-0004, (1) Approval to Accept Images of
Signatures and Digital Signatures [and] (2) Approval to Receive
Documents and Transmit Encrypted Documents by Email (Dec. 1, 2020),
https://www.irs.gov/pub/irs-utl/approval-to-accept-images-of-
signatures-and-digital-signatures.pdf; Memorandum from Sunita B. Lough,
Deputy Commissioner, Services and Enforcement, for All Services and
Enforcement Employees, Control Number: NHQ-01-0620-0002, (1) Approval
to Accept Images of Signatures and Digital Signatures [and] (2)
Approval to Receive Documents and Transmit Encrypted Documents by Email
(June 12, 2020), https://www.irs.gov/pub/foia/ig/spder/nhq-01-0620-
0002.pdf.
\49\ Public Law No. 116-25, Sec. 2302, 133 Stat. 981, 1013 (2019).
For additional background, see National Taxpayer 2020 Annual Report to
Congress 75-83 (Most Serious Problem: E-Filing and Digitalization
Technology: Failure to Expand Digitalization Technology Leaves Millions
of Taxpayers Without Access to Electronic Filing and Wastes IRS
Resources).
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All of these changes are beneficial for taxpayers and practitioners
and improve tax administration. I recommend that the IRS continue to
move forward into the 21st century with additional digital taxpayer
services.
G. Offer videoconferencing options to taxpayers
Videoconference technology allows taxpayers and their authorized
representatives to be both seen and heard and to share documents
without being physically present. The IRS Independent Office of Appeals
offers WebEx technology for virtual face-to-face conferences between
taxpayers, representatives, and Appeals Officers. The IRS Office of
Chief Counsel and the U.S. Tax Court are also conducting video
communications and virtual trials using ZoomGov.com. Although
videoconferencing should not replace in-person or telephone conference
options, it adds a digital option to communicate with taxpayers when
appropriate and may provide options for those with difficulty traveling
or the inability to take extended time off from work.
I recommend that the IRS evaluate the feasibility of expanding use
of these technologies to as many taxpayer-facing functions as possible,
without removing the in-person options for taxpayers. Unfortunately,
existing bandwidth has been too limited to handle extensive use of
these technologies. It is only recently that the IRS has permitted
limited internal videoconferencing during COVID-19 closures.
Videoconferencing should continue to be expanded and offered as an
option to taxpayers because it can help fill current or future voids in
face-to-face service at TACs and in dealing with revenue agents or
revenue officers.
In addition, taxpayers who are geographically remote from a TAC and
taxpayers with mobility or transportation challenges may find
videoconferencing technology more helpful and economical than traveling
for an in-person conference. Even taxpayers who are not geographically
remote may prefer the convenience of a virtual meeting. The IRS has
utilized Virtual Service Delivery (VSD) in the past, but it should
modernize its VSD capabilities to allow taxpayers to use neighborhood
facilities such as local post offices, community centers, Volunteer
Income Tax Assistance sites, and other partner locations to log onto
secure IRS applications. It is my understanding that the IRS is
exploring the feasibility of this option for remote locations. We
encourage the agency to continue down this path.
iii. conclusion
The 2021 filing season has presented unprecedented challenges for
taxpayers and the IRS. The pandemic created some of these challenges
and highlighted others. The challenges the IRS faced this year were
heightened by its reliance on outdated technology and a workforce that
has shrunk by more than 20 percent over the past decade.
Taxpayer service must improve, and our citizens deserve a
responsive and respectful tax administration that serves all taxpayers
fairly. Closing the tax gap should neither result in reduced taxpayer
service nor undermine taxpayer rights. To the contrary, voluntary
compliance should be rewarded and not become a victim of increased
enforcement. Congress and the IRS should ensure that efforts to narrow
the tax gap are consistent with taxpayers' fundamental rights and
encourage a fair and just tax system.
I believe adversity creates opportunities, and the pandemic helped
focus attention on areas where improvements are necessary and
achievable. With congressional support and creativity, the IRS can
capitalize on its ``lessons learned'' and improve its processes. I look
forward to continuing to work with the IRS and Congress to help improve
the taxpayer experience.
Senator Van Hollen. Thank you, Ms. Collins. Commissioner
Rossotti.
Senator Hyde-Smith. Can you turn your mic up?
Senator Van Hollen [continuing]. Rossotti, please--yes.
STATEMENT OF THE HONORABLE CHARLES O. ROSSOTTI, FORMER
COMMISSIONER, INTERNAL REVENUE SERVICE
Mr. Rossotti. Sorry.
[Laughter.]
Mr. Rossotti. Sorry. So, thank you for inviting me about
the tax gap. So, we estimate that the amount of taxes that were
legally due but not paid in 2019 was actually about $574
billion, and that would actually accumulate to $750 trillion
over the next 10 years if nothing more is done. And by
comparison, that amount is equal to all of the taxes paid by
the lower-earning 90 percent of taxpayers, about 135 million
people. And Commissioner Rettig, of course, just testified that
the number might even be higher than that.
So, we do estimate that it is practical to recover $1.4
trillion over 10 years, but that would still only be 19 percent
of the tax gap over that period, and in our estimate, all of
that gain would be from the top 25 percent of taxpayers. So,
tax compliance is very heavily driven by whether income is
reported by third parties in a form that the IRS can
efficiently use it. Where income is reported on documents such
as W-2s and 1099s, compliance is 95 to 99 percent, and almost
all that tax is paid voluntarily, without the IRS having to
audit or do anything. But where income is not reported at all,
compliance is as low as 50 percent.
So, our proposed plan for shrinking this gap is based on a
three-part program. First, move more of the income that's now
low visibility into a higher-visibility category by filling
some gaps in information that is not currently reported.
Secondly, it is necessary to upgrade IRS technology in order to
make use of this information, including information the IRS
already has, as well as to improve the efficiency of all our
IRS service and compliance activities. And third, it will be
necessary to rebuild the IRS's skilled workforce and to provide
them the tools to resolve taxpayer cases more rapidly and
efficiently. And I want to stress that it is critical to use
technology to make the entire service and compliance process
more efficient, because just scaling up what the IRS does today
will not accomplish the desired results, either for service or
compliance.
For example, currently, all the auditing that the IRS does
only recovers about two and a half percent of the tax gap. For
example, the IRS cannot efficiently evaluate information on 40
million K-1 returns, on 1099-K returns reported by payers, and
on foreign financial institutions that report under FATCA. It
can't do that automatically, but modern technology would make
it possible to use that information to precisely identify
deficiencies.
Technology would also allow the IRS to transform the
follow-up process when deficiencies are identified, to make it
far more accurate and efficient for both taxpayers and the IRS,
more efficient than traditional auditing. And this kind of
technology is not futuristic. It's widely used today,
including, on a limited scale in the IRS, for example, in
screening refunds. As noted by the Taxpayer Advocate, most of
the gain from taxes and from our plan as well is from voluntary
compliance, increased voluntary compliance. So, it is essential
to make it easy for taxpayers to comply when they want to, and
the investments that we propose would increase the ease and
speed of dealing with the IRS and also avoid unnecessary
audits.
We also recommend that, if Congress grants the IRS
additional authority, it should follow what is a bipartisan
practice of establishing pertinent and specific taxpayer rights
that would be relevant to the plan. And we have proposed
several in our program. I would note that our program would
require both authorization and consistent long-term funding
from Congress, and we recommend not a sudden increase but a
steady increase of 6 percent per year, over and above what is
required for general operations, because spreading this over 10
years is what will make it possible for the IRS to use this
funding efficiently. But we think that, over a decade, this
kind of an investment could gain revenue equal to about 20
times its cost and also vastly increase the quality of service
to taxpayers, which has been a subject today.
I do have to acknowledge that this program, to implement,
would be very challenging, but I've been running programs in
business and government for 50 years, and I believe that it is
achievable. But equally important, the gains would clearly
outbalance the risk that involved. And as Congress did when it
passed a law called the IRS Restructuring and Reform Act, it
could set very clear compliance and service goals that could be
established and monitored by Congressional committees, year by
year.
Finally, I just want to note that our proposals are for a
long-term investment. In the short term, as we heard today, the
IRS has to focus its immediate priorities on the filing season
and economic recovery programs.
And I would just close by noting that I believe that, apart
from money, that fundamental fairness alone is a compelling
reason to address the tax gap problem, especially when Congress
might be considering increasing taxes on people who are already
paying what they owe. Thank you, Mr. Chairman. I'm glad to take
questions.
[The statement follows:]
Prepared Statement of Charles O. Rossotti, IRS Commissioner, 1997-2002
internal revenue service: narrowing the tax gap and improving taxpayer
services
Mr. Chairman and Ranking Member, thanks for allowing me to testify
on how to shrink the ever-growing tax gap.
We estimate that the amount of taxes that were legally owed but not
paid was $574 billion in 2019 and will accumulate to $7.5 trillion over
10 years. This amount in 2019 was equal to what the lower 90 percent of
individuals, 135 million taxpayers, paid in Federal income taxes.
Commissioner Rettig recently testified the tax gap may be even larger
than that.
We estimate that it is practical to recover $1.4 trillion of this
tax gap over 10 years, which is still only 19 percent of the total. All
this gain would be from the top 25 percent of taxpayers and the
majority from the top 3 percent.
Tax compliance is heavily driven by whether a taxpayer's income is
reported by third parties in a manner that the information can be
efficiently used by the IRS. Where income is reported and easily
checked from forms such W-2's and 1099's, compliance is 95 to 99
percent. Almost all the tax on that income is paid voluntarily without
IRS intervention. Where income is not reported, compliance is as low as
50 percent.
Our plan for shrinking this tax gap is based on an integrated
three-part program:
First, move more income from low visibility to higher visibility by
filling the gaps on income that is not reported by third parties to the
IRS.
Second, upgrade IRS technology to make full use of all the
information available to the IRS to increase the effectiveness and
efficiency of all IRS compliance activities.
Third, rebuild IRS's skilled workforce and provide them technology
to resolve taxpayer cases more rapidly and efficiently.
It is critical to use technology to make the entire compliance
process far more efficient because simply scaling up what the IRS does
today will not produce the desired results. Currently, all of IRS
auditing activity recovers only about 2.5 percent of the tax gap.
For example, the IRS today cannot efficiently evaluate information
on 40 million K-1 forms, on the 1099-k reports from payers, or on
submissions required by FATCA. Modern technology can effectively use
this information to identify potential deficiencies.
Technology will also allow the IRS to transform the follow-up
process when deficiencies are identified to one that is far more
accurate and efficient for taxpayers and the IRS than traditional
auditing.
The technology we propose is not futuristic. It is widely used
today including on a limited scale in the IRS, for example in screening
refunds.
Most of the gain in our plan comes from increased voluntary
compliance so it is essential to make compliance as easy as possible.
The investments we propose would increase the ease and speed of dealing
with the IRS and reduce the number of unnecessary audits.
We also recommend that this committee follow its bipartisan
practice of establishing pertinent taxpayer rights when it considers
legislating authority for the IRS and our plan proposes several new or
clarified taxpayer rights.
Our program requires both authorization and consistent long-term
funding from Congress. We recommend a funding increase of about 6
percent per year above what is required to sustain IRS operations.
Spreading this increase over 10 years is what will allow the IRS to
make effective use of the funds Congress is providing.
Over a decade this investment will produce a revenue gain of about
20 times its cost and will vastly increase the quality of service the
IRS provides to taxpayers.
Implementing this program will be challenging, but based on my 50
years of managing programs in business and government I believe it is
achievable and clearly outbalances any risks. As Congress did when it
passed the IRS Restructuring and Reform Act, compliance and service
goals can be established, progress could be measured year-by-year and
closely monitored by Congressional oversight committees.
I note that our proposals are for long term investment. In the
short term, the IRS must focus on the immediate priorities of the
filing season, the economic recovery program and the new child tax
credit.
Finally, I believe that fundamental fairness alone is a compelling
reason to address this problem, particularly when Congress is
contemplating raising taxes on people who already pay what they owe.
Senator Van Hollen. Thank you, both, for your testimony. I
think we'll also stick to 8-minute rounds for this second
panel. And, Mr. Rossotti, let me start with you. Thank you for
going through the different elements of your plan. And you're
proposing a 6 percent increase in the IRS budget, per year,
over a 10-year period. Is that correct?
Mr. Rossotti. Yes, but over and above--you'd need some just
for inflation, just to keep the lights on, probably 2, 2.5
percent. So, if you add those two together, it would be about 8
to 8.5----
Senator Van Hollen. Got it. I haven't done that math. How
does that translate into real dollars, for example, in the
first year?
Mr. Rossotti. Well, if you said 8 percent that would be
about--what would that be? About a billion, I believe.
Senator Van Hollen. Got it. So, part of it is--and I think
both your testimony and that of Ms. Collins indicates that this
cannot be an either/or and that, in other words, we need to
invest in service, and we need to invest in enforcement, and
technology actually helps both improve. Mr. Rossotti, in
addition to the dollar investment increase, you also mention
the need to collect additional information at the IRS; in other
words, to match incomes with reporting. And we have that with
certain kinds of income. Can you be a little more specific
about exactly what authorities--additional authorities would be
required----
Mr. Rossotti. Yes.
Senator Van Hollen [continuing]. In that area?
Mr. Rossotti. There is already a very extensive reporting
machine, as you know. There's about 22 different kinds of
1099s. There's about 3.5 billion of those actually produced
every year, so it's an everyday experience for every taxpayer
to receive a 1099, and it helps the taxpayer prepare an
accurate return, and it helps the IRS to check it.
But there's certain gaps or holes if you will. It's like a
bucket that has a lot of water in it, but it's got several
holes. So, if you can fill those holes, which is what we
propose, which is just one additional 1099 that would recover
information, that report information on just money in and money
out, on certain bank accounts, that would be an additional
resource, together with the technology to put all this
information together, because some of it--which, as I
mentioned, that they already have but they can't use--you put
that together, it would, first of all, help taxpayers, as it
does today when they receive a 1099, to prepare an accurate
return.
It would allow the IRS to more efficiently check on whether
the return is accurate, and we believe it would also help to
avoid unnecessary audits. One of the problems that really
bothers taxpayers today is that even though there's less
auditing, some of it is very unproductive. It's not because
they want it to be unproductive but because they don't have the
information, the tools, to select the correct return. So,
there's about as much as 20 percent of individual audits, and
sometimes as much as 40 percent of corporate audits, that
really were unnecessary. They were what's called no-change
audits. Better information will help to eliminate that problem
and target the effort where it will do the most good.
Senator Van Hollen. Got it. And as I understand your
proposal--and think you said you would have the IRS, again,
focus where most of the money in this tax gap is, in terms of
people who owe but don't pay, and that's at the higher income
levels, whereas----
Mr. Rossotti. Well, but roughly speaking. I mean, there is
noncompliance, of course, at all levels, but the largest dollar
amounts are in the upper income. And we estimate that about 85
percent is in the top 25 percent of taxpayers, including
related businesses that they own.
Senator Van Hollen. Got it. Thank you. Ms. Collins,
listening to your testimony and Mr. Rossotti's testimony, it
does seem like this investment in technology can make a
substantial improvement, potentially, in responsiveness to
taxpayers' concerns. Can you talk specifically about what kinds
of technology upgrades you think are important? I know you
touched on some of them in your testimony.
Ms. Collins. Yes. I think, if you think about the pandemic,
some of the challenges taxpayer had were not being able to
speak with the IRS because their phones were just inundated
with calls. So, how else do you reach out to the IRS? You would
have to physically go to one of their buildings. Unfortunately,
due to COVID, we do not have a lot of the buildings staffed and
open up to the public. So, it's really a challenge for
taxpayers.
Think about what we all do, every day. You send emails. You
fax over a document. You upload a document. You receive
documents. A lot of those, because of security reasons and
others, the IRS has been unwilling to do. Due to COVID, they
have made some temporary arrangements to allow some electronic
transmission of documents, which has been huge. We have sort
of, I would say, those who are fluent with respect or
``comfortable,'' maybe is a better word, with electronics,
either using a computer or their phone. So, for those
individuals, having an online account where they could access
their information, they can conduct a transaction, they could
actually talk to--you know, think about, you call an airline or
a hotel, you get Bob or, you know, this mythical person who
actually sits there and would email you.
Things like that would really make an improvement for those
who are comfortable, but we also have a percentage of our
society that are not comfortable or not able to do that. So, I
do believe if we could provide a very robust online account,
the majority of tax professionals--and no disrespect to my
colleagues--would probably prefer not to talk to the IRS, and
it would be quicker just to go online and get the information.
But for those percentage of the population who don't have that
ability, we could free up those 15,000 customer service
representatives to actually answer calls and help those people.
So, technology, I think, would take the pressure off the IRS,
for a large percentage of taxpayers, to resolve their issues
and then free up their employees to do those who really need
it.
Senator Van Hollen. Well, that makes sense. And you
indicated that they may have done this on a pilot basis, right?
You know, in terms of----
Ms. Collins. Well, they've allowed some of their agents and
others to do electronic messaging and other types of pilots
that we've done, so to open up those communications. It was
originally issued as temporary guidance because of COVID, and
we have been pushing the IRS to consider making it permanent,
as well as other additions to increase the digital
communication.
Senator Van Hollen. So, if one of my constituents today
wanted to contact an IRS agent online, like through email, is
that something--how would they do it?
Ms. Collins. Right now, no. However, if they had an open
case and they had an agent assigned to them, they might be able
to work with that agent and do, through secure messaging and
other types of things, a program where they could contact it,
but there are hoops that the person has to jump through. So,
if, again, my hypothetical Bob just wanted to pick up, you
know, an email and talk to the IRS, that's not going to happen
today.
I would like to see that as part of the online account,
that they could contact an IRS agent and get that information,
whether it be 10 o'clock at night or 10 during the day because
I do think, again, the overwhelming majority, especially the
youth--they would much prefer to go online than actually pick
up a phone. So, I do see, as future generations--as an
organization, we really need to change how we do business.
Senator Van Hollen. Well, that makes a lot of sense. I
mean, obviously, we have to deal with the cybersecurity and
confidentiality piece, but do you have a rough estimate of how
much that would reduce the phone call volume by? I don't know
if you've had a chance----
Ms. Collins. I don't think we've ever----
Senator Van Hollen [continuing]. To look at that.
Ms. Collins [continuing]. Done a statistic, but I----
Senator Van Hollen. Yes.
Ms. Collins [continuing]. Do think, if you think about
where we were as an organization 10 years ago, filing
electronic returns, to where we are today, I don't think people
would've thought we would get as far. I'm not sure the actual
number. I know it's far in excess of 90 percent of the returns
that have been filed have been filed electronically. I think,
Commissioner Rossotti, you would be shocked to know that,
during your tenure, it would've been 90 percent. So, I do
think, as time is changing, we are seeing people going more
towards digital than actually, unfortunately, human
interaction.
Senator Van Hollen. All right. Thank you. Senator Hyde-
Smith.
Senator Hyde-Smith. Thank you. My question is for both
witnesses, something that we've covered a little bit. In recent
years, there have been rapid advancements in technology and
increasingly complex tax avoidance strategies, some of which
are legal and some which are not legal. Are IRS employees
properly equipped to handle all of the intricately complex
cases, or should the IRS evaluate where training of existing
employees is sufficient or when it is necessary to recruit
outside tax experts to bring new perspectives and skill sets to
the agencies to address this?
Ms. Collins. Who would like to go first?
[Laughter.]
Mr. Rossotti. Okay. Thank you, Senator Smith. I think that
you are absolutely correct. I think the IRS, as Commissioner
Rettig actually just mentioned, with several different
approaches, both hiring, you know, the workforce of the future,
well-trained people out of college, early in their career, but
also mid-career and sometimes senior people--and I had a little
bit of authority to do that when I was Commissioner, and, you
know, you might be surprised--maybe you wouldn't be surprised--
to find that there are actually very, very capable people who
would come in, even at a substantially reduced income, for a
few years, maybe three to 5 years, to work at the IRS, to do
those sorts of things, if they had the proper support and the
proper funding.
So, I do believe that you are exactly on target with your
question, and I believe that should be part of a long-term
program. The kind of program we said--I said, ``Rebuild a
skilled workforce.'' I didn't go into detail, but it's very
much along the lines of what Commissioner Rettig said about his
three different tiers of employees.
Ms. Collins. And I would agree with that. So, a year ago, I
joined as the NTA. Prior to that, I was 20 years on the
outside. So, similar to Commissioner Rettig, I represented
individuals all the way to very large corporations. And again,
no disrespect, but it's the experience. If you don't work in
that arena, it's very difficult to be trained. Partnerships is
an area that a lot of people are very confused with the law,
and partnerships, in my opinion, is an area that you probably
have a lot of abuses. So, it is very difficult for the IRS to
be able to work efficiently when you have 10, 15, 20 very high-
priced, very well-informed, trained folks sitting on the other
side of the table.
So, the IRS does have a heavy lift, technically, to get up
to speed, especially ever-changing--cryptocurrency, a lot of
other things that are new, that agents have not had to
historically deal with. So, one of the things, through the
Taxpayer First Act, the IRS is really revisiting, and we're
actually working with them on, is really the training program.
Where do we have to go? For two reasons. One, we're focusing
specifically on service and what we could do better for
taxpayers, but, two, also, technology. How do we use
technology, data mining, data analytics, and help agents get
the information they need, and then how do we train these
folks, or how do we bring people, entice them from the outside
to come in to help work with our teams and train them so that
our future leaders and our future employees are up to speed on
technical issues?
Senator Hyde-Smith. Very interesting. And, Ms. Collins, I
just want you to describe some of the challenges that the IRS
faces in its hiring process and what reforms the IRS could
institute to quickly hire staff. I think you've got an opinion
on that, and I'd like to hear it.
Ms. Collins. Well, I like how you use the word ``quickly,''
because that's probably one of our bigger concerns. The IRS
hiring process is a little slow, and as a result, I think we
lose good talent, because if the process takes three to 6
months before we make a commitment and make you an offer, you
probably have had four or five offers somewhere else, and
``Thank you very much, IRS. Have a nice day.''
So, that is a real challenge. How do we get our folks--we
have a division called Human Capital Resources Office, which
basically is the equivalent of our HR group, that do most of
the hiring. The advertising of the positions, we have a
struggle, because as part of our agreement with the union, a
lot of our positions we have to advertise from internal, which
means--and I'll use TAS as an example. We may have a position
at a mid-level leadership that we fill from within. So, we
advertise, we interview, we get the position filled, but it's
from within. We advertise that position. Somebody from within
applies. So, great, we're promoting someone's career. You go
all the way down; we've hired six people but only one new
person. And that's what happens. And I could now have 12 months
go by before I got that one new person.
And as an organization, the IRS is seeing that. A lot of
people move from within the organization, and they should have
that opportunity to develop and build their careers, but I
would like to see that there's some flexibility with the union,
especially if we're going to be able to hire larger amounts of
individuals, that we somehow work out that position so that we
could advertise externally and internally and move the process
along. So, it's really got to speed up the timeframe to make
the offers, to do the interviews, and get people on board,
because right now it's taking anywhere from three to 6 months,
on average, to get folks in the door, which is just
unacceptable.
And in this environment, we're seeing--very difficult to
have people want to come work here, not in the sense of--I
mean, IRS, I believe, is a great place to work. I came back
after my 30-some-odd years. I'm one of the old-timers that the
Commissioner referred to. But, you know, it is a great place to
work. It's just right now we're not seeing, across the board--
and private industry is seeing the same thing--applicants
rushing in. So, we're going to be competing with outside
industry. We need to be nimble, and we need to be--hire
quickly, to get, you know, good people through the door.
Senator Hyde-Smith. Thank you for that. And I've got a
little bit of time left. Mr. Rossotti, we've heard calls from
various interest groups to double the funding for a number of
the FSGG agencies, including the IRS. And although the Budget
Control Act spending caps will not be in place in the fiscal
year 2022, we still face fiscal constraints as we make resource
allocation decisions, of course, but why do you propose a 6
percent increase for the IRS as a more reasonable trajectory
for the agency?
Mr. Rossotti. Well, I think that the situation that has
been described by you and others about lack of service, as well
as the gigantic tax gap, it's just too big a problem to fix in
1 year or even 2 years. It simply has been accumulated over the
period--when you kind of talk about technology--and I think Ms.
Collins did a great job of describing what could be done on the
service side, and there's so much more that could be done with
information on the compliance side--but it just takes time.
I'll answer your question about technology. I spent most of
my time in the private sector, and I've been involved with
several large banks. The four largest banks in this country
each spend on technology, each, about four times what the IRS
has for technology, and they only have about 20 percent as many
customers, if you want to call a taxpayer a customer. So,
that's, like, a 20-to-1 ratio, and they've been doing that for
years. There's no way to make up that kind of a--you know,
immediately. If you tried to, you really fail, and you would be
back here asking questions of why the IRS isn't. But it is, as
Ms. Collins said, able to do things on incremental steps.
So, if you had an assured funding at a reasonable level,
which I say is 6 percent per year, you know, as my estimate,
over a period of 10 years, you would make enormous progress. If
you tried to give them a huge amount for 2 years and then say,
``Okay, now tell me what happened,'' frankly, it wouldn't work.
So, if you really want to rebuild this to improve the service
and compliance, it has to be done steadily, it has to be done
carefully. And I believe the Congress--I've even submitted a
proposal in my written testimony of how you could measure their
progress, year by year; measure it on both the service and the
compliance, so that you could see if they were actually
accomplishing what they do. But if you said, ``Send it to me
and then come back in 2 years,'' I'm sorry, it just wouldn't
work.
Senator Hyde-Smith. Thank you. I'm out of time.
Senator Van Hollen. Thank you. I think we'll do one more
round of 5 minutes each, and other Members of the committee can
join in if they arrive, but, Mr. Rossotti, just so I understand
your conclusion as to what the taxpayer and the country would
gain from the 6 percent-a-year budget, I think you said it
would yield a return of 19 times that investment over a 10-year
period. Is that what you said?
Mr. Rossotti. That is my estimate, you know, in
approximately that range. And let me just say, it does--these
numbers are sufficiently strong that I don't have to be
precise. I mean, obviously, it's an estimate, but let's say I
was wrong. And I did do an estimate of--so, if I was wrong, and
it took another 5 years, it would still come out to 11 times,
because there's just an enormous amount of money that is not
being collected that should be, and it's not fair to the people
who are paying.
On the service side, it's the same thing. I totally agree
with all the comments that have been made here about the vastly
poor effect of having--on compliance, if you have service--I
mean, what I hear from people, when I talk--people still call
me up, because I'm a former Commissioner, not that I can do
anything about it. But they say, ``You know what? I got this
letter from the IRS. I couldn't even figure out what it said,
but I was trying to get through to somebody. I finally got
through to somebody, and they--you know, they didn't have the
information to even answer my question.'' And it just goes on
and on.
That is terrible for the taxpayer. It's terrible for the
IRS, but it's not because the IRS employees are incompetent, or
they don't want to do the job. If they don't have the
information at their fingertips or, you know, there's not
enough of them to even answer the phone, then, you know, you
have that problem for people who are honestly complying. So, it
is not a single problem for a single year. It is a process of
rebuilding, and I--you know, I don't want to tick off my three
elements again, but that's what I believe is really required.
Senator Van Hollen. No, I appreciate that, and I--there's
clearly a direct link between service and being able to get
someone on the phone or online and compliance. That's one
category of lack of compliance: people who want to comply but
just can't get the answer and information. The other category,
of course, are people who are deliberately ducking their
responsibilities----
Mr. Rossotti. Sure.
Senator Van Hollen [continuing]. Which--as you mentioned.
And, you know, Ranking Member Hyde-Smith raised a really
legitimate issue in her questions with respect to the
Commissioner about past investments in technology----
Mr. Rossotti. Yes.
Senator Van Hollen [continuing]. Not always yielding the--
--
Mr. Rossotti. Yes.
Senator Van Hollen [continuing]. Results that have been
promised. I understand that you've put forward a particular
proposal with respect to technology. You do think--can assure
us the gains that we----
Mr. Rossotti. Well----
Senator Van Hollen [continuing]. Could make?
Mr. Rossotti. You know, I mean, assurance--I believe that--
what I would say is that the gains far outweigh the risks. If
you go through any major change program, and this is true in a
private business, you are going to have some setbacks. I'm not
going to say that you won't. But let me just point out that the
IRS has made significant progress with the funds that it has
been given.
When I was Commissioner, we were always on the GAO high-
risk list for technology. You know, they put out a list of the
ten most risky agencies. We were right up there, and I was
Commissioner. They're off that list. They're not on that list
anymore. The GAO has written reports about some technology
programs the IRS has done that have produced 15-to-1 returns,
for example, on certain kinds of identity theft and so forth.
So, they have made significant progress, but I think that,
you know, Senator Hyde-Smith, you asked the question about the
Commissioner. I can't comment about how he transferred funds,
but I can say this--that if I was running a factory to build
cars and you gave me money to build more cars, you know, more
labor and more--but the electricity went off because there was
a flood in the basement or the floor caved in, I wouldn't be
able to produce more cars. I mean, that is almost the situation
that the IRS can be in because you can't do compliance and you
can't do enforcement unless you have information and if you
have an information system that is not functioning, it doesn't
do any good. So, it is really the two, together, that makes the
difference. It's really impossible to segregate them. They
absolutely have to go together.
Senator Van Hollen. Ms. Collins, I have one last question
for you regarding IRS enforcement. And as we've heard, over the
past decade, IRS enforcement diminished due to a lack of
funding. Audit rates fell, especially sharply for higher-
income----
Ms. Collins. Right.
Senator Van Hollen [continuing]. Individuals making more
than $1 million a year, whereas, in contrast, IRS audits of
working-class people receiving the EITC fell at a much lower
rate. Did you look into this, and can you explain why
enforcement, while it went down a little bit on both, went down
a lot more on higher-income individuals, where I think the
evidence is clear that there's a bigger tax gap?
Ms. Collins. Right. I think part of the challenge for low-
income folks is it's a lot easier to automate an examination
for someone who's either potentially a W-2 or an Earned Income
Tax Credit return. A lot of that's automated. You don't need
the same human resources; you don't need the same level of
skill set to go through their return. It's probably four or
five pages, versus two, three, four inches. So, it takes a
different level of IRS employees.
And if you look at the allocation of--in the enforcement
side of large business and international, it's--I forget the
actual number, but it's far less than 10 percent of the total
IRS employees, where if you look at the individuals who focus
on return processing smaller individuals, it's probably
substantially half. So, they do have the resources, and they
are focusing on that.
Senator Van Hollen. Thank you. Senator Hyde-Smith, any----
Senator Hyde-Smith. Ms. Collins, we've heard a lot today
about COVID-19 as the reason for so many things happening, and
then as Senator Boozman, who stated he'd been on this committee
for several years, that a lot of these problems have been going
on for several years. Which challenges to the filing seasons
are unique to COVID-19 pandemic, in your opinion, and which are
recurring problems the IRS will continue to face? Can you
separate that out?
Ms. Collins. I can try, but can I just real quick follow up
on your last question about hiring? One thing I do want to
point out--that the IRS has a new group or project that we're
calling IRS Next, which is our future employees. We are working
really hard to try and resolve the issue so that when and if a
budget is approved that we can hire additional folks. We are
trying to come up with solutions so that we can get people in
the door quicker. So, although it is a current problem, we have
potential solutions on the table to try and fix that. So, that
is the goal that hopefully, come October, we can start focusing
on.
So--and back to your question, part of the challenges,
especially on the returns that have been unprocessed,
suspended, backlogged--you know, we use the different terms
interchangeably--the paper returns was a challenge. As the
Commissioner indicated, the service was shut down, so
literally, if you filed your paper return, it sat in a trailer
for potentially months or longer, and then by the time it got
to an office to be processed, literally the pile was quite
high. By the end of December, I think there was approximately 7
million Form 1040s that still needed manually processed.
So, with a paper return--and back to electronics--you need
a human to sit down, take the return, and go line by line and
enter it into the system. That's very time-consuming, versus if
it's electronic or it can be scanned, I mean, literally, that's
seconds, versus how many minutes does it take for a human? And
then also susceptible to problems, because someone could type
an error, transpose a number. So, paper returns are much more
difficult for IRS individuals, for processing, so it's very
time-consuming.
So, if you are one of those 7 million people, you're
probably not overjoyed to hear that we're finally down to
300,000-plus. I'm a little more optimistic than the
Commissioner. If they're down to 300,000 now, I think it'll be
less than 60 days, based on the numbers that we're seeing, but
again, if you're one of those 300,000, that's nothing to cheer
about, because most likely your return's been sitting there for
over a year. So, paper returns is a real problem for the IRS,
and COVID made it even worse.
The other challenge was, on one hand, thank you to
Congress, by changing the law to allow the application of what
we call the look-back rule to use your income from '19 versus
'20 to determine the benefits of your credits, because it would
potentially increase the credits. IRS was not able to change
its systems fast enough, so again, those required manual
processing. So, that's a large percentage of those cases
sitting in suspense. They need a human to go into the systems
and verify the 2019 return.
The other challenge that, again, is COVID related, was
the--what we refer to--the EIP payments, the Economic Impact
Payments or the stimulus payments. You have to compare that to
what is on line 30 of the 1040, which is a rebate credit. If
there's any discrepancy on those, again, it gets pulled out,
and you need a human to go ahead and process that.
So, a lot of the cases sitting in suspense that are being
worked are the result of change of law. They had challenges
because, again, thank you, Congress, they reduced the
unemployment income taxability by the 10,200. Again, that took
a lot of resources off for the IRS to quickly go ahead and fix
those. So, a lot of the challenges they're facing is indirectly
the result of COVID, because it's legislation, but on top of
it--this filing season's much better than last, because people
are able to work remotely on electronic filing documents, but
again, paper, paper correspondence, someone has to physically
be in the building and work through--as the Commissioner said,
sometimes it's a million a week--and that's a lot of
correspondence to go through.
Senator Hyde-Smith. Thank you very much.
Senator Van Hollen. Thank you, Senator. Ms. Collins, thank
you for being a terrific advocate on behalf of the taxpayers in
the country, and Mr. Rossotti, thank you for sharing your
expertise as a former commissioner. I think we've learned a lot
from both of you on this panel, and we look forward to getting
to work to try to implement the recommendations that you've
both made. And thank you to the Ranking Member for your
questions, and we've got a lot of work ahead of us.
ADDITIONAL COMMITTEE QUESTIONS
The hearing record will be kept open for 7 days if Members
want to submit questions for the record. This hearing is now
adjourned.
Senator Hyde-Smith. Thank you.
Senator Van Hollen. Thank you.
Ms. Collins. And please feel free to reach out, to the
extent you all have questions or would like to get additional
information.
[The following questions were not asked at the hearing, but
were submitted to the Internal Revenue Service for response
subsequent to the hearing:]
Questions Submitted to Hon. Charles P. Rettig, Commissioner
Questions Submitted by Senator Chris Van Hollen
Question 1. You have said that one issue contributing to the tax
gap is abuse of conservation easements. This is an important program
that the vast majority of participating landowners use honestly to
protect land for future generations, but can you elaborate on how
certain developers and promoters have abused this?
IRS Response. Internal Revenue Code (IRC) Sec. 170(h) provides for
a charitable contribution deduction so long as the easement donor meets
all of the statutory and regulatory requirements. The value of the
easement is determined based on a qualified appraisal as defined in
Treas. Reg. Sec. 1.170A-13(c)(3) for contributions made on or prior to
July 30, 2018, and Treas. Reg Sec. 1.170A-16 for contributions made
after July 30, 2018. To claim a deduction, there must be a reduction in
the property value due to the granting of the conservation easement. If
there is no loss in value, no deduction is allowed. Many landowners
correctly apply the law and use conservation easements as legally
intended. However, not all conservation easements qualify for a
charitable contribution deduction. In some instances, the taxpayers
fail to satisfy the statutory and regulatory requirements. In others,
the legal requirements are satisfied yet the value of the contribution
is not properly determined.
The IRS issued Notice 2017-10, designating specific syndicated
conservation easement transactions as listed transactions and requiring
disclosure statements by both investors and material advisors. In
syndicated conservation easements, promoters take a provision of tax
law for conservation easements and twist it. These abusive arrangements
are designed to generate inflated and unwarranted tax deductions, often
by using inflated appraisals of undeveloped land and partnerships
devoid of a legitimate business purpose. These transactions are then
sold to investors as a tax savings strategy. Typically, taxpayers are
allocated a charitable contribution deduction that significantly
exceeds their original investment. Taxpayers save on taxes, and the
promoter, appraisers, and other professionals promoting the transaction
receive large fees. The government must invest significant resources to
try to collect the correct taxes due. As previously reported, from
2016-2018 there are almost 800 cases claiming over $22 billion in
conservation easements that the IRS is actively examining. The IRS
continues to vigorously litigate these cases. Criminal Investigations
is pursuing criminal fraud, and the Department of Justice has
injunctions against and plea agreements from some promoters.
On August 25, 2020, the Senate Finance committee issued its report
on their investigation into Syndicated Conservation Easement
Transactions. The investigation found:
The transactions involve land valuations that appear so
inflated above their original purchase prices that they cannot
reasonably be characterized as anything other than abusive tax
shelters. Despite the formal documentation developed by the
promoters and nominal votes by investors, documents obtained in
this investigation clearly show that both the promoters and the
taxpayer-investors in these deals understood them simply as tax
shelters. At their core, they are transactions in which
taxpayers can save two dollars in taxes for every one dollar
they give to transaction promoters--with promoters pocketing
millions of dollars in fees for organizing the deals.
Unfortunately, despite considerable enforcement activity, taxpayers
and promoters continue to engage in these transactions. The IRS is
committed to addressing this non-compliance and stopping abuse of the
conservation easement provisions.
Question 2. Does the use of virtual currency, which may allow
anonymity in transactions, lead to the possibility of some avoiding tax
reporting obligations? What has the IRS done in recent years to address
problems that may arise due to the increased use of virtual currencies?
IRS Response. Virtual/Cryptocurrency does provide different levels
of anonymity in transactions. Typical transactions involving a
blockchain provide access to publicly available data and certain levels
of tracing. Other obfuscation methods are being instituted throughout
the ecosystem of virtual/cryptocurrency to provide more anonymous
activities.
There are compliance risks inherent in digital asset use. The IRS
works to mitigate these risks and promote voluntary compliance by:
--Promoting awareness of compliance issues associated with digital
assets;
--Issuing guidance;
--Adding a question about virtual currency to Form 1040;
--Sending letters to taxpayers identified through third-party
sources;
--Acquiring technological enforcement tools;
--Utilizing data analytics;
--Enhancing existing compliance strategies;
--Working with our law enforcement partners, both domestic and
international, to address common reporting standards,
deconfliction and elevated capabilities to identify and combat
criminal activities; and
--Working with academia and the private sector to enhance internal
capabilities and look toward technical solutions to tracing
transactions.
Question 3. Congress provided funds in the recently enacted
American Rescue Plan for IRS system upgrades--almost $1 billion. Have
you developed a plan on how you plan to use those funds? If so, can you
share that plan with the subcommittee?
IRS Response. We appreciate the additional funding Congress
provided through the American Rescue Plan to support IRS's Integrated
Modernization Business Plan (Modernization Plan) and related
information technology (IT) modernization efforts. With the
Modernization Plan funding, we will continue to make meaningful
improvements in taxpayer service and compliance, while transforming
foundational IRS technology to allow future innovation and quicker
delivery of IT capabilities.
Attached are the American Rescue Plan spend plan tables. We are
committed to documenting our continued progress through the quarterly
Omnibus reporting to Congress and to our oversight partners at the U.S.
Government Accountability Office and the Treasury Inspector General for
Tax Administration (TIGTA).
We've developed an approach for this funding that accelerates
existing Modernization Plan initiatives, begins initiatives from phase
2 of the plan, and introduces new initiatives based on emerging needs
and technologies. As shown in the attached preliminary spend plan
(Table 4), IRS will invest in themes described in the Modernization
Plan, including:
--Security.--Accelerate expansion and integration of Secure Access
Digital Identity (SADI)--IRS's new NIST-compliant
authentication solution--across all taxpayer facing
applications, as well as accelerate existing cybersecurity
programs including identity and access management,
vulnerability and threat management, and security operations
and management.
--Taxpayer/Customer Experience.--Continue the development of
foundational digital platforms and capabilities aligned with
the IRS Taxpayer First Act Taxpayer Experience Strategy, such
as expanding online accounts for individuals and tax
professionals, improving live assistance, and expanding multi-
lingual access to information.
--Infrastructure.--Establish off-premises capabilities and
efficiencies in the cloud to house modern applications.
--Data.--Build new data platforms and capabilities for analytics
across service, enforcement, and operations support efforts,
including the use of Customer Account Data Engine 2 (CADE2)
data to move toward near real-time access to modernized
individual account data.
--Legacy Systems Modernization.--Begin execution of the Individual
Master File (IMF) modernization strategy and accelerate IRS
technology footprint reduction through retirement,
consolidation, and refactoring of legacy applications.
Question 4. The law requires publicly traded corporations to
disclose ``Uncertain Tax Benefits'' in their filings with the
Securities and Exchange Commission, which are tax breaks that
authorities are more likely than not to disallow. However, for years
now, we have seen corporations keep billions of dollars from these tax
breaks, not because they were investigated and found to be legitimate,
but because the statute of limitations runs out before the tax
authorities reached any conclusion. According to recent analysis by
Institute for Taxation and Economic Policy, in 2020 alone, ExxonMobil,
General Electric, Verizon, Apple and 10 other corporations reported
that they would keep $1.3 billion in previously claimed tax breaks for
this reason.
Question 4a. Corporations also report Uncertain Tax Positions to
the IRS. What processes does the IRS use to scrutinize Uncertain Tax
Benefits disclosed to the SEC, and Uncertain Tax Positions reported to
the IRS?
IRS Response. The Institute for Taxation and Economic Policy
analysis referred to above does not give the complete picture. Due to
IRC Sec. 6103, we can't comment on specific taxpayers or their
situations, but we can say generally that such findings don't reflect
whether or not the taxpayer had been examined. The IRS does not give
taxpayers a finding that an issue is legitimate during an examination.
Therefore, even if an examination is conducted, any release of tax
reserves for book purposes will cite the expiration of the statute as
the reason and not that the IRS found the issue to be legitimate.
Furthermore, the Unrecognized Tax Benefits reported in the SEC Form 10-
K filings represents a global reserve balance that does not necessarily
relate entirely to U.S. Federal Income tax. The unrecognized tax
benefits could also relate to foreign or State income tax positions
that do not affect the U.S. Income Tax filing.
Taxpayers report uncertain tax positions to the IRS on Schedule
UTP. The Schedule UTP is a tool used in conjunction with other risk
analysis factors to identify the highest compliance risks among our
taxpayer base and to assist in working issues effectively and
efficiently. As part of that risk analysis, examiners review
disclosures, external information like SEC filings, and other similar
information to identify large, unusual or questionable items. TIGTA
reviewed the Schedule UTP in 2018 and recommended that IRS consider
modifications that would improve the information reported on the
Schedule UTP. The IRS agreed with this recommendation and continues to
evaluate potential improvements to the Schedule UTP.
Question 4b. Would the IRS be able to investigate more of these
Uncertain Tax Benefits with additional enforcement resources?
IRS Response. Additional enforcement resources would position the
IRS to increase audits and compliance activities of large corporate
taxpayers.
Question 4c. Why would the IRS allow the statute of limitations to
run out on any claim for a corporate tax break when the corporation
itself does not believe its claims can withstand legal scrutiny?
IRS Response. Without specific facts, this is difficult to answer.
The IRS does not have sufficient resources to examine every corporation
that has disclosed uncertain tax benefits or uncertain tax positions.
And, as stated previously, these disclosures are not a guarantee of tax
non-compliance. However, for large corporations, it is unlikely that
the IRS allowed the statute to expire on an examination or did not
protect the statute on future tax years the IRS plans to examine. IRS
examiners conduct a thorough risk analysis to determine whether to
examine a taxpayer and what issues to examine. There are many variables
to consider in making these determinations, including resources and
materiality. As part of the risk analysis process, they look at
disclosures, external information, and other sources to establish an
examination plan.
Question 5. On June 19, 2020, I joined Senator Cortez Masto and
several of my colleagues to write you a letter that included 10
recommendations to ensure that survivors of domestic violence can
access their Economic Impact Payments.
Please identify any recommendations included in the letter that the
IRS has implemented.
For any recommendations that the IRS has not implemented, please
explain the reason why it was not implemented.
As the IRS implements the monthly payments for the expanded Child
Tax Credit that were included in the American Rescue Plan, what steps
is the IRS taking to ensure that survivors of domestic violence are
able to access these payments?
IRS Response. The legislation authorizing the IRS to issue Economic
Impact Payments (EIP) requires the payments to be based on a tax
return. When a return is filed and joint payment is issued, we cannot
legally determine who receives their rightful portion or benefit from
the payment and it becomes a civil matter. None of the legislation
authorizing the IRS to issue EIP authorizes the IRS to issue duplicate
payments, even in the event an individual reports they are a victim of
domestic violence. We continue to perform extensive outreach and an
education campaign to help people understand the EIP and ensure
awareness of the payments in vulnerable and underserved communities. We
also have information available on IRS.gov regarding innocent spouse,
filing a superseding return, and filing a claim if your payment is lost
or stolen. When we did not have banking information on file for the
second and third EIPs, we used banking information available from other
Federal benefit accounts to deliver payments as quickly as possible. We
also have a dedicated toll-free telephone line to provide assistance
regarding questions and or misdirected payments.
______
Questions Submitted to Erin M. Collins, National Taxpayer Advocate
Questions Submitted by Senator Chris Van Hollen
Question 1. The IRS has stated that a correspondence audit, which
is often how the IRS audits working class taxpayers claiming the EITC,
costs approximately $150 for the IRS. In your testimony, you cite IRS
statistics showing that taxpayers with incomes below $50,000 fail to
respond to proposed adjustments in correspondence audits 45 percent of
the time. How can the IRS make this process work better for taxpayers,
so they are able to answer the questions asked of them by the IRS?
Response. Low-income taxpayers who receive the EITC must navigate
complex eligibility requirements. The notices they receive from the IRS
obfuscate these requirements. Some taxpayers do not know how to respond
to the notices and therefore don't respond. As a result, some give up
refundable credits to which they are entitled. For the National
Taxpayer Advocate's 2021 Annual Report to Congress, we will be
analyzing this issue, and we expect to provide details and
recommendations to improve the level of response.
My office has recommended that Congress simplify the EITC
eligibility requirements with the twin goals of (i) increasing the
number of taxpayers eligible for the EITC who claim and receive their
benefits and (ii) reducing the improper payments rate. For a detailed
set of proposals, see National Taxpayer Advocate fiscal year 2020
Objectives Report to Congress, vol. 3 (Special Report: Earned Income
Tax Credit: Making the EITC Work for Taxpayers and the Government),
https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2020/08/
JRC20_Volume3.pdf.
Short of Congress' restructuring the EITC and related family
credits, I believe the IRS should take three steps to ease the burden
on the taxpayers it examines.
First, the IRS should create notices that are easier for taxpayers
to understand and set forth clearly the issue it is examining (e.g.,
relationship or residency or income). For each issue, the IRS should
explain why it is questioning the item on the return. It should include
a questionnaire on which the taxpayer could itemize the list of
documents he or she is providing to support the claim, along with an
IRS-provided envelope the taxpayer may use to mail back a response.
With each such notice, the IRS also should include a paper version of
its online ``EITC Assistant,'' as many taxpayers do not have access to
the Internet and therefore cannot avail themselves of online tools.
With more informative notices designed to elicit a response from the
taxpayer, more audited taxpayers will be able to respond and provide
the necessary information to support their claims.
Second, low-income taxpayers who are audited generally qualify for
free assistance from a Low Income Taxpayer Clinic (LITC). To its
credit, the IRS includes a list of clinics with its audit notices, but
the information about LITCs could be given more prominence. For
example, the notices could include two black-bordered boxes, one
containing LITC information and the other containing TAS contact
information.
Third, if a taxpayer responds to an examination notice, whether in
writing, by phone, or by visiting a TAC, the IRS should assign one
employee to be the point of contact and to work the case. For field or
office examinations, the IRS routinely assigns an auditor to each case
so the taxpayer can interact directly with that individual concerning
the exam. For correspondence examinations, the IRS does not provide
audited taxpayers with the name or direct contact information of an
employee with whom to work. Rather, the taxpayer must call a toll-free
number and likely will speak to a different employee every time he or
she calls.
We understand the IRS initially does not assign cases in
correspondence examinations in order to achieve processing
efficiencies, but if a taxpayer responds to a notice to dispute it, we
have recommended that the IRS provide the taxpayer with the ``name,
telephone number, and unique identifying number of an IRS employee who
can serve as their direct contact throughout the correspondence audit
process, along with the employee's secure email address or the
[Taxpayer Digital Communications] Secure Messaging access needed to
send and receive documents and communicate electronically with the
assigned examiner.'' See National Taxpayer Advocate 2020 Annual Report
to Congress 102, 118 (Most Serious Problem: Taxpayers Encounter
Unnecessary Delays and Difficulties Reaching an Accountable and
Knowledgeable Contact for Correspondence Audits), https://
www.taxpayeradvocate.irs.gov/wp-content/uploads/2021/01/
ARC20_MSP_07_Correspondence.pdf.
Assigning an employee to work with a taxpayer once the taxpayer
responds to an examination notice would assist the IRS by ensuring it
receives the information it needs to resolve the examination. More
importantly, it would assist the taxpayer with preparing and submitting
the information needed to resolve the exam expeditiously and
efficiently. It would also educate the taxpayer as to the refundable
credits' requirements. (We note that approximately one-third of each
filing season's EITC claimants are new). This process would ensure the
IRS records the correct address for the taxpayer, which is particularly
important because lower income individuals change homes more frequently
than affluent taxpayers. In our three-part EITC section of the 2015
Annual Report to Congress, we noted that low-income taxpayers relocate
at a rate of 20 percent per year, as compared to 12 percent of the
population at large.
Question 2. The IRS offers an online account option, but I
understand its usefulness is limited. Why is it that we cannot
communicate with the IRS as we do with our banks, and do you have
recommendations for improvement?
Response. The IRS offers an online account option for individual
taxpayers, but as your question correctly states, its usefulness is
limited in two respects. First, most taxpayers who try to establish
online accounts cannot do so because they cannot pass the e-
authentication requirements.\1\ Second, the functionality of the
accounts is very limited. For the majority of taxpayers who have been
doing their banking online for two decades or more, the contrast
between their online bank accounts and an online IRS account is stark.
Most bank customers can pay their bills online, deposit checks online,
and withdraw cash from the nearest ATM. They rarely need to speak with
a bank representative.
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\1\ IRS, Office of Privacy, Governmental Liaison and Disclosure
response to TAS information request (Oct. 13, 2020) (stating that the
authentication rate for IRS online applications requiring the highest
level of assurance authentication, including online taxpayer accounts,
was 42 percent in fiscal year 2020).
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As I stated in my testimony and in my 2020 annual report, I believe
the IRS should prioritize the development of robust online accounts so
that taxpayers and their authorized representatives have the option of
interacting online with the IRS for all common transactions, just as
customers routinely interact with their financial institutions through
online accounts. During the 2021 filing season, the IRS received 167
million telephone calls. Only 9 percent of taxpayers reached a customer
service representative--and only after lengthy hold times. This low
level of service must not be repeated. An online account would allow
taxpayers and the IRS to exchange information at their convenience,
reducing their need to telephone the IRS and freeing up telephone
assistors for taxpayers who have complex issues or do not have the
ability or desire to communicate electronically.
My understanding is that there are two reasons the IRS has not
already made robust online accounts available--data security concerns
and lack of funding to create the accounts and add key functionality.
For obvious reasons, the IRS must ensure that taxpayer return
information is protected and not subject to hacking. On a positive
note, the IRS is implementing Secure Access Digital Identification
(SADI) in conjunction with its Child Tax Credit Upload Portal and will
be implementing it for other systems beginning in fiscal year 2022.
SADI is anticipated to modernize the e-authentication platform and
improve online access for all taxpayers.
The IRS's technology challenges are well known, and it has not had
the resources to make many critical systems upgrades or the ability to
include key functionality required for online accounts. However, banks
and other financial institutions face similar data security challenges,
and as noted above, most of them have been offering robust online
accounts for more than two decades. The IRS received significant
supplemental funding for its Business Systems Modernization account as
part of the American Rescue Act, and the Administration's fiscal year
2022 budget proposal calls for an increase in base funding. It is my
recommendation that the IRS use this funding to build better online
accounts, increase functionality, and address data security challenges
as quickly as possible.
The IRS must prioritize the development of accessible, robust, and
functional online taxpayer and practitioner accounts. Currently,
taxpayers who manage to establish online accounts on IRS.gov cannot
view most relevant account information, including correspondence and
account status, and they cannot conduct numerous transactions online.
With the existing online account, for example, taxpayers cannot view
images of the tax returns they have filed or information returns filed
by third parties; view most notices (including the statutory notice of
deficiency, the collection due process notice, and the notice of claim
disallowance); update their contact information; file documents; submit
an offer in compromise; access employee contact information for open
examination, collection, or Appeals cases; view the status of
compliance actions; or utilize secure messaging to communicate with an
IRS employee. This functionality should not be considered a luxury for
taxpayers; rather, these should be standard services the IRS provides
for all taxpayers.
______
Questions Submitted to Hon. Charles P. Rettig, Commissioner
Questions Submitted by Senator Patrick Leahy
(1). Throughout the pandemic, and before it, my office has
consistently heard from Vermonters who struggle to get ahold of
employees at the Internal Revenue Services (IRS) when they have
questions about their taxes. The IRS has been plagued by significant
wait times and deteriorating rate of response for assistance provided
through the national toll-free line. In 2020, only one in four callers
ultimately got through to an IRS employee with an average wait time of
27 minutes. At the same time, the IRS has been ``closing'' Taxpayer
Assistance Centers (TACs) throughout the country and especially in
rural areas such as towns in Vermont.
For taxpayers living in rural communities with limited access
to the Internet, the TACs are often the only option to receive
assistance or guidance from the IRS. However, the overall number of
TACs have declined and the number of TACs currently staffed with only
one employee has increased in recent years. To make matters worse, many
of the TACs that are supposed to be open are essentially closed with
the no plans to reopen. Vermont has four TAC sites, of which two are
virtual service delivery (VSD) only. Of the four, currently only one
site is open and scheduling appointments with taxpayers. For some of my
constituents, that would be a five to 6 hour roundtrip for an
appointment.
With Vermont's aging population and limited Internet access,
many taxpayers still rely on paper forms. Reductions in the number of
participating Tax Forms Outlet Program (TFOP) sites and in the number
and type of forms provided through that program have also created
barriers for taxpayers who would like to comply with the tax code.
While budget restraints have undoubtedly forced the IRS to
make difficult choices in recent years, reductions to taxpayer services
are disproportionately impacting rural communities and making it
difficult for rural taxpayers to efficiently and accurately pay their
annual taxes. With President Biden's emphasis on closing the tax gap, I
am hopeful that the IRS will be investing more in taxpayer services
that can help increase compliance with the tax code and errors that can
cost the IRS money in foregone revenue and error resolution.
Question 1. How does the IRS plan to better serve and assist rural
Americans, so that taxpayers in rural areas can correctly file their
taxes?
IRS Response. We recognize the need to serve all taxpayers through
multiple channels so they can obtain assistance in the most convenient
manner available to them. Providing taxpayer service continues to be a
top priority for us, whether at Taxpayer Assistance Centers (TACs),
through free tax preparation at a Volunteer Income Tax Assistance
(VITA) site, over the phone, or online.
We are committed to ensuring that we reach those taxpayers who are
considered underserved and unserved. Over the past year, we have made
significant progress in our outreach to the homeless, engaging directly
with more than 7,300 private and local government agencies to provide
EIP information to more than 6.8 million individuals. We have also
greatly expanded services to those with limited English proficiency,
providing translation services to taxpayers on the phone and in our
TACs in 350 languages, and establishing an aggressive translation
program on IRS.gov.
A planned outreach program to taxpayers in rural communities was
delayed due to the impacts of COVID-19; however, we will resume the
program as soon as it is safe to deploy face-to-face services and
targeted virtual services in communities our data has identified for a
pilot program. This program will allow us to identify the types of
expansion channels that will provide the services needed in those
communities.
Taxpayers in rural areas can access our products locally through
the Tax Forms Outlet Program supported by our partnership with various
Post Offices and Libraries. These participating locations provide
taxpayers the ability to pick up tax products in their local area. In
addition, we provide taxpayers the ability to order the products they
need by calling our toll-free line, 800-829-1040.
Question 2. What is the IRS' plan for reopening the TACs in rural
areas that are currently closed, such as the center in Brattleboro, VT?
IRS Response. Unfortunately, the Brattleboro, VT TAC is closed
because our Individual Taxpayer Advisory Specialist retired in 2020. We
hired a replacement specialist, who then resigned in January 2021. Our
current hiring plans for this office include recruiting two new
employees. That recruitment process has started. Our TAC leadership
team has developed an Optimal Staffing Plan, which includes expanding
our smaller, one-person TACs to a minimum of two technical employees.
We are hopeful that we can initiate this plan effective October 1,
2021. Doing so will reduce closures due to normal employee absences and
due to normal attrition and retirements. Of the current 358 TACs, 20
are unstaffed, 85 are one-person locations and 94 are two-person
locations.
Face-to-face service through the TACs is augmented by Virtual
Service Delivery (VSD) in trusted partner locations. These locations in
Vermont, like Montpelier and Rutland, provide service to taxpayers
through a face-to-face computer video connection. We have been working
with our partners at these sites to re-open that service to taxpayers.
Unfortunately, the Montpelier VSD is in a State building that is closed
to the public until September. The Rutland site is in a library that
has not fully re-opened; they are waiting on funding to update their
HVAC system. We will continue to work with the Rutland site to
determine when it will be able to re-open.
The IRS has also recently completed a VSD pilot that allowed
taxpayers to use their personal computers, tablets, and smart phones to
connect to assistors to resolve their issues. We are completing the
analysis of that pilot and hope to incorporate that capability in our
Rural Outreach Strategy.
Currently, taxpayers in rural areas, who can't resolve an issue
using online tools or the toll-free line, can call the dedicated TAC
appointment line at 844-545-5640. More than half the time, the IRS
assistor can resolve the issue immediately or offer a convenient self-
service option. When the taxpayer needs face-to-face service, the
assistor schedules an appointment at the closest available TAC, which
for our Vermont taxpayers can also currently include locations in New
Hampshire or Massachusetts. However, taxpayers can get many services
more conveniently through the mail or online at IRS.gov.
We encourage taxpayers to view, download and print tax products
from IRS.gov, where all finalized tax products are available. With the
exception of Publication 17, taxpayers can order a paper copy of any
current-year form, instruction, or publication from IRS.gov/OrderForms
or by calling 800-829-FORM (3676). Generally, taxpayers receive
products within 10 business days if the products are available.
Most taxpayers can resolve their inquiries by visiting IRS.gov or
by calling our toll-free line, 800-829-1040, from the convenience of
their home or office. Resources available on IRS.gov include:
--Forms and publications
--Interactive tax law tools
--Get Transcript by Mail
--Where's My Refund?
--Direct Pay
--Online Payment Agreement
--Understanding Your IRS Notice or Letter
Taxpayers without Internet access can call our toll-free automated
response systems that provide recorded information on a variety of
topics. We also created Publication 5136, IRS Services Guide, to help
taxpayers and practitioners locate the services they need.
Taxpayers in rural areas can access our products locally through
the Tax Forms Outlet Program supported by our partnership with various
Post Offices and Libraries. These participating locations provide
taxpayers the ability to pick up tax products in their local area. In
addition, taxpayers can order the products they need by calling our
toll-free line, 800-829-1040.
We also make additional services available to taxpayers through our
community partners and IRS programs. VITA and Tax Counseling for the
Elderly (TCE) sites throughout the State offer free assistance with
return preparation. VITA sites help people who generally make $59,000
or less and people with disabilities or limited-English ability. TCE
offers free tax preparation for all taxpayers, particularly those who
are 60 years of age or older. The TCE program specializes in questions
about pensions and retirement-related issues unique to seniors.
During the traditional filing season, taxpayers can find VITA/TCE
sites for their local area on IRS.gov. They may also check the IRS2Go
mobile application. IRS2Go allows taxpayers to check their refund
status, make a payment, find free tax preparation assistance, sign up
for helpful tax tips, and more. IRS2Go is available in both English and
Spanish.
Question 3. What level of funding does the agency believe is
necessary for the IRS to able reopen TACs and expand tax assistance
programs for rural Americans throughout the country?
IRS Response. The IRS and TACs need consistent funding levels to
maintain current services and to expand services to the currently
underserved and unserved communities. For example, the Optimal Staffing
Plan outlined in question 2, above, costs approximately $30 million
over the current level for Field Assistance operations.
(2). Amid the pandemic, my office regularly hears from constituents
asking about the status of their refunds. One single mother has had to
reschedule needed medical treatment for her disabled son. Another had
to postpone a home purchase. Normally the Taxpayer Advocate is able to
help ensure that hardship cases are expedited. According to a recent
report by the Treasury Department, the IRS has a backlog of over 8
million individual returns and other transaction to process included
within that backlog is over 3.5 million individual paper returns and
almost 1.5 million amended returns. That is a 1,835-percent and 1,238-
percent increase, respectively, compared to the end of 2019 As of April
7, the Taxpayer Advocate advised us that there were over 7 million
returns in the IRS ``error resolution unit''. In this tax return
``purgatory'', the Taxpayer Advocate has no ability to ``see'' the
return or direct the IRS to process hardship cases.
Question 1. The National Taxpayer Advocate issued a Taxpayer
Advocate Directive to the IRS generally directing it to ``complete its
processing of all unprocessed prior year tax returns and correspondence
by May 1, 2021, or by April 15, 2021, provide a detailed plan for
completion of the backlog processing.'' Has the IRS responded to this
directive? How long does the IRS expect it will take to clear the
backlog?
IRS Response. We responded to the Taxpayer Advocate Directive (TAD)
on March 1, 2021. In our response, we explained that we would not be
able to complete the backlog by the dates indicated by TAS. The TAD
contains planned actions that are underway for completing the backlog.
As of June 2, 2021, the individual return backlog has been processed
through the transcription function and the business return backlog has
811,000 returns remaining to be processed. We are closely monitoring
inventories to ensure all work is processed in the order received. This
sometimes requires trans-shipping work from center to center according
to resource availability. It also requires strategically using overtime
in all operations to help work through the backlog inventories.
Question 2. How many additional employees will be necessary to
clear this backlog?
IRS Response. It is difficult to provide an estimate on the amount
of time it will take to clear the backlog completely through all the
pipeline functions. To address the backlog inventories, we will
continue hiring an additional 1,400 employees at our processing centers
throughout the summer months. We will also convert over 1,000 seasonal
employees to a permanent work schedule, which will ensure more
employees are available to work throughout the year.
Question 3. How does the IRS expect Americans to file their taxes
on time when the agency cannot process people's tax returns in a timely
manner?
IRS Response. The IRS workforce navigated preparation for the 2021
filing season (FS2021) while continuing to implement COVID-related
relief measures and delivering an extended 2020 filing season. These
circumstances challenged our ability to make the necessary annual
changes for FS21. Nonetheless, due to the ongoing efforts of our
employees, we delivered a successful filing season again this year.
FS2021 opened successfully on February 12. To give you an idea of
how well our systems performed, the IRS received over that initial
weekend a total of 55 million submissions. These submissions included
individual Federal returns and other items such as state tax returns,
amended returns and returns filed by businesses. At the peak that
weekend, our IT systems enabled us to successfully receive 335
submissions per second.
The February 12 opening of the filing season was slightly later
than in previous years. The delayed start gave us time to do additional
programming and testing of our systems following the December 27 tax
law changes that provided the second round of EIPs and other benefits.
The additional programming and testing ensured that people would
receive their needed tax refunds and any remaining stimulus tax credits
they might be eligible for as quickly as possible.
After carefully considering all the options, the Department of the
Treasury (Treasury) and the IRS determined a limited FS2021 deadline
extension for individuals filing Form 1040 to May 17, 2021, was in the
best interest of tax administration. On March 17, Treasury and the IRS
announced that the deadline for individuals to file Form 1040 and pay
their Federal income tax was extended from April 15, 2021 to May 17,
2021. IRS Notice 2021-21 provided details on the additional tax
deadlines that were postponed until May 17.
We are now opening mail within normal timeframes and all error-free
individual returns received prior to 2021 that do not require further
review have been processed. We understand the importance of timely
processing tax returns and issuing refunds. We continue to work the
returns that need to be manually reviewed due to errors. We are
rerouting tax returns and taxpayer correspondence from locations that
are behind to locations where more staff is available, and we are
taking other actions to minimize any delays.
Tax returns are opened and processed in the order received. As the
return is processed, it may be delayed because of issues such as errors
concerning the Recovery Rebate Credit, missing information, or
suspected identity theft or fraud. If we can fix the issue without
contacting the taxpayer, we will. If we need more information or need
the taxpayer to verify that it was they who sent the tax return, we
will write the taxpayer a letter. The resolution of these issues
depends on how quickly and accurately the taxpayer responds, and the
ability of trained IRS staff working under social distancing
requirements to complete the processing of the return.
______
Questions Submitted by Senator Joe Manchin, III
(1). Earlier this year, you appeared before the Senate Finance
Committee and explained how the U.S. Government is losing billions in
unpaid taxes. While the tax code has grown more complex over the past
decade, the agency's budget and staffing has not kept pace. Since 2010,
the number of tax returns has grown by 9 percent, but IRS funding has
been cut by 21 percent, the number of revenue agents, who can conduct
audits, has fallen by 35 percent, and the audit rate has fallen by 45
percent. The most recent official IRS estimates said that every year
from 2011 and 2013, the IRS failed to collect $441 billion in tax
money, but you have stated that it could possible exceed $1 trillion
per year. That is a shocking number. The administration has proposed to
boost the IRS's budget by $80 billion over the next decade to increase
enforcement to acquire an additional $300 billion in new revenue from
2022 through 2031.
Question 1. Are you supportive of the administration's plan to
allocate $80 billion to the IRS for enforcement and how do you plan on
using that funding to increase enforcement?
IRS Response. Yes, the IRS contributed to the development of this
proposal and fully supports it. With the American Families Plan Tax
Compliance Agenda--approximately $80 billion over 10 years--the
administration proposed an ambitious program to foster a tax system
where Americans pay the taxes they owe. The proposal has four
transformational elements:
--Provide the IRS the resources it needs to address sophisticated tax
evasion.
--Provide the IRS with more complete financial information and
resources to intake and analyze the data.
--Overhaul outdated technology to help the IRS identify tax evasion
and serve customers.
--Regulate paid tax preparers and increase penalties for those who
commit or abet evasion.
The plan proposes ramping up IRS enforcement of the tax laws and
the associated funding and staffing over a decade but the additional
resources will go toward enforcement against those with the highest
incomes and audit rates will not rise relative to recent years for
those earning less than $400,000 in actual income. Because the
expansion in the IRS's budget is phased in over a 10-year horizon, each
year the IRS's workforce should grow by no more than a manageable 15
percent. It also includes increased funding for technology which is
phased over the 10-year period so IRS IT can modernize in an orderly
and effective way. The combination of authority to regulate paid
preparers, additional staff, additional financial information
reporting, and technology to analyze it will allow the IRS to increase
enforcement dramatically.
Question 2. How does the IRS plan to collect unpaid taxes on
transactions using cryptocurrency?
IRS Response. The IRS has announced a campaign to address
transactions related to cryptocurrency. The virtual currency campaign
addresses noncompliance related to the use of virtual currency,
including cryptocurrencies, through multiple treatment streams
including outreach, soft letter contacts, and examinations. These
compliance activities have begun and follow the general tax principles
applicable to all transactions in property, as outlined in Notice 2014-
21. The initial soft letter mailings have resulted in numerous amended
returns. We will continue to implement appropriate compliance activity
under this campaign to address potential cryptocurrency non-compliance.
The IRS can identify, collect, and liquidate virtual currency, as
it would other assets. When applicable, the IRS considers all assets in
determining specific plans of action to collect taxpayers' unpaid
taxes.
We are working on multiple collaborative initiatives with the
private sector, academia and others to identify tax signatures in
blockchain data, ways to identify unreported income and look at sectors
of the ecosystem that are facilitating this activity.
We will also continue to work with Treasury's Financial Action Task
Force (FATF) and Organization for Economic Cooperation and Development
(OECD) to highlight the challenges in this area and propose new
reporting requirements to ensure proper compliance.
Question 3. Do you believe that most of the uncollected taxes are
sitting in an international tax shelter?
IRS Response. We do not believe that most of the uncollected taxes
are sitting in international tax shelters. The most recent estimate of
the gross tax gap is $441 billion. The gross tax gap is composed of
three components: nonfiling, underreporting, and underpayment. The
estimated gross tax gaps for these components are $39 billion, $352
billion, and $50 billion respectively. The gross tax gap estimates are
also segmented by type of tax. The estimated gross tax gap for
individual income tax is $314 billion; for corporate income tax, it is
$42 billion; for employment tax, it is $81 billion; and for estate and
excise tax combined, it is $3 billion. The tax gap estimate is not
segmented by issue (e.g., international tax shelters). If international
noncompliance is identified in the examinations that are the foundation
for each estimate, they are implicitly included in the estimate.
Outside of the tax gap methodology, recent research indicates that
there could be as much as $50 billion in underreported tax owed on
income generated from offshore assets and from pass-through business
activities like partnerships. These activities are difficult to detect
and are likely under-represented in IRS official tax gap estimates.
Question 4. Besides funding, what authorities does the IRS need to
improve the collection of taxes in the future?
IRS Response. Treasury recently released the Green-book, listing
various legislative proposals aimed at improving tax administration.
These proposals, if passed into law, will help to close the tax gap.
The American Families Plan Tax Compliance Agenda also includes
proposals to improve our ability to promote compliance. Research
demonstrates that mandatory third-party information reporting
dramatically improves voluntary compliance. Additional reporting
requirements related to digital assets would improve the Service's
ability to collect taxes in the future.
An additional IRS authority that would benefit tax administration:
--The authority to regulate return preparers: IRS justification on
the benefits of regulating return preparers is well documented.
IRS-CI has historically spent approximately 25 percent of our
investigative time working refund crimes, such as the Return
Preparer Program, Questionable Refund Program, and Stolen
Identity Refund Fraud schemes. IRS authority to regulate return
preparers would enable us to more readily stop refund crimes
before they occur and keep those issues in the realm of a civil
regulatory issue. Post enactment, we would reduce the time
currently expended on refund crimes matters significantly and
divert those resources to high impact cases such as
international and offshore tax evasion cases.
(2). A 2016 flood in Richwood, West Virginia caused massive
destruction and millions of losses. The flood destroyed 80 homes and
businesses and damaged another 100 structures, including the middle and
high schools and the wastewater treatment plant and sewer lines.
Unfortunately, ninety-five residents had to be rescued from the nursing
home, which closed, eliminating 136 jobs. Overall, losses totaled more
than $50 million. A review of the Richwood's flood spending plan
illustrated that the mayor and other city officials were not paying the
employment taxes for the city employees. According to the city, there
was no money to pay the taxes because, years after the flood, the
Federal Emergency Management Agency (FEMA) had not reimbursed the city
for the cost incurred to hire people during the recovery. The Trust
Fund Recovery Penalty and fines totaled approximately $325,504 a few
years ago. The nonpayment also lead to criminal charges and IRS liens
against the mayor and other city officials. Currently, the city of
Richwood is striving to pay the amount owed and remove the IRS lien,
but have ran into a few hurdles getting this issue resolved.
Question 1. How often does the IRS pursue municipal officials for
unpaid employment taxes?
IRS Response. As a matter of Federal tax administration, employment
tax is generally the liability of the employing entity rather than the
individual officials of the entity. Under certain circumstances,
individual liability may arise.
One such example is the Trust Fund Recovery Penalty (TFRP),
authorized by IRC Sec. 6672. The TFRP represents the amount of the
unpaid trust fund taxes. It may be assessed against any person required
to collect, account for, and pay over taxes held in trust who willfully
fails to perform any of these activities. As such, this penalty could
apply to any individual who bears the responsibility and willfully
fails to take the actions described above, not just municipal
officials.
Question 2. Could you commit to working with my office and the City
of Richwood to calculate the amount owed to remove the IRS lien?
IRS Response. The IRS is always willing to work with taxpayers and
their duly authorized representatives to resolve tax liabilities.
Taxpayers or their authorized representative can find out the amount
required to fully pay any Notices of Federal Tax Lien that attach to
their property or rights to property by contacting our Centralized Lien
Operation at (800) 913-6050. If you need assistance with a particular
case, please contact our Legislative Affairs--National Congressional
Affairs office.
(3). Last time that you appeared before this Committee, we were able
to have a discussion regarding the modernizations of the IRS. Now, more
than 2 years after the Integrated Modernization Business Plan was
released, I am still appreciative of your commitment to putting the
agency's information technology on a path toward modernization over the
course of the next 6 years. There's no question that the efficient
operation of the Internal Revenue Service is integral to the
functioning of our government. However, I want to point out that the
dynamics in rural areas like West Virginia need to kept in mind as the
modernization plan is rolled out. If the IRS begins to limit
constituent access to paper forms to make their processing more
efficient and switches to online services it may only be favorable to
some. For the people who don't have broadband access or don't feel
comfortable using the Internet this will result in a disservice. And
unfortunately, this is the case for many West Virginians.
Question 1. Can you provide the committee with an update on the
modernization plan? As a result of the COVID-19 pandemic, do the IRS
intend to maintain a 6 year window for completion?
IRS Response. The IRS Integrated Modernization Business Plan (Mod
Plan) was published in April 2019 and provided a 6-year view of IT
modernization goals. Since then, we have adjusted and executed the Mod
Plan, delivering significant modernized capabilities as described in
the fiscal year 2019 and fiscal year 2020 Annual Key Insights Reports
(AKIR). We delivered these reports to Congress on April 13, 2020, and
March 31, 2021, respectively.
Although 2020 was a year of unprecedented challenges for the
country, we are proud to have successfully implemented the CARES Act,
managed an extended tax filing season, and delivered 100 percent of the
planned modernization capabilities. Examples include expanding customer
callback options for taxpayers to a total of five lines, saving
taxpayers 486,000 hours of live hold time, and delivering a new
platform that uses layers of artificial intelligence to detect
potential fraud. We are committed to modernizing IRS IT in support of
our mission to provide top-quality taxpayer service and to enforce the
tax laws fairly. We continue to deliver required technological
improvements that are comparable to leading financial institutions,
while maintaining privacy and security and meeting new legislative
mandates with unprecedented speed and accuracy.
The enactment of the American Rescue Plan Act of 2021 (American
Rescue Plan) has enabled us to reimagine the modernization program and
go beyond the parameters of the original Mod Plan published in April
2019. The funding received through the American Rescue Plan will aid
the IRS in modernizing IT foundational capabilities and infrastructure
through the acceleration of existing programs and the addition of new
programs to the portfolio. IRS Omnibus quarterly reports will include
updates on the entire modernization program, including those
capabilities funded through the American Rescue Plan legislation,
beginning in the first quarter of fiscal year 2022.
Our modernization efforts have been constrained by the lack of
predictable and consistent funding. Through the first 3 years of the
plan (fiscal year 2019-2021), we have received just over half ( 55
percent) of the Business Systems Modernization funding envisioned in
the initial plan. This has resulted in rescoping and rescheduling, even
with our use of user fees and inter-appropriation transfers to support
delivery. We have consistently delivered on our modernization efforts,
though often more slowly than initially planned due to this rescoping
and rescheduling. Additional multi-year funding included in the
American Families Plan will allow us to address foundational
modernization needs to bring our technology up to modern standards and
deliver IT improvements to tax administration that meet the needs and
expectations of taxpayers.
Question 2. What efforts have been made to this point to ensure
rural areas are not being left behind during this transition?
IRS Response. We recognize the need to serve all taxpayers through
multiple channels, so they can obtain assistance in the most convenient
manner available to them. Providing taxpayers with free tax preparation
at VITA sites continues to be a top priority for us. We are committed
to ensuring we reach those taxpayers who are considered underserved and
unserved. Recently, we engaged community organizations in a national
symposium identifying resources available for anyone interested in
partnering with the IRS to start a VITA program in rural areas.
Currently, taxpayers in rural areas who can't resolve an issue
using online tools or the toll-free line can call the dedicated TAC
appointment line at 844-545-5640. More than half the time, the IRS
assister can resolve the issue immediately or offer a convenient self-
service option. Taxpayers can get many services more conveniently
through the mail or online at IRS.gov.
We encourage taxpayers to view, download and print tax products
from IRS.gov, where all finalized tax products are available. With the
exception of Publication 17, taxpayers can order a paper copy of any
current-year forms, instructions and publications, they can order them
(except Publication 17), from IRS.gov/orderforms or by calling 800-829-
FORM (3676). Generally, taxpayers receive products within 10 business
days if the products are available.
Most taxpayers can resolve their inquiries by visiting IRS.gov or
by calling our toll-free line, 800-829-1040, from the convenience of
their home or office. Resources available on IRS.gov include:
--Forms and publications
--Interactive tax law tools
--Get Transcript by Mail
--Where's My Refund?
--Direct Pay
--Online Payment Agreement
--Understanding Your IRS Notice or Letter
Taxpayers without Internet access can call our toll-free automated
response systems that provide recorded information on a variety of
topics. We also created Publication 5136, IRS Services Guide, to help
taxpayers and practitioners locate the services they need.
Taxpayers in rural areas can access our products locally through
the Tax Forms Outlet Program supported by our partnership with various
Post Offices and Libraries. These participating locations provide
taxpayers the ability to pick up tax products in their local area. In
addition, taxpayers can order the products they need by calling our
toll-free line, 800-829-1040.
We also make additional services available to taxpayers through our
community partners and IRS programs. VITA/TCE sites throughout the
State offer free assistance with return preparation. VITA sites help
people who generally make $59,000 or less and people with disabilities
or limited English ability. TCE offers free tax preparation for all
taxpayers, particularly those who are 60 years of age or older. The TCE
program specializes in questions about pensions and retirement-related
issues unique to seniors.
During the traditional filing season, taxpayers can find VITA/TCE
sites for their local area on IRS.gov. They may also check the IRS2Go
mobile application. IRS2Go allows taxpayers to check their refund
status, make a payment, find free tax preparation assistance, sign up
for helpful tax tips, and more. IRS2Go is available in both English and
Spanish.
(4). It is no secret that the talk of Congress right now is the
possibility of an infrastructure package. However, in order for an
infrastructure package to be passed, it goes without saying that we
have to have a way to pay for it and pass some sort of tax reform. I
believed, and still do, that real reform needs to meet a few goals: it
needed to focus on permanent relief for working class families; make
small businesses and corporations competitive in a global economy; be
fiscally responsible; and simplify the tax code. As we continue to
debate and discuss next steps on an infrastructure package, we need to
keep these thoughts in mind. We cannot return to the strictly partisan
methods that have been used by both parties to advance legislation with
no input from our friends on the other side of the aisle. Reaching an
agreement on a package can be done if we work together.
Question 1. In your mind, what areas of tax reform should Congress
examine as we look for potential pay fors for an infrastructure
package?
Treasury Office of Tax Policy Response. The administration has
provided numerous revenue proposals in the American Jobs Plan. These
proposals are described in more detail in https://home.treasury.gov/
policy-issues/tax-policy/revenue-proposals and generally focus on
reforming corporate taxation, particularly in the international tax
area. Treasury will continue to work with Congress on these reforms.
Question 2. Are there portions of the 2017 tax bill that are being
discussed for reform that should be changed? Are there things that
should be left untouched?
Treasury Office of Tax Policy Response. The American Jobs Plan
proposal fixes the problems of both prior law and current law. The plan
raises the corporate income tax rate from 21 percent to 28 percent.
This is an administratively simple way to raise revenue and increase
the progressivity of the tax system. Similarly, in the international
tax area, the American Jobs Plan proposes eliminating the (QBAI)
exemption in the GILTI minimum tax for the first 10 percent return on
offshore tangible assets, and repealing FDII. These changes would
eliminate offshoring incentives. A much stronger minimum tax (with
country-by-country administration and a higher rate) will put an end to
the profit shifting incentives that were present in current and prior
law. Accompanying this change, the administration recommends reforms to
the BEAT (as described in the SHIELD proposal) that will curtail
foreign multinational company profit shifting.
(5). In the past year, Congress has authorized numerous programs aimed
at helping vulnerable Americans weather the new economic challenges
presented by the pandemic. This included over $850 billion of direct
payments to taxpayers. While I commend you for steering the Federal
Government's massive effort to deliver billions to impacted Americans,
including 964,000 West Virginians, I remain concerned that the payments
are not getting to those who need it the most. The American Rescue Plan
contained several provisions directly aimed at helping parents: Larger
stimulus payments of $1,400 for each dependent, an increase in the
child tax credit, and more money funneled through the tax credit to
help parents offset work-related child-care expenses. Unfortunately,
West Virginia has over 10,000 homeless youth. The COVID-19 pandemic,
along with the opioid epidemic, has compounded this issue with high
unemployment, unstable living conditions, and job insecurity, resulting
in higher rates of homelessness in children, youth and families. As
such, more and more grandparents are raising their grandchildren in
West Virginia. That's why it is imperative that we ensure that money
gets to the children or their real caretakers in these households.
Question 1. How should a grandparent or relative notify the IRS
that they have become the primary caretaker of a child?
IRS Response. Advance Child Tax Credit (CTC) payments are based on
the children claimed for the CTC on a 2020 tax return (or 2019 tax
return, if the 2020 tax return has not been processed as of the payment
determination date for monthly advance CTC payments). Later this year,
we will update the Child Tax Credit Update Portal (CTC UP) to allow
taxpayers who have already claimed a child to inform us about the
qualifying children they will claim on their 2021 tax return. This
information will allow us to adjust the estimated 2021 Child Tax
Credit, including the amount of monthly advance CTC payments.
If a taxpayer does not receive advance CTC payments for a
qualifying child now, they may claim the full amount of allowable CTC
for that child when they file their 2021 tax return.
Question 2. What should a grandparent do if he/she is the primary
caretaker of a child and that child's tax credit or EIP payment goes to
their noncustodial parent or parents?
IRS Response. See the response to question 1, above, for
information about how eligibility is determined and how a grandparent
can claim a child.
If a taxpayer will not be eligible for the CTC for the 2021 tax
year, they can unenroll through the CTC UP. CTC UP was available in
June and allowed taxpayers to unenroll before the first advance CTC
payment was made (and taxpayers can unenroll moving forward). The total
amount of advance CTC payments that a taxpayer receives during 2021 is
based on the IRS's estimate of their 2021 CTC. If the total amount
received is greater than the actual CTC a taxpayer can claim on their
2021 tax return, they may have to repay the excess amount on their 2021
tax return during the 2022 tax filing season. For example, if they
receive advance CTC payments for two qualifying children properly
claimed on their 2020 tax return, but no longer have qualifying
children in 2021, the advance CTC payments they received will be added
to their 2021 income tax unless they qualify for repayment protection.
Question 3. What mechanisms or procedures can the IRS set up to
ensure that future tax credits and/or benefits go to the child's actual
caretaker?
IRS Response. As described above, advance CTC payments in 2021 are
based on an estimate of the 2021 CTC. The payments are based on
eligible children claimed on a 2020 tax return (or 2019 if the 2020 tax
return hasn't been processed). If taxpayers will not be eligible for
the CTC in 2021, they should consider unenrolling from the advance CTC
payments. When taxpayers file their 2021 tax return during the 2022 tax
filing season, they will need to compare:
1. The total amount of the advance CTC payments received during
2021; with
2. The amount of the CTC they can properly claim on their 2021 tax
return.
Excess Child Tax Credit Amount: If the amount of CTC exceeds the
total amount of advance CTC payments, the taxpayer can claim the
remaining amount of CTC on their 2021 tax return.
Excess Advance Child Tax Credit Payment Amount: If they receive
a total amount of advance CTC payments that exceeds the amount of CTC
they can properly claim on their 2021 tax return, they may need to
repay some or all of that excess payment to the IRS.
In January 2022, the IRS will send Letter 6419 to provide the total
amount of advance CTC payments paid to the taxpayer during 2021.
Taxpayers may need to refer to this letter when filing their 2021 tax
return during the 2022 tax filing season.
______
Questions Submitted by Senator John Kennedy
(1). The fiscal year 2022 budget proposes to create a comprehensive
financial account information reporting regime. As part of this
proposal, banks and third-party payment providers would be required to
report account holders' aggregate account outflows and inflows. Using
banks as an extension of the IRS would be incredibly burdensome and
costly to regional and smaller banks.
Question 1. Banks already submit CTRs for deposits and withdraws of
more than $10,000, with the option to report transactions below that
threshold. Does the IRS feel that this is not sufficient reporting? Who
is the IRS trying to target by receiving reports of transactions below
$10,000?
Treasury Office of Tax Policy Response. When the IRS is able to
verify the accuracy of tax filing with third-party information
reporting, compliance rates are more than 95 percent. For opaque
sources of income, where no such reporting exists, compliance rates are
under 50 percent. Strengthening third-party reporting is one of the
most effective ways to improve tax compliance. The tax gap for business
income (outside of large corporations) is driven primarily by the lack
of comprehensive third-party information reporting and the resulting
difficulty identifying noncompliance outside of an audit. The IRS
selects returns for examination based on an assessment using
information available on the potential for noncompliance. But when the
IRS has no visibility into opaque income streams, it lacks the ability
to focus enforcement activity effectively. Requiring comprehensive
information reporting on the inflows and outflows of financial accounts
will increase the visibility of gross receipts and deductible expenses
to the IRS. The IRS will use this new information to better focus
enforcement activities, detecting obvious areas of gross non-compliance
and decreasing the likelihood that fully compliant taxpayers will be
subject to audit. Under the enhanced information reporting, voluntary
compliance will rise, as taxpayers realize that the IRS has an
additional lens into previously underreported income streams.
Question 2. The IRS is proposing banks send them all financial
account flows. Does the IRS have the ability to sort through this
volume of transactions?
Treasury Office of Tax Policy Response. It will be imperative to
provide the IRS the resources it needs to best deploy this information,
as well as existing information it collects--as the administration's
proposal does. For example, today the IRS cannot efficiently evaluate
all of the information on submissions required by the Foreign Account
Tax Compliance Act. With modernized IT and the additional funding
proposed in the American Families Plan, the IRS will be able to intake
and analyze financial information by applying artificial intelligence
and other modern techniques.
Question 3. What safeguards is the IRS proposing to ensure
information does not get in the hands of the wrong people?
Treasury Office of Tax Policy Response. The IRS is dedicated to
protecting taxpayer privacy and safeguarding returns and return
information from unauthorized access, use, or disclosure. Modernization
funding would allow the IRS to support efforts to meet threats to the
security of the tax system, including the 1.4 billion cyberattacks the
IRS experiences annually.
(2). The administration is proposing to increase the corporate tax
rate in the U.S. from 21 percent to 28 percent. Typically, small
businesses are organized as sole proprietorships, partnerships, LLCs,
and S Corporations. These entities are taxed at the individual level
and are not subject to the corporate tax rate. However, small
businesses can also be C Corporations, which will be taxed at 28
percent if the proposal passes.
Question. Do you support raising taxes on small businesses? Please
explain.
Treasury Office of Tax Policy Response. The administration has
focused this year on providing direct assistance to small businesses
and working families to help them deal with the challenges of the
pandemic and building back from that. The American Rescue Plan provided
significant economic relief in the form of loans for small businesses,
expanded tax credits to help employers retain and safely bring back
workers, and grants to millions of the hardest hit businesses. As you
noted, most small businesses are organized as sole proprietorships,
partnerships, LLCs, and S Corporations that are not taxed at the entity
level. These businesses would not be affected by a higher corporate tax
rate.
(3). Practitioners are experiencing difficulty in reaching the IRS to
help their clients in a timely manner. Taxpayer written correspondences
in response to IRS notices is not processed before the next scheduled
IRS correspondence is sent to the taxpayer escalating the penalty
situation for the taxpayer that otherwise would have been handled with
the first written correspondence.
Question. What is being done to address Taxpayer Rights regarding
the backlog of unprocessed IRS mail that impacts them?
IRS Response. We are not aware of a backlog of remittances awaiting
processing. We are opening mail within normal timeframes and all error-
free individual returns received prior to 2021 that do not require
further review have been processed. We understand the importance of
timely processing tax returns and issuing refunds. We continue to work
the returns that need to be manually reviewed due to errors. We are
rerouting tax returns and taxpayer correspondence from locations that
are behind to locations where more staff is available, and we are
taking other actions to minimize any delays.
Tax returns are opened and processed in the order received. As the
return is processed, it may be delayed because of issues such as errors
concerning the Recovery Rebate Credit, missing information, or
suspected identity theft or fraud. If we can fix the issue without
contacting the taxpayer, we will. If we need more information or need
the taxpayer to verify that it was they who sent the tax return, we
will write the taxpayer a letter. The resolution of these issues
depends on how quickly and accurately the taxpayer responds, and the
ability of trained IRS staff working under social distancing
requirements to complete the processing of the return.
(4). The slowed down IRS processes for practitioners power of
attorneys (POT) being posted has greatly impacted taxpayers receiving
help. It takes approximately four weeks before the POT is in the
Centralized Authorization File (CAF) system.
Question. The IRS has recently announced they are rolling out an
online Tax Pro portal in July to mitigate the delays in processing
POTs. A practitioner cannot respond on behalf of a taxpayer's letter
that requires a response within four weeks of receipt while waiting for
final processing. What steps do you recommend the practitioner take to
best meet the needs of the taxpayer?
IRS Response. Practitioners do not have to wait for their power of
attorney to be processed before being able to respond on behalf of the
taxpayer. We accept a completed ``unprocessed'' paper or faxed copy of
a third-party authorization as valid. We provide immediate assistance
to the practitioner when the document submitted contains all the
essential elements, including the following:
--Taxpayer's name and address;
--Taxpayer Identification Number;
--Representative's name and address;
--Type of tax;
--Form number and tax year or period;
--Representative designation, signature, and date; and
--Taxpayer's dated signature.
(5). The zip codes for all 64 Louisiana parishes are supposed to be
flagged in the IRS system for Severe Winter Storm tax relief but when
practitioners call in to have relief granted for a taxpayer, they are
sometimes told their zip code is not eligible for the relief.
Question. Please explain why this is occurring. What needs to be
done to remedy this situation?
IRS Response. All parishes in Louisiana were granted relief
following the disaster declaration FEMA-4590-DR, and all taxpayers
residing in those parishes or having books and records within those
parishes are eligible for relief. Taxpayers with an address of record
with the IRS in the designated disaster area do not need to call or
request disaster tax relief. The IRS provides disaster tax relief to
qualifying taxpayers automatically. However, taxpayers or their
preparers may need to self-identify that they are qualified for relief
if they maintain records in a covered disaster area that are necessary
to meet a tax deadline falling within the disaster period. We are happy
to work with any taxpayer who needs assistance determining their
eligibility for relief. In the event relief is being requested or was
previously denied, practitioners can contact the IRS at 866-562-5227 or
send bulk requests to:
Internal Revenue Service
Planning & Analysis Staff
4800 Buford Highway
Stop 96C
Chamblee, GA 30341
(6). There are 2019 Amended returns that were mailed in that are still
waiting to be processed. This is creating undue hardship on taxpayers
receiving lien notices for taxes not owed.
Question. What is the current backlog of unopened mail from 2019?
Why is the IRS issuing lien notices before addressing unopened mail?
IRS Response. We no longer have a backlog of unopened mail from
2019.
We are not aware of a backlog of remittances awaiting processing.
We continue to balance the need to issue lien notices and other
compliance correspondence with the possibility that we have not
processed a payment or account adjustment. As always, taxpayers who
believe that a notice they receive is incorrect should contact the IRS
at the number on the notice.
______
Questions Submitted by Senator John Boozman
1. American Families Plan Farm Impact (Ag Committee):
-- As you know, the recently proposed American Families Plan
proposes significant tax changes with respect to capital gains
tax rates, like-kind exchanges and stepped-up basis.
-- In my home state of Arkansas, the economic impact of food and
agriculture contributes to over 48,000 jobs, over $91 billion
in economic output and nearly $9 billion in taxes.
-- Administration officials, however, suggest that 98 percent of
family farms in the U.S. would not be impacted by these
proposed tax changes. What is your perspective Commissioner on
how these proposed tax changes will impact family farms and the
farm economy?
Treasury Office of Tax Policy Response. Family farms will not
be affected by the proposal to tax unrecognized gain (and thus
the increased capital gains tax rate) unless and until the farm
ceases to be both family owned and operated.
-- And can you share any analysis that the IRS has done that has
led you to reach these conclusions?
Treasury Office of Tax Policy Response. We understand that,
according to USDA data, only 2.4 percent of U.S. farms are
farms where the proprietor and his or her relatives do not own
a majority interest in the farm.
2. IRS Backlog:
-- I support a tax code and system that ensures hard-working
Arkansans keep more money in their pocket, and part of that is
ensuring that Arkansans receive the correct amount of their tax
refund, and they receive it in a timely fashion.
-- One problem I'm hearing a lot from Arkansans is that they aren't
getting their tax refunds in a timely fashion. In fact, many
constituents have told me that they've logged onto the IRS
website and have read that the IRS states ``we issue most
refunds in less than 21 calendar days.''
-- Despite that ``less than 21 calendar days'' timeline,
constituents tell me that it's taking much longer than that to
get their refund, often times double the 21-day mark and, in
some cases, up to 16 weeks. In fact, constituents have told me
that they have called the IRS after the 21-day mark, and the
IRS representatives have informed them that, given the impact
of COVID-19 on IRS staffing, that 21-day timeline is
unrealistic.
-- As you may imagine, it is extremely confusing and upsetting to
hard-working constituents to read one thing on the IRS website
and hear another, especially as they're waiting on their
important refund check.
-- While the IRS website provides information regarding IRS refund
processing during the COVID-19 pandemic, the IRS has not
updated the website to factor in the clear delays that the IRS
has in processing and distributing these refunds.
-- This delay and lack of updated timelines has resulted in a
backlog in refunds, and constituent confusion. Why does the IRS
website still provide pre-COVID timeframes, notably ``less than
21 calendar days'' in most cases, when in fact it is often
taking double that time to process and receive refunds?
IRS Response. We regularly update information on IRS.gov to
realistically reflect our processing timeframes. Please visit
our Status of Operations page for additional information and
ongoing updates here: https://www.irs.gov/newsroom/irs-
operations-during-covid-19-mission-critical-functions-continue.
As the return is processed, it may be delayed because of issues
such as errors concerning the Recovery Rebate Credit, missing
information, or suspected identity theft or fraud. If we can
fix it without contacting the taxpayer, we will. If we need
more information or need the taxpayer to verify that it was
them who sent the tax return, we will write the taxpayer a
letter. The resolution of these issues depends on how quickly
and accurately the taxpayer responds, and the ability of
trained IRS staff working under social distancing requirements
to complete the processing of the return.
-- Can I count on you to take steps to both ensure that the IRS
will update its timeframes in order to avoid confusion and
provide transparency if it cannot meet the ``less than 21
calendar days'' timeframe, and that the IRS will work to
process and distribute refunds in a timelier fashion so that
Arkansans and Americans across the country can receive their
refunds in a timely manner?
IRS Response. We understand the importance of timely
processing tax returns and issuing refunds. We have processed
all error-free returns received prior to 2021 that do not
require further review. We continue to work the returns that
need to be manually reviewed due to errors. We are rerouting
tax returns and taxpayer correspondence from locations that are
behind to locations where more staff is available, and we are
taking other actions to minimize any delays.
Tax returns are opened and processed in the order received.
As the return is processed, it may be delayed because of issues
such as errors concerning the Recovery Rebate Credit, missing
information, or suspected identity theft or fraud. If we can
fix the issue without contacting the taxpayer, we will. If we
need more information or need the taxpayer to verify that it
was them who sent the tax return, we will write the taxpayer a
letter. The resolution of these issues depends on how quickly
and accurately the taxpayer responds, and the ability of
trained IRS staff working under social distancing requirements
to complete the processing of the return.
As mentioned in our response above, we regularly update
information on IRS.gov to realistically reflect our processing
timeframes. Please visit our Status of Operations page for
additional information and ongoing updates here: https://
www.irs.gov/newsroom/irs-operations-during-covid-19-mission-
critical-functions-continue.
SUBCOMMITTEE RECESS
[Whereupon, at 3:40 p.m., Wednesday, May 19, the
subcommittee was recessed, to reconvene subject to the call of
the Chair.]