[Senate Hearing 117-585]
[From the U.S. Government Publishing Office]
S. Hrg. 117-585
THE IRS'S FISCAL YEAR 2022 BUDGET
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HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
FIRST SESSION
__________
JUNE 8, 2021
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[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
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U.S. GOVERNMENT PUBLISHING OFFICE
50-980-PDF WASHINGTON : 2023
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COMMITTEE ON FINANCE
RON WYDEN, Oregon, Chairman
DEBBIE STABENOW, Michigan MIKE CRAPO, Idaho
MARIA CANTWELL, Washington CHUCK GRASSLEY, Iowa
ROBERT MENENDEZ, New Jersey JOHN CORNYN, Texas
THOMAS R. CARPER, Delaware JOHN THUNE, South Dakota
BENJAMIN L. CARDIN, Maryland RICHARD BURR, North Carolina
SHERROD BROWN, Ohio ROB PORTMAN, Ohio
MICHAEL F. BENNET, Colorado PATRICK J. TOOMEY, Pennsylvania
ROBERT P. CASEY, Jr., Pennsylvania TIM SCOTT, South Carolina
MARK R. WARNER, Virginia BILL CASSIDY, Louisiana
SHELDON WHITEHOUSE, Rhode Island JAMES LANKFORD, Oklahoma
MAGGIE HASSAN, New Hampshire STEVE DAINES, Montana
CATHERINE CORTEZ MASTO, Nevada TODD YOUNG, Indiana
ELIZABETH WARREN, Massachusetts BEN SASSE, Nebraska
JOHN BARRASSO, Wyoming
Joshua Sheinkman, Staff Director
Gregg Richard, Republican Staff Director
(ii)
C O N T E N T S
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OPENING STATEMENTS
Page
Wyden, Hon. Ron, a U.S. Senator from Oregon, chairman, Committee
on Finance..................................................... 1
Crapo, Hon. Mike, a U.S. Senator from Idaho...................... 2
ADMINISTRATION WITNESS
Rettig, Hon. Charles P., Commissioner, Internal Revenue Service,
Washington, DC................................................. 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Crapo, Hon. Mike:
Opening statement............................................ 2
Prepared statement........................................... 47
Rettig, Hon. Charles P.:
Testimony.................................................... 5
Prepared statement........................................... 48
Responses to questions from committee members................ 54
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 97
Communication
Center for Fiscal Equity......................................... 99
(iii)
THE IRS'S FISCAL YEAR 2022 BUDGET
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TUESDAY, JUNE 8, 2021
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10 a.m.,
via Webex, in Room SD-215, Dirksen Senate Office Building, Hon.
Ron Wyden (chairman of the committee) presiding.
Present: Senators Cantwell, Menendez, Carper, Cardin,
Brown, Bennet, Warner, Whitehouse, Hassan, Cortez Masto,
Warren, Crapo, Grassley, Thune, Portman, Toomey, Cassidy,
Lankford, Daines, Young, and Sasse.
Also present: Democratic staff: Adam Carasso, Senior Tax
and Economic Advisor; Joshua Sheinkman, Staff Director; and
Tiffany Smith, Chief Tax Counsel. Republican staff: Gregg
Richard, Staff Director; Don Snyder, Tax Counsel; and Jeffrey
Wrase, Deputy Staff Director and Chief Economist.
OPENING STATEMENT OF HON. RON WYDEN, A U.S. SENATOR FROM
OREGON, CHAIRMAN, COMMITTEE ON FINANCE
The Chairman. I will give my prepared remarks in a moment.
First, a brief comment on this morning's breaking news. This
morning there appears to be a massive unauthorized disclosure
of taxpayer records. The source of this information is unclear.
Given the IRS's responsibility to protect taxpayers' data, it
has a responsibility to investigate the source of this
disclosure.
In the meantime, as reported by ProPublica, what this data
reveals is that the country's wealthiest, who profited
immensely during the pandemic, have not been paying their fair
share. I will have a proposal to change that.
Now with respect to today's hearing, the Finance Committee
welcomes Commissioner Rettig to discuss the President's 2022
budget request for the IRS. The Commissioner knows well that
this committee's interest in closing the tax gap, improving
enforcement, and fighting the unfairness in our tax laws, is a
special priority for this committee.
That starts, in my view, by going after cheating by the big
guys at the top. A few key examples, starting with wealthy
taxpayers who skip filing their tax returns altogether.
According to a 2020 report from the Inspector General for Tax
Administration, nearly a million wealthy taxpayers failed to
file returns between 2014 and 2015, dodging a total of $46
billion in taxes. Tax season came and went, they disappeared
from the radar.
Senator Whitehouse and I insisted on some explanations. Two
weeks ago, he and I got a letter from the Internal Revenue
Service that said that the agency brought charges against only
200 taxpayers for failing to file a return over a period of 6
years. Something is really out of whack here, colleagues.
On the one hand, you have a fortune going unpaid by wealthy
individuals who essentially blow off the responsibility they
share with every other American taxpayer. On the other hand,
only a couple hundred non-filers are facing charges. You would
think that the IRS would be aggressively following up on the
affluent non-
filers, but the evidence just does not show that that is the
case.
Here is a sickening example of high-earners escaping real
scrutiny. More than $2 out of every $3 earned by partnerships
in this country goes to the top 1 percent of earners. These are
sophisticated entities that bring in big revenue. However, the
most recent data shows that out of millions of partnership
returns filed in 2018, only 140 were audited. If you are a
wealthy cheat in a partnership, your odds of getting audited
are slightly higher than your odds of getting hit by a
meteorite. It is an audit rate of 0.00004 percent.
On the other hand, taxpayers who claim the EITC have been
much more likely to get audited. Again, something is just out
of whack with respect to enforcement. For the sake of fairness
and for the sake of the budget, it makes a lot more sense to go
after cheating by the big guys than focusing on working people.
The President's budget proposal has a lot to say on those
issues. The funding increases for enforcement personnel and
information technology would help to build up the IRS's ability
to handle the premier cases, which are tax evasion by the
wealthy.
At the same time, it is important to recognize that there
is history here. And the history is that the IRS has a history
of going after the little guy too often. The budget proposes
expanding the information that major financial institutions
must report about client accounts. It is absolutely critical
that the focus of that information reporting be on the wealthy
tax evaders. The budget also includes a proposal that has been
a big priority for this committee for a long time: the
authority to regulate paid tax preparers. Too many Americans
who need help filing their taxes are falling victims of
fraudsters and incompetent individuals. Taking a smart approach
and creating rules in this area will help lots of people avoid
a tax refund nightmare, particularly those of modest income who
depend on their refund every spring to make ends meet.
So there is a lot for this committee to discuss. I want to
thank Commissioner Rettig for joining us and look forward to
the discussion.
And let's now hear from our friend, Senator Crapo.
[The prepared statement of Chairman Wyden appears in the
appendix.]
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Thank you, Senator Wyden. And like you,
before I begin my formal statement, I want to comment on the
ProPublica information that came out today.
Essentially, as the chairman has said, we are seeing
information today that appears to be 15 years' worth of leaked,
confidential individual tax data from the IRS. We do not know
the details of what happened here yet or not, but this
information today is very relevant, in my opinion, to some of
the proposals that the administration has on the table to
expand the IRS's access to data on people; not just to their
tax filings, but for individuals and companies to have their
data, and financial institutions to have open access to the
IRS. And these are issues that are very significant and require
resolution.
As to my formal statement, again, Mr. Chairman, I thank you
and Commissioner Rettig for joining us today. It is safe to say
that we all support efforts to administer our Nation's tax laws
and collect taxes that are legally due.
Today we will hear from Commissioner Rettig about proposals
to massively increase the budget at the IRS, aimed largely at
increased compliance and enforcement efforts.
Commissioner Rettig, you have the chance to provide your
perspective on an array of issues, including any updated tax
gap analysis your agency is preparing, various compliance or
enforcement-related proposals contained in the President's
budget, and recently enacted spending programs that the IRS
will soon begin implementing.
Focusing on the administration's discretionary funding
request for the IRS, I look forward to hearing about how the
IRS would spend the $1.2 billion in additional funding in
fiscal year 2022, including the specific activities that the
funds would go toward, and what the expected outcome from these
activities will be.
The President's Fiscal Year 2022 budget proposes not only a
significant increase in IRS funding, but also a dedicated
mandatory flow of funding for the IRS over a 10-year period
based partly on some speculative and questionable assumptions
and analysis. Multiyear guaranteed appropriations like this are
rare, and it is important to understand whether the
circumstances actually warrant it.
It is also important to understand how much additional
funding the IRS can efficiently use, as well as the specific
implementation plans the IRS has to put any additional funding
and receipts to good use. Much has been said about the decline
in IRS funding from the 2010 fiscal year. Less has been said
about data suggesting the IRS has become at least somewhat more
efficient in the aftermath of these declines, such as the fact
that the IRS gross revenue collections have increased every
year, year over year, since 2010 from $2.34 trillion in 2010 to
$3.56 trillion in 2019.
Further, the IRS's cost of collection has decreased every
year, year over year, since 2010, from 53 cents in cost per
$100 collected in 2010, to 33 cents cost per $100 collected in
2019. Moreover, we need to better understand the actual
correlation between the IRS's enforcement budget and the
enforcement revenue it collects.
For example, IRS data shows enforcement revenues actually
increased between fiscal years 2012 to 2013, from 2013 to 2014,
2015 to 2016, 2016 to 2017, and 2017 to 2018, despite actual
enforcement spending decreasing in each of those periods.
Similarly, between fiscal years 2019 and 2020, enforcement
revenue declined by $6.4 billion, despite actual enforcement
spending increasing by $317 million. Suffice it to say we need
to better understand the facts at play here, particularly
before we rush to adopt multi-billion-dollar funding increases.
And as we all know, revenue comes from the economy, and
revenue collected is far more sensitive to the state of the
economy than it is to the size of the IRS budget, or the scope
of its enforcement. When the economy grows, revenues rise. And
when the economy shrinks or grows sluggishly, revenues fall or
grow slowly.
The administration's budget proposes several new reporting,
compliance, and enforcement regimes, including a proposal to
require near-universal disclosure to the IRS of gross inflows
and outflows for both traditional and nontraditional financial
accounts for businesses and for individuals, as well as for
third-party settlement entities.
I have long been very critical of big data collection
activity and oppose turning banks and brokers into government
tax collectors. And I have strong concerns about proposed IRS
big data requirements.
According to the budget request--and I am quoting--``This
requirement would apply to all business and personal accounts
from financial institutions, including bank loans and
investment accounts, with the exception of accounts below a
low, de minimis growth flow threshold of $600, or fair market
value of $600.''
Commissioner Rettig, you may recall that expanded 1099
information reporting was enacted in the Affordable Care Act to
include any payment over $600. And the American people soundly
rejected that provision, leading to its rapid repeal a year
later.
Absent bipartisanship in developing enhanced compliance and
enforcement activities, and public acceptance of their
legitimacy, the administration's proposals will not be durable.
The key issue for the IRS and for those of us who oversee it is
to strike the appropriate balance between rigorous enforcement
of the tax laws and heavy-handed, stifling intrusiveness.
I am concerned about the implications of many of the
President's budget proposals, including requiring additional
and highly burdensome information reporting when some existing
reporting is duplicative, and much is still not being utilized
to the fullest extent.
Proposals to increase compliance and enforcement can have
merit, but there is risk of turning the IRS--and perhaps even
private financial institutions--into huge gatherers of
information that is not necessary for tax administration and,
in my opinion, violates the privacy of Americans.
Also, in regard to compliance, I would be remiss if I did
not indicate my continued disappointment in the lack of
responsiveness of the IRS and Treasury to my inquiries. You
appeared before this committee on April 13th, Commissioner
Rettig, and I have yet not received responses from you to
questions that I asked for the record.
I also sent you a letter on May 10th with a series of
questions about the speculative and questionable tax gap
projections that you have recently put forward. I only received
a partial response to my questions late yesterday afternoon.
It is somewhat surprising for the administration to request
outsized and mandatory funding for the IRS while at the same
time not complying with basic transparency and accountability
responsibilities.
Commissioner Rettig, I look forward to your testimony, and
I do thank you for appearing here before us today.
Thank you, Mr. Chairman.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. Thank you, Senator Crapo.
Commissioner, please proceed.
STATEMENT OF HON. CHARLES P. RETTIG, COMMISSIONER, INTERNAL
REVENUE SERVICE, WASHINGTON, DC
Commissioner Rettig. Chairman Wyden, Ranking Member Crapo,
and members of the committee, thank you for the opportunity to
discuss our proposed budget for Fiscal Year 2022 and our
efforts to help taxpayers, especially during the COVID-19
pandemic, and our ongoing efforts to address the tax gap.
Before I begin, I would like to thank Congress for
recognizing the efforts of our employees during the pandemic on
behalf of the country. We are proud to serve our country and
want to provide meaningful services of nature and quality every
American deserves.
The problems facing tax administration today are not new.
It will take time to overcome the challenges of the past, and
without adequate, consistent, timely multiyear funding, the
agency will continue to struggle to replace more than 50,000
employees expected to be lost through attrition over the next 6
years, expand and train our workforce, and support
implementation of our multiyear integrated business
modernization plan, the Taxpayer First Act, as well as
continuing to enhance both meaningful service and compliance
efforts.
Like all Federal agencies, the IRS is best suited to
provide the services Americans deserve and appropriately
enforce the tax laws in support of compliant taxpayers when it
receives the resources it needs to do so. At a time when the
IRS has faced consequential resource challenges, it has also
been called upon to take on new significant responsibilities.
I believe that 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 more than $800 billion through more than
474 million payments in three rounds of Economic Impact
Payments, including refunds for filing season 2020. And so far,
in filing season 2021, the IRS and Treasury have distributed
more than $1.3 trillion.
Turning to the 2021 filing season, I am pleased to report
that the filing season has generally gone smoothly. On filing
day, May 17th, we received a record of 15.36 million returns.
Through May 28th, the IRS has processed more than 137 million
individual returns, including 101 million refunds totaling more
than $281 billion.
We are working through backlogs in returns, but we are
current on all returns received by us during calendar year
2020. Our Error Resolution System currently has about 9.4
million returns in process, which are principally due to
inconsistencies between reconciling amounts of EIPs received
for the return recovery rebate, EITC claimants claiming with
respect to 2019 versus 2020, and identity theft. We are working
through these using mandatory overtime for our employees and
exercising every effort that we can.
We are also current in opening mail. We receive between 1
and 1\1/2\ million pieces of mail per week. All of the mail is
opened within a week of receipt by the Internal Revenue
Service.
In 2021, we received more than 150 million phone calls, and
at peak we were receiving calls at the rate of 1,500 per
second. Between live and automated systems, we answered more
than 36 million calls. We have had more than 1.4 billion visits
to IRS.gov. We are on track with respect to implementation of
the statutory requirements for the Advance Child Tax Credit,
with the first payments to be received July 15th.
More than 30 million households, and more than 65 million
children, will be receiving monthly payments beginning July
15th. We will soon launch the online tools, and we invite
members and staff for a demonstration of our CTC online tool
which includes a Non-filer tool that will soon be launched, a
CTC update tool that will be launched by the end of June, an
eligibility tool, and other relevant information.
We have been doing outreach, including recently
distributing more than 30 million letters to potentially
eligible individuals. Congress can help us in our efforts by
providing direct hiring authority and consistent, timely
multiyear funding sufficient for us to provide meaningful
services on behalf of every deserving American.
You have referenced the President's Fiscal Year 2022 budget
proposal, which has three critical components--the
discretionary budget request of $13.2 billion, a 10.4-percent
increase above the 2021 enacted level; and two other portions
which are intended to build back the IRS: the Program Integrity
Allocation Adjustment, and the American Families Plan. These
streams, we believe, are important. We are willing, as Treasury
is, to meet with members and staff to discuss them. And
ultimately, we will do our best with the funding that Congress
provides, and we realize, and you realize, that we are a tax
administration agency, and we will try our best.
So, Mr. Chairman, Ranking Member, with that I invite
questions and thank you for having us appear today.
[The prepared statement of Commissioner Rettig appears in
the appendix.]
The Chairman. Thank you very much, Mr. Rettig. Let me start
with a Treasury Inspector General for Tax Administration report
that showed that 900,000 high-income taxpayers dodged $46
billion in taxes by failing to file a return between 2014 and
2016.
When we asked about the legal consequences, your office
replied in a May 25th letter that the IRS asked the Department
of Justice to charge 200 taxpayers for failing to file a return
between 2014 and 2020. Everybody else appears to have just
gotten away with not paying the taxes that they owed.
Let's start by having you explain why so few persons were
charged with failing to file a tax return over the past 6
years, when the Inspector General and others are saying tens of
thousands of high-flyers got away with shirking their duty.
Commissioner Rettig. Every high-income non-filer from tax
year 2016 forward is involved in compliance actions with the
Internal Revenue Service. The reference that you are referring
to is under 7203, which is a misdemeanor for a failure to file
an income tax return. And the statistics you have are
statistics that we provided.
There have been legislative proposals, even recently, about
making a multiyear non-filer matter a felony, as opposed to a
misdemeanor. The system is not designed to effectively address
misdemeanors. We have limited resources in our Criminal
Investigation function. Decisions have to be made based on
resources. The same people in Criminal Investigation, who are
specular at what they do, who would look at misdemeanor cases,
and the majority of misdemeanors in the Department of Justice,
if they bring those cases--that is their decision to indict--if
they bring those cases, in the majority of those cases, the
individual does not receive a period of incarceration. In the
majority of the felony cases that are brought, people receive a
period of incarceration. The incarceration is not only a
deterrent to the individual who ends up in prison, but it is
also a deterrent to other similarly situated taxpayers.
The Chairman. Let's stay----
Commissioner Rettig. We share your concerns, Senator.
The Chairman. Let's stay with this question of how the
wealthy always seem to be able to skip out on their
obligations. In 2018, the IRS audited 140 partnerships. By my
math, that is less than 0.00004 percent of the 4 million
partnership returns filed that year.
So you have a better chance of being struck by lightning
than being audited, if you are a partner in a partnership. And
this is exceptionally concerning, given that around 70 percent
of all partnership income accrues to the top 1 percent of
households.
So this is another example of the tale of two tax codes.
You have the nurses in Medford, OR, this morning treating COVID
patients. They pay taxes with every paycheck. But if you are a
millionaire who can arrange their assets through a
sophisticated, complex web of partnerships, you can abuse the
system essentially with impunity.
And I would like to know what you are going to do to have a
significant reform in this area: enforcement of large
partnerships. I think that is key to my proposition--and that
will be the heart of my proposal; it is the heart of my
proposal--to ensure that the wealthy pay their fair share.
And so, explain to me how you intend to deal with this
significant gap in tax fairness.
Commissioner Rettig. We share your concerns. Our highest
rates of attrition are in our most specialized senior
examiners. The President's budget, not only under the
discretionary budget which has funding for enforcement and
services, but under the PIA, as well as the mandatory
provisions, specifically provides for increased resources for
specialized agents looking at partnerships, wealthy
individuals, and corporations. And I believe it was at this
hearing in April, if I am not mistaken, where I indicated that,
in those arenas, we are outgunned; that the resources outside
the Service on a particular case more often than not far exceed
the resources we are able to devote. And out of 4.2 million
partnership returns--we cannot touch 4.2 million when, Service-
wide, I have 6,500 field revenue agents. And I need to deploy
those as best I can.
The Chairman. So just tell us for the record, with the
added money for enforcement that is going to get my support,
how much of an increased effort will you direct to these very
wealthy partnerships where there just has not been the focus
and scrutiny that enforcement requires?
Commissioner Rettig. Our enforcement focus--and I need to
address also that the budget also involves funding, and in the
discretionary part of the budget, the most significant increase
is in taxpayer service and modernization. But speaking to the
enforcement point, which is what we are addressing here, our
specialized agents whom we are looking to bring onboard--and it
is a significant hiring for us, and it is at three separate
levels. We are not just hiring under 5-year--if we receive the
budget--under 5-year people. We are looking at that category of
individuals. We are looking at mid-career people in their 30s
and 40s who have a degree of experience. And we are looking for
people at my level who also have a degree of experience who can
not only instruct our people but can work these cases from the
moment they come on board.
But our focus is on--and I have the list; if I have a
moment, I can provide it to you, sir. Our focus is on high-net-
worth individuals, global high wealth, large pass-throughs, the
largest pass-throughs, large corporate compliance, the ultra-
large corporate compliance, employment tax field examinations,
employment tax correspondence examinations and--I'm finishing--
transfer pricing, non-filer virtual currency, Bank Secrecy Act
Forms 8300, and abuse of transactions, both promoters and
taxpayers.
And that is our list that we are requesting the ability to
bring on specialized agents to make a determination on.
The Chairman. I would like, in writing, additional detail
about how you intend to focus in those areas. All right?
Commissioner Rettig. We will do that.
The Chairman. I would like to have it within a week,
because we are going to have to move pretty quickly on these
issues.
Senator Crapo?
Senator Crapo. Thank you very much, Mr. Chairman. I am
going to follow up on the same general topic, but from a
different perspective, Commissioner Rettig.
I completely agree that we need to make sure that those who
fail to pay taxes due are identified and are forced to pay the
tax that they owe, and pay the necessary penalties for tax
avoidance.
That being said, the President's budget calls for a new
change in the law, allowing the IRS to have what I see as near-
universal access to the reporting of Americans' financial
account information to the IRS--transactions over $600.
This proposal will carry with it a significant amount of
privacy concerns, in my opinion. Like I said, I do not have a
problem with helping the IRS get stronger ability to focus and
specialize in dealing with these wealthy individuals,
partnerships, and corporations who are avoiding tax owed under
the law. But I do not think that Americans would support giving
up access to their own private financial information to the
IRS, or to any government agency, and the information we got
today in the ProPublica circumstance is just evidence of why
Americans, I think, are going to be very concerned about giving
the IRS direct access to their financial data.
The question I have for you is, do you believe that the
American people support having their banks effectively act as
IRS agents and report on, quote, ``flows of deposits into or
withdrawals from their checking and savings accounts that
amount to more than $600''?
Commissioner Rettig. As a tax administrator, it is probably
not appropriate for me to comment on what I believe. But you
know, we see the media reports going in both directions.
The information reporting does get provided to the Internal
Revenue Service in the event of an examination. It is one of
the first things, obviously, that agents request. And they can
request informally or formally. And in part, I think there is a
strong belief that modernized systems and the ability to
actually use the information that we have and would receive
will help us lessen the burdens on some taxpayers by having us
not audit certain taxpayers, and maybe streamline the
examinations of others. But as I said, ultimately, we are tax
administrators, and we will implement to the best of our
ability what Congress approves.
Senator Crapo. Well, Commissioner, I have been working for
years, and I believe Senator Wyden has too, on privacy on the
Internet. I think that people have a right to privacy of their
data. And I do not mean just financial data, but their
activities on the Internet--and the data collection that
private-sector companies are collecting on Americans now is
phenomenal. And I think Americans are fed up with it.
I think that this proposal to literally increase the IRS's
ability to, in my opinion, violate the privacy and access the
private financial information of individuals in a manner that
is far in excess of what currently exists, is of great concern.
How can the IRS assure Americans that the information it
would receive under this proposal would be used for proper
purposes? And in light of the ProPublica information report we
saw today, how can it protect people from that kind of
violation of their own privacy?
Commissioner Rettig. The IRS is one of the largest data
warehouses in the world presently. And the IRS has
significant--I cannot speak to the ProPublica article, as I
think we have discussed; I cannot speak to anything with
respect to specific taxpayers. I can confirm that there is an
investigation with respect to the allegations that the source
of the information in that article came from the Internal
Revenue Service. Upon reviewing the article, the appropriate
contacts were made, as you would expect, and the investigators
will investigate and ultimately that will be there. But we also
have, as you know, a very strong Inspector General in TIGTA,
the GAO. We have a Taxpayer Advocate whose purpose that came in
through the 1997-1998 IRS Restructuring and Reform Act was to
provide oversight and be in-house in the IRS and uncover, if
there are issues that need to be uncovered and dealt with.
So you know, we will find out about the ProPublica article,
but we do have quite a few systems in place. And I would say
for the volume of data that we have and that gets exchanged, I
think the IRS has been very successful in protecting that data.
But we are not insensitive to your comments.
Senator Crapo. Well, thank you very much. My time has
expired, so I will not ask--I have a number of additional
questions that I will submit for the record, but I do want to
let you know that I am going to follow up on whatever we
received from you yesterday with regard to your analysis of the
tax gap. I think that we need to get much deeper into that.
Commissioner Rettig. And for all members, I am available
for one-on-ones. Members of our staff are available for one-on-
ones with members, or with your staff. I am available to meet
with your staff.
Senator Crapo. Thank you.
The Chairman. Senator Grassley?
Senator Grassley. You just answered my first question when
you said that you are investigating this ProPublica release of
secret IRS files. I assume that, if your investigation finds a
violation of the law, you are going to see that people are
prosecuted. Is that right?
Commissioner Rettig. Absolutely. I share the concerns of
every American for the sensitive and private and confidential
nature of the information the IRS receives. As you all are well
aware, I spent 36 years on the outside. I think that trust and
confidence in the Internal Revenue Service are sort of the
bedrock of asking people and requiring people to provide
financial information. And we have, as I said, turned it over
to the appropriate investigators, external and internal.
Senator Grassley. After the April 13th hearing we had, I
submitted written questions to you regarding the IRS's
administration of the Private Debt Collection program and its
implementation of changes enacted under the Taxpayer First Act.
However, I have yet to receive a response. When should I expect
to receive a response to that letter?
Commissioner Rettig. Sir, as you know, I am a huge
proponent of private debt collectors. I think that they have
been a significant help to the Internal Revenue Service, as
well as--we often have discussions about whistleblowers and
where we are headed. I see whistleblowers as a critical
component of the future of the IRS.
The responses to the questions for the record are in
clearance. They are outside of my immediate domain, if you
will. So I would anticipate soon. We have pushed to get those
released to you. And I do not take lightly the concept that,
for the ranking member, we released the letter to him last
night. I get it that that is not sufficient time to look at a
letter for a follow-up. And same with the QFRs, you should have
received them before today. I will only comment that internally
and in the clearance process, which is outside of the IRS,
people are pushing really hard. It is not an excuse, sir, it is
an explanation. But the shorthand answer is, soon. And I am
trying to be on top of that to get that information to you.
It is not without lack of attention, if you will, sir.
Senator Grassley. Last month, the Inspector General for Tax
Administration released an updated report on improper payment
rates for refundable tax credits. The report indicates the IRS
continues to struggle to meaningfully reduce improper payments
for refundable credits. Yet, according to the report, IRS and
Treasury have requested the Office of Management and Budget to
exempt refundable credits from improper payment reporting
requirements.
This comes at the same time that the current administration
is seeking massive expansion of several refundable credits. Why
would the IRS and Treasury seek to limit information available
to Congress to evaluate these credits and their proposed
expansion?
Commissioner Rettig. I do not think it is limiting
information available to Congress. I think it is more in terms
of the accounting, the Internal Revenue accounting, and would
be pleased to follow up with you. The figures will not go away.
Those figures are significant, as you are aware, if you have
seen the report. With respect to EITC, the rate is about 25
percent, about $17 billion per year. With CTC it is about 12
percent, $4.5 billion per year.
There have been proposals on the credits to essentially
merge credits and make them more administrable by the Internal
Revenue Service into something maybe along the orders of a
family credit where the IRS can rely on information in its
systems.
We do not have, for these refundable credits, information
as to, say, the residence of a dependent and such. And it makes
it extremely difficult to administer those in the ordinary
sense.
So, I will follow up with you in terms of the background
for that, but it is not to prevent Congress--I am a huge
believer in your oversight, this committee and others, a huge
believer in transparency, and equally that you are a meaningful
part of tax administration with us on behalf of this country.
So, there is no intent or incentive or desire to withhold
information. To the contrary: we need you.
Senator Grassley. I am going to have to submit my other
questions for answers in writing, but the important one for you
to answer in writing is in regard to Tax Administration saying
that there is an improper payment rate of 27.4 percent, the
highest rate of any credit, when it comes to the premium tax
cut. So, I would like to have you look at that. Thank you.
[The questions appear in the appendix.]
The Chairman. I thank my colleague.
Senator Menendez?
Senator Menendez. Thank you, Mr. Chairman.
Commissioner, let me start off by thanking the dedicated
employees of the IRS. I hope you will share that with them,
especially for their tireless work during the last year to get
stimulus checks into the hands of hardworking Americans.
Thanks to the American Rescue Plan, 27 million children
nationwide, and more than 1.6 million children in New Jersey,
are estimated to benefit from the historic expansion of the
Child Tax Credit.
So, Commissioner, given the issues with the stimulus
payments last year, how is the agency working to ensure that
all taxpayers who are eligible for the Child Tax Credit
payments will receive these payments on July the 15th and each
month thereafter?
Commissioner Rettig. Individuals who we have information
for will receive the payments commencing July 15th. It will be
based on a 2020 return, if not a 2019 return. This week we are
in process, and will complete the process by June 16th, of
sending out over 30 million, I think the number is actually 36
million, letters to potentially eligible people. It is not
saying they are eligible, but it is people we may have
information on that might indicate they might be eligible.
We have a very significant outreach program. As I indicated
earlier, we are launching one of our online tools this week. We
are launching a second online tool in the very near future. We
have invited members of this committee, and members of Congress
and staff members, for a demonstration of our online tools.
Part of our inquiry and invitation is to get feedback from
members of Congress and staff as to the tool. We are very
proud. We think Congress will be very proud. But that does not
mean that we have all the answers. We have been working with a
lot of people, and we also realize that individuals
generically, individuals do not always go to IRS.gov to get
their information, so we are working with literally thousands
and thousands of community-based organizations around the
country to distribute information. Information will be
distributed in multiple languages. A lot of this is information
that we learned in the first round of EIP, EIP1, EIP2, EIP3,
the outreach that we conducted.
We have been very fortunate to interact with more than
10,000 different organizations around the country that
previously were not interacting with the Internal Revenue
Service, based on what our core processes were. So, we have
quite a bit of outreach.
We will also be providing members of Congress and staff
with toolkits and social media that you can use in your
districts--you know, both Twitter and relevant types of things.
We need help getting the word out, as we did need help with
the EIP1, 2, and 3. We believe that the systems that are going
to launch will be as seamless as possible. That is not saying
it will be seamless. We have tested. We are testing and, you
know, with each round in this type of situation, we learn and
get better.
Senator Menendez. I appreciate that, and I will have my
staff take advantage of this offer. And we certainly want to be
a partner in this regard. You know, the reason I asked is, last
year an estimated 41 million taxpayers did not receive the
stimulus check because they received an advance on their
refund, or they did not file a tax return in advance of the
July 15, 2020 tax filing deadline.
In addition, many taxpayers, especially those with young
children, received checks that were incorrect and did not
properly reflect the number of children in their household. Now
I heard you mention an online portal. Are you launching an
online portal that allows working families to update their
information with enough time to ensure that this money can get
into their pockets by July 15th?
Commissioner Rettig. When the portals launch, they will
launch with the statutory requirements. And because, as you
know, we have moved the filing season back a month, the same
people who work on filing season EIP in the IT context are the
same people who work on this. So we got crunched, if you will,
a little bit on time. But we will launch with the statutory
requirements, and on a monthly basis thereafter, we will update
the portals.
And I should also indicate, you know, coming to the comment
that everybody does not go to IRS.gov, they will be able to
walk into an IRS office. We will have paper interactions.
People will be able to update on the phone, once they are
authenticated. We will be able to update on the phone, and
ultimately people will be able to use their personal online
account at IRS.gov to do these updates. And ultimately, we will
also be in Spanish.
Senator Menendez. Well, that is good to hear. I know you
mentioned on the phone. I just want to say that the National
Taxpayer Advocate has continually ranked the IRS customer
service as one of the most serious problems facing the agency.
With the 150 million calls that went to the IRS this year, only
7 percent of the calls reached an IRS employee.
So I am glad that we are going to have that service. But we
have to have a service that actually works. There is nothing
more frustrating to a taxpayer, to a citizen, to say you can
avail yourself of this service, and then when you avail
yourself of it, you cannot get someone to answer your question.
Commissioner Rettig. If I may comment, the level of
service, and particularly the phone, is an appropriated item.
And as I said, in the President's budget, the President asked
for funding for 75 percent. We are supposed to answer 7\1/2\
out of 10 calls. That is an item that, if we get that funding,
in the normal circumstances, we will be answering 7\1/2\ out of
10 calls. The calls currently are about 19 minutes.
Historically they were 12 minutes. Our people are proudly
interacting with Americans. We are principally the government
agency, other than SSA and VA, to interact.
And I have called on people to spend a few more minutes on
our folks' calls who are emotional. A lot of people in this
country have endured a lot of hardship, and we tend to be the
people that they reach out to. So the calls are longer calls,
and they increase volume, and have crunched that. But if, for
example, instead of 7\1/2\, it would go to 8\1/2\, that extra
10 percent of calls to be received, we would need an
appropriation of another $100 million. And every IRS employee,
myself included, wants us to answer 10 out of 10 calls. It is
not our choice.
Senator Menendez. Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Next is Senator Carper, and I think he is on the web.
Senator Carper?
Senator Carper. Thank you.
The Chairman. Senator Carper, your connection is not great.
Let's try again.
Senator Carper. There you go. Is that better?
The Chairman. Yes.
Senator Carper. Commissioner Rettig, I wanted to thank you
and your staff for spending some time with my team and me, as
we try to figure out how we are going to pay for major
investments in surface transportation--our roads, highways,
bridges--and to do so in a way that the burden does not fall
inordinately on low-
income families.
I thank you very much for trying to help us think outside
the box as we do that. So that's just a ``thank you,'' and we
look forward to continuing to work with you on that front.
Second, I want to follow on what Senator Menendez was just
questioning about, and that's customer service. What was the
old cartoon? It was Pogo, the old cartoon was Pogo--it was a
long time ago--and he said, ``We have seen the enemy, and it is
us.'' And when it comes to the poor service, the Congress and
previous administrations just cut the heck out of the IRS, year
after year after year. And we continue to change the tax code;
we make it more complex.
We have for years now not provided extra resources and
technology. It is no wonder the folks whom we are serving are
not satisfied with the service they get. We can do something
about that. I hope my colleagues and I will do our job now
going forward.
I want to ask a question. How would the IRS budget proposal
before us help the agency close the tax gap? And would the
tools in the Biden plan complement your efforts in your agency
to improve enforcement?
Commissioner Rettig. The President's proposal has three
critical components, each of which has an impact on the tax
gap. The discretionary proposal provides for basically taking
care of the attrition of the Internal Revenue Service. The PIA
and the mandatory provisions have the ability to essentially
build back the Internal Revenue Service, to rebuild both our
service and enforcement side of the house.
I think the committee is aware that we are down 17,000
enforcement personnel over the last decade, and that the tax
complexities have increased significantly. The challenges and
duties and responsibilities of the Internal Revenue Service
have similarly increased significantly over this same time
period.
The complexities of structured transactions, if you will,
by taxpayers on the outside, both corporate individuals and
pass-through entities, have increased significantly. The filing
of partnership returns, I think the most current data, is about
4.2 million partnership returns. And I think, as I have
indicated earlier, I only have about 6,500 field revenue agents
to deploy in every one of these neighborhoods, which is a
compliance challenge.
There are also provisions in the President's budget
proposal for additional information reporting, including
information reporting in the virtual currency context. We are
well aware that there are compliance challenges for folks
engaged in virtual currencies. It is a high priority for the
Internal Revenue Service and myself, together with others, and
we need to make resource decisions among those.
The President's budget is designed to provide considerable
assistance to the taxpayer service side of the house, to the
modernization side of the house, to the enforcement side of the
house, as well as operations support. And it is those four key
components that create tax administration for the Internal
Revenue Service, for the people of this country, for Congress.
And we know we can do it better, but we need appropriate
mandatory, multiyear, consistent funding to get there.
It is also critical for us, if we were to get this
legislation, that we receive direct hiring authority, which
would allow us to quickly onboard the specialized level of
individuals that we are looking for at the mid- and toward the
end of the normal career who are interested in coming on board.
And so, there is an entire package. And, sir, as we
discussed the other day, I am more than willing to meet with
you and your staff and others to get into details on what we
plan to do.
I will say, the IRS, proudly--employees of the IRS, IRS
leadership--have been working on a plan for many months. So if
Congress enacts something, do not expect us to wait 6 months to
show you what we intend to do. We are pretty close to there.
And I did a June 1st mandate a while ago for our leadership
of what I wanted to see in terms of something to ultimately be
able to share, and we were ahead of schedule. And I think you
will be proud. We need the funding. If we get the legislation,
we will show you quickly what we intend to do. But we do not
intend to wait 6 months to implement what we hope Congress
provides to us. We will be ready.
Senator Carper. Thanks so much.
Lastly, how will this budget proposal improve access to tax
filing services for both low-income and vulnerable taxpayers?
Commissioner Rettig. Well, you know, the income equality
issues--Treasury, and I know there are other Senators who are
very interested in this as well. We have worked hard with
Treasury on issues involving income equality, income
inequality, and there are working groups at Treasury who are
focused on this. We are the tax administrators. Our role in
that is essentially implementation and administrability of what
Congress and the administration might do.
And as far as the voluntary income tax, and prefile, and
the rest, you are hitting my sweet spot. The lower-income
taxpayers, the vulnerable taxpayers, the taxpayers who are
challenged with the English language, are the people whom I
think we all have a high degree of moral responsibility to, but
it is a privilege to help these folks get it right.
They, by and large, are the ones who are trying to get it
right. They get preyed upon by preparers. They may be a little
confused, and they are not comfortable with the language, but
personally I can say, for most of the IRS employees, we
consider it a privilege to be very active in these communities.
And we will continue to be so.
Senator Carper. Oliver Wendell Holmes once said, ``Taxes
are what we pay for a civilized society.'' Thank you for what
you and your team do at the IRS. We have to make sure that we
collect the taxes that are needed, so thank you.
Commissioner Rettig. Thank you, sir.
The Chairman. The time of the gentleman has expired.
Senator Cardin?
Senator Cardin. Thank you, Mr. Chairman.
Commissioner Rettig, it is a pleasure to see you.
This hearing is about your budget. I have been one of the
members who has been advocating for increased resources to the
IRS for a long time. This budget is certainly a welcome budget,
to see the increase in the President's budget for IRS. But I
think it is important to point out that, if you look at the
historic decline of support for the Internal Revenue Service,
we are just making up for what we should have done in the past,
and we still have a long way to go in regard to the resources
necessary to efficiently collect the taxes of this country.
I was listening to your exchange with Senator Menendez in
regard to the service issues, and I think we all recognize that
you play a critical role. And your workers are on the front
line and need always to have a smile with their service,
recognizing the frustration of our constituents may be directed
at them.
So I just first want to thank the workers at the IRS and to
acknowledge that I hope this is a trend that will continue: to
give you the support you need to carry out your mission.
I want to talk a little bit about the Taxpayer First Act,
which deals with some of the issues we have already talked
about. Your customer service strategy deals with cyber
concerns. It deals with protecting taxpayers, and low-income
taxpayers. It was put on hold, or sidelined as a result of
COVID-19, the implementation on some of these issues.
Can you just give us a realistic target date, if this
budget is approved by Congress, as to the implementation of the
Taxpayer First Act?
Commissioner Rettig. Quite frankly, I think that the IRS
might be living in a perfect storm. If the budget is to pass--
we have brought on a new Director of the Taxpayer First Act
office, Heather Maloy. She is instrumental in looking at
increasing staffing across all lanes. The Taxpayer First Act
provisions are critical for that.
Heather is now in daily meetings with myself in her role.
We actually launched yesterday, referring to IRS NEXT. The
Taxpayer First Act provisions will be enacted extremely
quickly. The best I can do--I am not trying to give you a
lawyer answer, but I can tell you that all hands are on deck.
What we are seeing and how we are looking at things between
funding resources, staffing, modernization, customer service--
which we know is important to you; it is very important to us--
all of these come together as a multifaceted approach to be
able to provide Americans what they deserve. And that is where
we are headed.
We are very focused on private-sector interactions with the
customer base, if you will. We are trying to replicate or
exceed where we can. We are trying to modernize our systems.
And part of the President's proposal is a catch-up, if you
will, for funding that we did not receive.
As you know, we have only received about 55 percent of the
funding that was requested for the integrated business
modernization plan. We have had to delay other projects in
order to keep that project on target. That part of the
President's proposal actually catches us up and allows us to
move at a faster pace.
So, if you will, wrapped within the Taxpayer First Act, all
lanes are coming together. As I am sure you are aware, we did
not get funding under the Taxpayer First Act, so we have been
operating essentially without funding to do what we can do. But
I will say that we have done quite a bit and, critically, I
think most of you are aware that we brought on a taxpayer-
experienced officer, Ken Corbin, and I am confident that all of
your staff are very familiar with Ken. And importantly, Ken and
I actually do randomly selected IRS employee Zoom calls. We
send out 150 invitations. About half of those who respond--the
first half to respond get a link. Multiple times a week,
employees all around the country, from Guam to Puerto Rico to
Washington, DC, get on a Zoom call with Ken and me.
Senator Cardin. So let me take you up on your offer of
keeping us informed. As you said, if you could, tell us how the
implementation is occurring, and where we are together on
expectations of what we can achieve. We know it is a challenge,
and if you would keep us informed on that----
Commissioner Rettig. Absolutely.
Senator Cardin. I want to cover one other question, if I
might, dealing with paid preparers. We talked about this
before, the lack of authority, and we have to do something
about it. The chairman has been very active and engaged in
trying to give the authority to the IRS.
But I have seen the President's budget. You are increasing
the fine against ghost preparers. That is great. But can you
enforce it? What type of enforcement are we going to have in
regard to those who are receiving fees from taxpayers but are
not reporting that on the IRS return?
Commissioner Rettig. Yes. The ghost preparers are
individuals who prepare returns but do not sign them, and they
do charge. The line on the return is for a paid return
preparer. And we do indicate, when we--I cannot explain exactly
how we get there. I know how we get there, but in a public
forum I should not indicate how we get there. But a word to the
ghost preparer community is: we know you are there. We are
focused. And we have this option coming up in terms of civil
penalties, and there could be criminal penalties. Because these
returns tend to have similar errors, and they batch returns
with the same errors, they get identified.
So we will get there. We need all the tools we can get in
terms of return preparers. And as you are well aware, they are
preying on the most vulnerable taxpayers, and not only the
lower-income folks but folks who are not comfortable with the
English language. And if you sit in one of these cases and you
see what happens to these individuals involved, you would be
highly motivated to get us all the tools you can on the
preparer world.
Senator Cardin. Thank you.
Mr. Chairman, I think this is an area that you are
interested in, and I think we should really follow up on it.
The Chairman. I very much appreciate your leadership on
this, Senator Cardin.
Senator Brown is next.
Senator Brown. Thank you, Mr. Chairman. Thanks very much
for today's hearing, and welcome back, Commissioner. You have
spent a lot of time in this committee, so thank you.
Let me start by joining my colleagues in thanking the men
and women in the IRS. You have been withstanding drastic budget
cuts, a pandemic, and frankly a Congress that has not done its
job in providing the resources you need.
As you know, Senator King and I have led efforts to provide
you with more funding. I am very happy the President has put
forward a proposal to do this. And I echo the words of the
Senators I have listened to in the last few minutes--Senators
Carper and Cardin, I know others, Senator Menendez also--who
talked about this.
One of the most important parts of the American Rescue Plan
was the expansion of the Child Tax Credit. As you know, I have
asked you about this before. Secretary Yellen is going to begin
in July, given what she is doing with the Child Tax Credit, the
monthly payments. We, in the Rescue Plan, also expanded the
Earned Income Tax Credit for workers not raising children in
the home.
We know that 20 percent of people eligible for the EITC do
not claim it--one out of five. Many families, because of the
Rescue Plan, will be eligible for the first time. So I want to
follow up on Senator Menendez's questions.
Commissioner, how will the IRS use increased funding to
better reach and better serve filers eligible for the EITC, and
now the CTC, and to increase take-up of the EITC? What are your
plans?
Commissioner Rettig. I will indicate that present
indications are that we will spend more than the funding that
we have been appropriated with respect to the CTC, given the
extent of outreach efforts that we are undertaking and plan to
undertake.
This includes meetings around the country that we have
already had, a CTC summit with more than 25 representatives of
community groups. We have had interactions with a lot of people
around the country. We sent out 30 million letters this week.
They will be completed by the 16th.
We have three rounds of outreach letters going out to
individuals about awareness. We are launching our online tools
soon, which include four different tools: IRS.gov landing page,
the Non-filer tool, the CTC update tool, frequently asked
questions that will be posted. And an eligibility tool will be
similar to the EITC assistance tool that many of you are
familiar with. And in terms of the outreach, we are
coordinating with the same community groups and trying to
expand that with respect to EIP1, 2, and 3. And we are on the
ground throughout the country.
We also, as I may have indicated earlier, will be providing
tool kits to every member of Congress, as we did with respect
to EIP. We will be providing tool kits to different State
agencies, as well as State taxing authorities around the
country, and agencies that principally are providing other
types of benefits to individuals.
We have a lot of media outlets, and the scope, if you will,
of outreach for the IRS has greatly expanded really as a result
of EIP1, 2, and 3. This has been fantastic for us in terms of
getting into the community.
Senator Brown. Thank you, Commissioner. There are a number
of people on this committee who care about this. I just saw on
my screen one of the real leaders in this, Senator Bennet, and
he and I and others will continue to talk to you, particularly
as the July date approaches.
Let me shift in my last couple of minutes, Mr. Chair, to
compliance. My constituents in Ohio, whether they punch a clock
or swipe a badge, they have to pay the taxes they legally owe.
And when people beat the system, that means that workers doing
an honest day's work in small businesses playing by the rules
are exploited by the rich guys outrunning the IRS.
Part of the problem is that their income--for IRS,
obviously, their income is more complex. We do not have
adequate reporting, and the money is harder to follow, making
it easier for them to get away with not paying what they owe.
You obviously know that.
Tell us, if you would--I mean, the President's proposal
benefits honest taxpayers who have to compete with the
dishonest cheats. Tell me--tell us, how much revenue would this
bring in, without raising taxes by a penny, that we could use
to pay for investments in infrastructure and other things, if
we were able to get 100-
percent compliance? What would it mean?
Commissioner Rettig. Well, you know, I really leave the
computations to the Office of Tax Analysis at Treasury and
others, and I think, like you, we have seen figures that range
from $1.4 trillion, $700 billion, to hundreds of billions of
dollars. What I can indicate, based on my private practice
experience and my tenure here at the Internal Revenue Service,
is that giving us the appropriate resources will be an absolute
game changer for this country, both in terms of services to
taxpayers, and enforcement.
And enforcement supports compliant taxpayers, the more that
people understand that the IRS is doing its job. And to do our
job we need resources, we need consistent, multiyear funding.
We need mandatory funding. We need direct hiring authority. We
will do our job. We will hire the people we need to hire. But
we absolutely have to have the resources to do so.
We will work with Congress. I am more than willing to come
up, meet collectively, individually, and walk through it. And I
think previously at this hearing I indicated that my
anticipation was we should be able to collect--whatever the
actual tax gap is--we should be able to collect somewhere
between 10 and 20 percent with an understanding that, with the
people we bring on board, there will be a curve. We will not be
as effective initially when we onboard everybody, but this
agency, with the desire of our employees, is very good at what
it does, and we respect the rights of taxpayers.
I am incensed at the folks who say that we are going to
treat taxpayers on the street unfairly. We are not. And our
employees live in the communities that we examine, that we
interact with, and we are very proud to do so. So this is not
an agency--and I am familiar with the history of Senator Roth's
hearings in 1998, and what led to those hearings--this is not
that agency.
Our employees--and I think they have shown it with respect
to EIP1, 2, and 3 and getting back into the office--our
employees are proud to do what they are doing. Give us the
resources, and we will make you proud as well.
The Chairman. Thank you very much. It is an important
issue, Senator Brown.
Senator Cantwell?
Senator Cantwell. Thank you, Mr. Chairman.
Thank you for being here today, Commissioner. Following up
on that resource question, I know that the IRS has lost a lot
of employees since 2010, tens of thousands of employees since
then. And so there is a lot of discussion today about
corporations and high-income filers, and you have made
statements that some of the budget requests by the
administration, I think 4,500 new employees you are proposing,
would work on those high-income filers and those
investigations.
But you know, we have just had roundtables with some of our
small business owners, and I heard a longstanding concern,
which is just that we need more people at the IRS to be
answering phone calls about basic things for small businesses.
So what portion of that new hiring do you think would go to
those kind of activities?
Commissioner Rettig. In the President's budget request, the
highest in the discretionary, the highest allocation--and I am
searching for the number which I have here somewhere--is 13
percent for taxpayer services, which is exactly the folks that
you are referring to. And it is about 9 percent for
enforcement, and then it is about 36 percent for modernization,
which also provides taxpayer services, the ability to interact
with us in a seamless and comfortable manner.
So that is all in the discretionary budget for the
administration. The PIA is enforcement-oriented because we are
down 17,000 enforcement personnel. And when I use the term
``enforcement,'' that is not just front-line revenue agents,
revenue officers, but that would include appeals officers, it
would include taxpayer advocate representatives, it would
include IRS counsel people. It is sort of a package. We cannot
just increase one piece of the IRS when the IRS's tax
administration is a process.
And at a House hearing recently, I made a comment.
Everybody is focused on the IRS, and budget, and staffing, and
resources. Keep in mind that in the district courts, the claims
courts, the bankruptcy courts, and in criminal prosecutions,
the Department of Justice handles those matters for us. They
represent the interests of the Internal Revenue Service. And if
we get a significant increase in staffing and the Department of
Justice, specifically the Tax Division, does not, you should
anticipate a bottleneck on us giving them cases that they are
unable to handle because of their staffing issues.
They are a significant part of both civil and criminal tax
administration in this country. But we are focused on all lanes
of the IRS, and significantly in the service lane.
Senator Cantwell. So is it----
Commissioner Rettig. I--excuse me. I come from a small
business family. I was a small business owner on the outside
and, you know, we do not intend to leave anybody behind.
Senator Cantwell. Great. Well, I am definitely hearing from
people that they are feeling left behind, at least in some of
the cases where they're affected, so I am appreciating that
that largest amount, you are saying 13 percent, would go to
that. So if someone could follow up with me just on what you
think that would mean as it relates to services, or improvement
in services, that would be so helpful.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
Senator Portman?
Senator Portman. Thank you, Mr. Chairman.
Commissioner, welcome back.
Commissioner Rettig. Thank you.
Senator Portman. We had a good conversation with you only
about a month and a half ago, and I definitely need to talk
about a number of those issues, but in terms of compliance, you
and I had a discussion about the need for better taxpayer
service.
Senator Cardin and I wrote this bill called the Protecting
Taxpayers Act, some of which is now being implemented, and I
appreciate that. It is part of the Taxpayer First Act.
But this modernization effort is never-ending. And the
challenges are more sophisticated. I want to talk about
cryptocurrency for a second.
We talked about digital assets and cryptocurrency back in
April when you were before us, and you talked about the low
visibility of these taxpayers and the importance of their
compliance in closing the tax gap. I talked about how we were
working on potential legislation to address that.
I want to ask you a couple of questions about it. I noticed
in the budget that you have $41 million to expand cyber-crimes
efforts, and $32 million for crypto-related enforcement
operations. You have also proposed additional information
reporting for businesses that receive crypto assets with a fair
market value of more than $10,000.
In addressing the issues related to information reporting
on cryptocurrency, do you feel that the IRS has the necessary
authority to issue appropriate regulations?
Commissioner Rettig. I think we need congressional
authority. When we get challenged--as you are aware, we get
challenged frequently. And to have a clear dictate from
Congress on the authority of us to collect that information is
critical. And the most recent market cap in that world, in the
crypto world, exceeded $2 trillion and more than 8,600
exchanges worldwide. And by design, most crypto virtual
currencies are designed to stay off the radar screen. So you
know, we will be challenged.
Right now, what we do is we issue John Doe summonses, and
it is highly public. We recently did that. We are very active
in both the civil and the criminal enforcement world. We do
need additional tools, and we absolutely need additional
resources.
Senator Portman. Okay. Well, I appreciate that answer. And
as you know, we want to work with you. We have circulated some
ideas, including with some of the stakeholders, and we want to
be sure that we get your input on that as it relates to
cryptocurrency and digital assets.
Commissioner Rettig. We would appreciate the opportunity to
work with you.
Senator Portman. Thank you.
On the issue of staffing, I support more resources for the
IRS. I have for years, since I was involved in the reform
efforts a couple of decades ago. And for my small business
constituents back in Ohio, and individuals who are having to
struggle with this over-complicated tax code, you want smart,
effective people at the IRS to work with. And the
professionalism is important; the training is important.
One of my concerns is, you are asking for a lot of new
people, and it takes a lot to train them up. And I see that you
have asked for hiring of at least 5,000 new personnel for
enforcement alone, but you say it should not exceed a
manageable 15 percent per year. Over 10 years, it seems that
probably would double the IRS workforce.
So do you have the ability to train these people up and to
make them effective? And second, do you have the workforce out
there to tap into? In other words, are you having trouble
hiring people?
Commissioner Rettig. We are actually looking at hiring, and
I may have indicated earlier, we started developing a plan
months ago. We went a little bit at risk, if you will. And so,
if we receive legislation, we will be able to implement quickly
upon that receipt of the legislation. But our view, and my view
is, we are looking at different categories and individuals. We
are not looking necessarily, as one might think, for
individuals with less than 5 or 10 years of experience on the
outside. We are looking for that category, certainly, but we
are also looking for the mid-career people, maybe aged 35 to
45.
We are also looking for people at my age category, and
those last two categories can come in and hit the ground
running, both in terms of managing a team of, if you will,
examiners if they are on the enforcement side, as well as being
instructors. And we need private-sector people to come in and
help us in terms of instructing, particularly in the
partnership and virtual currency world, to come in and serve as
instructors to the middle and lower--lesser experienced, if you
will--folks.
So we have a variety of plans. We also are working on our
outreach to different communities; not just the professional
communities, but colleges, institutions, and others. We also
are working on facilities where we would place facilities for
the increase in personnel. And I think the committee may be
aware that, proudly, we recently opened a facility in Puerto
Rico. And for the first time in a long time, we received more
applicants, more qualified applicants, than we posted for that
position, and we benefited with the folks there who were also--
many of them were also multilingual.
We are also looking at opening facilities in certain
underserved communities, and we are already on the ground in
those communities. We are going to see what we can do in terms
of opening facilities, should we receive legislation.
I give you that as an indication that we are not waiting
for legislation. We will be ready.
Senator Portman. But you will need the appropriation of
additional funding to be able to follow through on it.
Commissioner Rettig. Absolutely. Without the funding----
Senator Portman. Well, thank you, Mr. Chairman. I think the
oversight responsibilities of this committee are such that it
would be good to continue to have this discussion and be sure
that, you know, we are on board with regard to the plans.
The Chairman. We have Senator Thune waiting, and I
certainly share your thoughts there.
Senator Thune?
[Pause.]
The Chairman. Senator Thune? The report was that you were
on----
Senator Thune. I've got you. Sorry. I'm sorry, Mr.
Chairman; I did not push the button.
The Chairman. Go right ahead.
Senator Thune. Thanks. Commissioner, good morning, and
welcome back to the committee. And thanks again for your
service.
According to the IRS, overall tax compliance rates have
been holding steady around 85 percent since the 1980s.
Voluntary tax compliance has been around 82 to 84 percent, and
net tax compliance around 85 to 86 percent after late payments
and enforcement.
Would you say that the U.S. has a relatively high and
stable tax compliance rate----
Commissioner Rettig. I believe that----
Senator Thune [continuing]. And how does the U.S. voluntary
tax compliance rate compare with other countries, particularly
OECD countries, would you say?
Commissioner Rettig. I do not have the data on the OECD
countries, but I do believe that, particularly among
sophisticated countries, a compliance rate in the low 80s is
meaningful. And keep in mind that the compliance rate is based
on the data that we are aware of based on identified
noncompliance.
Senator Thune. So given the number, different numbers being
thrown around about the size of the tax gap, I am wondering,
like a lot of people are, how we deal with the measure of
whether we are narrowing that gap, if we cannot even agree on
the size of it.
The latest official IRS estimates show a reduced tax gap
compared to prior years in this century, which is a good thing,
but the tax gap clearly remains a problem. Let me ask you, what
is the agency doing to improve how it estimates the tax gap so
we can get a number that is more timely and more accurate?
Commissioner Rettig. Well, when I got on board--the last
tax gap estimate when I got on board was a few years prior to
2019, estimating tax gap information for 2011 and 2013.
Personally, I think it was unacceptable in terms of
developing an audit plan moving forward. One, it is already, at
this time, about 7 years old. Two, it's an economy that is not
a digital world economy. Three, we looked to an economy that
did not have a virtual currency, and many other types of
monetary type of transactions that were out there. It also did
not address inbound transactions, if you will. Foreign-based
taxpayers doing business in the United States are completely
absent from our computations.
So I gave the challenge to our RAAS unit, which is our
research unit. And in the recent testimony, the Acting Director
of RAAS testified that he believed that the 2019 tax gap figure
was about $646 billion, before you get to the rest of the
items.
What we are comfortable saying is, the tax gap is
significant. Significant resources will help us put a
significant impact, if you will--and I apologize for using that
term three times--on the tax gap. And we have said that we
believe that we can, with appropriate resources, with
modernization, and the implementation of that staffing and
training and all that, that we should be able to recover about
between 10 and 20 percent of the tax gap on an annual basis.
I think that the desire of every IRS employee is to recover
more of that, more than the 20 percent. I think it is fair for
Congress to hold us to, if you give us the resources, to
provide you with metrics of what we are doing, how we are
doing, and the impact it has in terms of taxpayer service, as
well as on the enforcement side of the house. And you know,
what ultimately should be the question on measurement is the
deterrent factor rather than what we are able to actually
capture.
But we are going to issue tax gap reports for 2012, 2013,
and 2014 in 2022. We are also going to issue some forecasting
into the current years, because this data is important for us
to determine what we are doing currently. So having 7-year-old
data, personally I thought was somewhat unacceptable to develop
work plans today.
And for about 2 years now--and I have been on board less
than 3 years--but for about 2 years now our RAAS group has been
working very hard and has made a lot of progress, and we hope
to be able to share that with you.
So, during 2022, we will issue the next group, if you will.
We need to get this data more current. We know you want to know
it, and we need to know it. So we are focused. We have been
focused on that. And the tax gap is both--service and
enforcement have an impact. And voluntary taxpayers need help.
If we just increase those rates that you mentioned 1 percent--
and you consider IRS brings in about $3.5 trillion each year--a
1-percent increase in voluntary compliance by itself is $35
billion per year.
The Chairman. I thank my colleague----
Senator Thune. Mr. Chairman, I would quickly point out
before my time expires--I would just say to the Commissioner
that I think one of the reasons too is people cannot get
through, and I think high-quality customer service will help
with voluntary tax compliance. And we get lots of calls from
people who wait for hours on the phone. According to the
National Taxpayer Advocate, only about 2 out every 100 phone
calls were getting through.
So I think that would be a huge improvement as well.
The Chairman. I thank my colleague.
Senator Lankford is next.
Senator Lankford. Mr. Chairman, thank you. Commissionr, it
is good to see you again. Thanks for being here and going
through so many different questions.
Can I ask a question on just your operations? When will you
get operations fully up, post-COVID, for face-to-face meetings,
for interactions? What is your time frame at this point?
Commissioner Rettig. We are open. Our submission processing
centers are open. They are actually working multiple shifts.
They are working weekends. This is our filing group. Our mail
is--we get about 1 to 1.5 million pieces of mail per week. We
got 1.2 million pieces of mail last week.
The mail is being opened in less than a week and put into
processing. So that is people on the ground doing it, and the
quality of the employees that we have is spectacular.
Our interactions--we flipped to a virtual environment, like
the rest of the world. We will stay in a teleworking virtual
environment somewhat indefinitely. I do have a concern in
onboarding people. A lot of people out in the private sector
want to have a virtual environment. We need to train. You
cannot train--my example, 704(b) regs--remotely when people are
multitasking. We need to have people understand what we are
training them.
And similarly, the collegiality and learning what it is
that we do and what we do not do, we need to have people--I am
a little old-school, and I understand that--but in my mind,
people need to be around people to pick up some of that. So we
have to hit the right blend. We are working with NTEU
significantly on what is the right model for our agency.
And we have different categories of individuals.
You know, we have people who open mail right through to the
most sophisticated cybersecurity folks on the planet. And we
intend to get this right. But I will say, a silver lining, in
March of 2020, our customer service representatives, the folks
who answer the phone, only 3 percent were telework-eligible. A
hundred percent are currently telework-eligible. And where that
came as a benefit is when we had the snowstorms and the cold
fronts and had to shut down some of our facilities; those folks
could go to work at home. So we have had some benefit.
Senator Lankford. I am going to have some follow-up with
you on that, on dealing with remote work long-term and the
possibility that you could expand your pool of individuals to
be able to hire from anywhere across the world. Quite frankly,
if they are working for some of our U.S. military and their
spouses and other folks, I would love to be able to work with
you and be able----
Commissioner Rettig. We are engaged with military spouses,
and they tend to be excellent employees for us----
Senator Lankford. So let's discuss that.
I want to ask about this bank reporting proposal that has
come out in the President's budget. His proposal is requiring
financial institutions, banks, to report any transactions of
$600 or more. Obviously, that captures a tremendous number of
transactions from banks.
I think a lot of American people already do not know that
$10,000 or more is already reported, and this would take that
to $600 or more. So my questions are, do you need that level,
that granular level of information from banks for the IRS to be
able to validate reporting?
Commissioner Rettig. Similar with what happened when FATCA
came in and we got FATCA reporting, we did not have the funding
to modernize our systems to handle the reporting that we were
receiving. So we remained behind the curve in our ability to
use that information.
To the extent that we get additional reporting information
here, we absolutely must have funding. And these are somewhat
separate lanes, but it is all interconnected, funding to
actually process information. And critically, it is not just--
everybody is focused on our ability to process information for
enforcement and examination leads. It is similarly important
for us to be able to process information so we know the
taxpayers not to examine, to lessen the burden that we would
otherwise place on taxpayers based upon information there.
So, we need modernization. We need analysts. And we need,
you know, service representatives on that.
Senator Lankford. What would you need budget-wise to just
fulfill that? And is that $600 transaction amount something
that IRS requested to be included? Where did that number come
from?
Commissioner Rettig. Those proposals are from the
administration and from Treasury.
Senator Lankford. So, what level of funding would you need
to be able to process that level of information? Because that
is a lot of information the administration is asking for.
Commissioner Rettig. Yes, I would have to get you the
specifics on that breakout. I do not have the specifics----
Senator Lankford. Well, I would assume it is exponentially
larger than the $10,000. With the $10,000 transactions turning
around now and dropping it to $600, it is going to catch, I
cannot even imagine how many more. You are telling me now you
do not have the resources to be able to fulfill the $10,000
reports that are coming in. Is that correct?
Commissioner Rettig. We need resources across all lanes to
be effective. Giving us one lane and then--you know, quite
frankly, it has been troublesome being on board when we see our
Inspector General say IRS is not doing this, this, and this,
but we do not have the funding to do that. So we sort of get
caught in that. So, all lanes need to be funded. These
provisions are interconnected.
Senator Lankford. Okay. Thank you, Mr. Chairman.
The Chairman. The time of the gentleman has expired.
Senator Casey is next.
Senator Casey. Thank you, Mr. Chairman. I want to thank the
Commissioner for his appearance and for his public service.
I want to thank you as well, Commissioner, for the
remarkable and, what can only be described as an enormous
effort you have had to undertake, and your team has undertaken
in the course of the pandemic. And I have and will continue to
advocate for the IRS to have the resources which are so
critical to fulfill its responsibilities.
In this committee's April hearing, you projected that the
tax gap could be as high as $1 trillion, meaning $1 trillion in
taxes going unpaid every year. We know that many of these non-
filers are high-income individuals. I have heard from many
Pennsylvanians since then, since April, who are concerned, if
not outraged, about this gap and would like to see all
taxpayers play by the same rules.
The President's 2022 budget request has funding requested
to scale up both staffing and operations at the IRS to expand
both enforcement and compliance. Can you explain how that
additional funding would assist the IRS in going after tax
cheats and ensuring that all taxpayers are paying their fair
share?
Commissioner Rettig. You know, I have 17 months left in my
term. If Congress gives us the funds, we will implement. We are
ahead of the curve to implement legislation that has not yet
passed. That should be--and we are willing to come up and show
what we have and where we do it. But that should give an
indication of the desire--it is not just me, but me and
everybody else. We want to be impactful on services. We want
people to receive the services they deserve from the Internal
Revenue Service. And we are well aware--I came in with the same
thing, I think, probably in my confirmation hearing, but
certainly through today, I have always said the same thing. And
I have said it for 36 years on the outside, that enforcement
supports compliant taxpayers; that the bulk of the revenue this
country receives comes from compliant taxpayers.
You are well aware that my--I am very proud, but I think I
am the first Commissioner whose spouse came to this country as
a refugee. My in-laws are not comfortable in the English
language. I have a line of sight into vulnerable communities. I
come from a mother who was raised in a storeroom to a diner,
and I learned as a child how you take a shower with a sink in a
diner.
We have lines of sight there. We can improve the conditions
for every American. And the people who make an effort to comply
need to know that we are there to help them. I think
significantly during 2020, I could have come to you and said,
``We have a plan for languages.'' But in September of last
year, we launched a language program during the pandemic when
we were on our heels in so many different directions. And the
2020 1040 is in English and Spanish.
You can call into our centers and get your information
services in more than 350 languages. And there is a Schedule
LEP on the 2020 1040 where individuals can check a box and ask
the Internal Revenue Service to communicate in a different
language. As of March, more than 220,000 individuals checked
that box.
Those types of services, to me, are equally important as
the enforcement side. I only have 6,500 field revenue agents.
We need more. And I am running out of runway, as they say, on
the outside in terms of my term. This agency will do the right
thing well beyond me, but I, like you, want to help them get
there.
People came on board when I did with considerable private
practice experience in the lanes that we are going to receive
funding to be impactful in, and we are doing our best. So I
think you will be proud, but without funding--if you just look
at one category, 6,500 field revenue agents, 4.2 million
partnership returns, that is before we get to the high-wealth
individuals and the corporations and the this and the that.
Senator Casey. Commissioner, thanks. We look forward to
working with you on those human resources, because I think the
Congress, both parties, both Houses, are duty-bound to get you
the resources, if we believe what we say.
Last--and I know I am out of time. Maybe I will submit this
for the record. It might be easier for the committee purposes.
But I want to send you a question about tax scams. But I am
running out of time, so I will make sure that we send you that
question for the record.
Commissioner Rettig. And I am available to meet with the
members one on one, or just to meet with your staff. Place the
call. We are here. That is what we do.
[The question appears in the appendix.]
Senator Casey. Commissioner, thank you very much. Thank
you.
The Chairman. And thank you for your efforts, particularly
as chair of the Aging Committee, in going after tax scams,
Senator Casey.
Next we have Senator Bennet, who I think is online.
Senator Bennet. Thank you, Mr. Chairman. Can you hear me,
Mr. Chairman?
The Chairman. We can hear you, Senator Bennet.
Senator Bennet. Thank you very much. And thank you,
Commissioner, for your testimony today.
And I know others have asked about the Child Tax Credit,
which, as you know, the American Rescue Plan significantly
expanded. The expansion is based on my bill with Senator Brown,
the American Family Act, which will give 96 percent of American
families advanced payments of $250 per month per child or $300
per month per child under the age of 6. This expansion will cut
childhood poverty nearly in half this year, with even larger
effects for kids of color.
I am deeply grateful, I want to first say, Commissioner,
for what you and the IRS staff have done to ensure that
Americans will receive a monthly CTC payment starting on July
15th. And I am really pleased by Treasury's announcement that
88 percent of children will receive these benefits without
further action needed from their families.
I think it is fair to say, Commissioner, that you were a
big part of making sure that that could happen, because of the
work that you had done before.
I wonder if you could talk a little bit about how the
resources in your fiscal year 2022 budget request help IRS
ensure payments get to the hardest-to-reach populations. And I
also should say that I am thrilled that the Biden
administration is committed to extending the State and monthly
CTC through at least 2025.
I plan to do everything I can do in my power, along with
Senator Brown and many of our colleagues, to make it permanent.
In the long term, if extended or made permanent, what
additional resources, both ongoing and one-time, should
Congress consider giving the IRS to ensure monthly CTC payments
are made as smoothly and as systematically as possible to reach
all eligible children?
Commissioner Rettig. The amount of money--if Congress was
to pass legislation, we would be able to provide information as
to the amount of funding required to operate this on a
permanent basis. But we would need to see the legislation to
see what the requirements are for us to be able to do so. And
we would be able to do so--we would really appreciate, and we
do appreciate the fact that, to the extent Congress works with
us on legislation, it is very important, I can say from what I
have seen in my almost 3 years, that we get involved in terms
of helping with respect to the administrability of provisions
so that we can provide seamless assistance to the folks.
I will say, with respect to CTC, you should expect, and you
should hope, and you should require that we do historic
outreach--and we are doing historic outreach. We are
capitalizing on the outreach that we did with respect to the
three rounds of EIP--EIP1, 2, and 3--I guess affectionately
referred to now on the street as the ``stimmies.'' But we
learned a lot. We created a lot of partnerships, if you will,
with community organizations. Those have served us well.
We have, this week, sent out 30 million letters that will
be completed for potentially eligible people. We have four
rounds of letters going out. If we need to do more letters, we
will do more letters. I made a comment earlier that our present
estimate is that we will be spending more money than we were
funded with respect to the 6 months because of outreach. This
is not an agency that folds up when there is no more money left
to spend. We actually delay other activities so that we can do
what you would want us to do. And the outreach is a significant
component here.
So, I think you will be proud of the online tools, and I
invite you and your staff to a demonstration of those tools.
Senator Bennet. Well, Commissioner, again, one of the
partners you got during the previous work you were talking
about was my office. I am very grateful for the spirit with
which you are approaching this work. So, anything we can do to
help, we stand ready to help.
Turning to a different subject in the last minute that I
have, Commissioner, I--and I know a number of my colleagues on
this committee--are deeply, deeply concerned that some of our
Nation's largest, most successful companies like Amazon and
their exceedingly well-off owners pay little or no Federal tax.
Now many small businesses have lost income, and families have
lost jobs during the pandemic. Many of these large companies
have seen profits soar to unprecedented heights.
In your view, how much of this problem is caused by
loopholes or tax expenditures written into our Nation's tax
laws? And how much of it is due to actual evasions, such as
companies shifting income overseas? And how will the fiscal
year 2022 budget request help IRS address tax evasion by large
companies?
Commissioner Rettig. I think it is a combination. You know,
I was on the outside between, you know--well, until I came on
board here--but what we saw in terms of transactions and
structuring happened when the IRS essentially was on its back
from the Roth hearings from 1998 through about 2002, 2003.
I do not think it is a coincidence that structuring got
much more aggressive in the planning community. I am not saying
that it is appropriate or inappropriate that people tend to
take advantage if they see the IRS is vulnerable.
We are not vulnerable when we are on the scene. We are not
vulnerable as to the taxpayers that we are able to contact. And
in the transfer pricing--I think that is one of the comments
that you made--in the transfer pricing arena, we have cases
that are exceeding $5 and $10 billion. And if you are the
taxpayer in one of those cases, you are going to spend a
billion dollars to save, you know, $4 to $9 billion. And keep
in mind, IRS has a budget of maybe $12 billion total to run the
entire operation.
We need funding to be impactful. We need specialized
agents. We need training. We need people from the outside. We
need people from the inside. And none of what I have said about
hiring people from the outside should be disparaging to the
people on the inside. We need a blend of expertise, and we need
to be able to be on watch. This country deserves to have the
best tax administration agency on the planet. It should
appropriately fund the agency.
We need direct hiring authority. We need consistent,
multiyear, timely funding, mandatory funding. And I believe,
and with your oversight and interactions, I believe you will be
proud of what we do to get to the term that people use:
``Everyone pays their fair share.''
There is a difference between evasion, as you have
identified, between evasion and aggressive transactions. But
the aggressive transactions, in my estimation--I was not on the
planning side on the outside; I was a controversy lawyer--but
they get more aggressive if they think that we are vulnerable.
And you know, I've got to tell you, we are not vulnerable to
the people we are able to touch, but the taxpayers that we are
not able to touch, we are not able to touch. Help us. Help us
get there. The desire is there.
Senator Bennet. Thank you, Commissioner.
Thank you, Mr. Chairman.
The Chairman. I thank my colleague.
I believe Senator Warner is going to go next, and he is on
the web.
Senator Warner. Thank you, Mr. Chairman. I appreciate you
holding this hearing.
Commissioner Rettig, first of all let me--and I am sure
other members have said this--express my thanks to you and all
of your staff. I hope you will convey that. I know it has been
a challenging last 15 months, and I have had, and my staff has
shared some of the frustrations with closed offices and all. I
do think the agency, writ large, has performed well.
You just, in your last impassioned statement to Senator
Bennet--I would like to pick up on a couple of those threads.
Can you talk a little bit about how much more effective and
predictable it would be, and what are the specific benefits
that would come from a stable, multiyear funding stream for the
agency? How much money is wasted, or how many activities are
put on hold because of some of our bad behavior in Congress in
terms of continuing resolutions and threats of budget
shutdowns?
Commissioner Rettig. You know, the lack of consistent
funding causes the agency--the way the agency adjusts its
budget is, it has attrition. And when we do not get funding, we
do not replace the people who retire.
We have been stellar in the last 3 years in our ability to
hire and move people around internally. And it has made a huge
difference. When I got on board, one of the comments that I
heard was that we will be able to replace, you know, plan on
replacing maybe 25 percent of attritions. That is of an agency
that already has, if you will, 17,000 fewer enforcement agents.
How can that be? How can you plan on having tax
administration in the greatest country on the planet and only
replace 25 percent of the most experienced people you have,
when you need those people to train the new people? We had a
hiring gap from 2011 to 2018 which means that--you know, I use
that in terms of recruitment. I tell people, ``There is nobody
above you. To the extent you have come on board, you train, and
you learn, you can be all you want to be inside our agency.''
And that is true. And we are very hopeful to get the funding to
be able to be impactful to provide both services. And you know,
the press seems to just pick up on the enforcement side of the
President's budget, but the highest category in the
discretionary budget is for services and for modernization--13-
percent increase for services, 36-percent for modernization.
Those two go to helping underserved communities. They go to
helping us answer the phones, to getting chat bots, to having
it be an experience like people would have in dealing with the
private sector.
We want to be there. The desire is there. The staffing
issues that we have are significant. We have 52,000 people to
replace in the next 6 years. That is the net figure. That is
our experience on the----
Senator Warner. Let me just ask on that note, on
replacement, are there additional--you have talked about the
need to get specialized personnel. Are there additional
authorities you need beyond the money for you to be able to go
out and hire the right people?
Commissioner Rettig. Absolutely. We must have direct hiring
authority. I cannot go into the private sector and try to
recruit mid-level, even new, but mid-level or senior-level
people to come on board who would be immediately impactful,
people who have my experience--maybe not my age, but maybe my
age--who can come in and be impactful and run teams of
examiners, or teams of lawyers, or teams of appeals officers in
the entire compliance side of the house, immediately. To have
the experience on the outside, but without direct hiring
authority I cannot keep these people interested in coming
onboard for a 3-, 6- or 9-month period. They will go elsewhere,
or decide they are just going to either retire or do what they
are doing.
We need to capitalize on the interest that we are able to
generate. There are a lot of people like myself who want to
come on board for the good of the country, if you will, but we
need to bring them on board when we have that interest. You
know, interest wanes with time. And the mid- and senior career
people are not coming on board for the economics of it. I did
not come on board with the idea to go get my dream job after
being Commissioner. I left my dream job with my best friends,
and I have frequently said in public, my next job is not going
to involve suits----
Senator Warner. Let me get in one last quick question,
which is--and this may have been asked, and if it has, I
apologize. I think you made a good point earlier. We have
focused on tax evasion, but the other half of that is just
plain aggressively pushing the edge, trying to be legal but
pushing the edge.
When we think about that tax gap, the $700 billion or $1
trillion, or whatever number, could you give us some
guesstimate on how much of that is evasion, and how much of
that is overly aggressive behavior?
Commissioner Rettig. If I look at my experience on the
outside, in terms of numbers, the higher-income people are
surrounded by highly experienced lawyers, accountants,
economists--you know, tax specialists--and all those folks are
not typically going to be involved in an evasion, a potential
criminal case. Although we do call them on it, and we are
active, and we are active in terms of a lot of different arenas
that I probably should not go into publicly.
So I would say that the majority is folks who tend to get
aggressive in the structuring of transactions, maybe with an
eye that the IRS will not be there. It is completely
inappropriate to play what is known as the ``audit lottery'':
will the IRS audit this taxpayer? If so, do they step in and
say, oh, we made a mistake? Multiple mistakes, multiple years,
is a pattern, and that creates a criminal case. And I think
people are familiar with that.
You know, keep in mind that the largest criminal tax case
in the history of the United States involved professionals, not
taxpayers. It was out of the Southern District of New York, and
it was at a time when the IRS was perceived to be vulnerable
between 1998 and 2000, and it was in 2002.
So, although I come from the practitioner community and I
hold practitioners in high regard, it is a very difficult
occupation. It never bends. They are also part of tax
administration, and they need to do the right thing.
I was at a program early on in my career as Commissioner,
in front of more than a thousand colleagues, and I made one
comment, and I would repeat that comment to you all today, and
to any of them who are watching, and I know that a lot of our
employees are watching. And my comment was: when I came on
board as Commissioner, I respected pretty much every tax
practitioner that I ever interacted with in practice. I get it.
It is tough, whether you are a preparer or you are in a
different function. And my comment to my colleagues at that
time, and my comment today is: when I leave as Commissioner--
and I am in my last 17 months--they ought to all hope I have
that same respect for them. I expect my colleagues to step up
and do the right thing and not take advantage of an IRS that
some may perceive to be challenged, with resources or
otherwise. And if Congress helps us--and we do need help--if
Congress helps us, we will respond appropriately and, I think,
make everybody happy.
Senator Warner. Thank you, Mr. Chairman.
Senator Crapo [presiding]. Thank you, Senator Warner.
Next is Senator Cortez Masto.
Senator Cortez Masto. Thank you. Commissioner, thank you. I
echo comments of my colleagues on the challenges that the IRS
has faced, particularly being underfunded. And I know, even in
Nevada--I have had Nevadans reach out to me in frustration
because they were unable to reach anyone at the IRS. And I
think this hearing today is helpful to hopefully have people
understand the challenges that you are facing right now,
particularly being underfunded.
So my first question to you is, you mentioned to Senator
Warner that there are 52,000 positions that you have to
replace? Is that correct?
Commissioner Rettig. 52,000 is our attrition over the next
6 years. So if we do nothing, if we hired zero, we would go
from about an 83,000 employee operation, and you would take
52,000 out of that. That is the net number, and thankfully IRS
employees have a history of staying onboard about 5 years
beyond their eligibility for retirement.
Senator Cortez Masto. Thank you. So I just wanted to
understand. So those are not vacant positions? Those are
anticipated after people retire and leave, and your need over
that next period of 5 years to fill those positions. Correct?
Commissioner Rettig. I have to replace those just to stay
with what we are able to do today
Senator Cortez Masto. Right. No, I just wanted an
understanding if they were currently vacant or not. So that
is----
Commissioner Rettig. No, no, no; those are people who are
on board today. Sorry.
Senator Cortez Masto. I appreciate that.
So let me ask you this. The Low-Income Taxpayer Clinics
provide critical services to working taxpayers who are unable
to hire representatives to advocate on their behalf in
addressing their Federal tax disputes.
While there are many in my home State that could benefit
from these services, the last of these clinics, unfortunately,
closed in Nevada. And so my question to you is, can increased
funding for the IRS help to ensure broad accessibility to Low-
Income Taxpayer Clinics to all eligible taxpayers in States
like Nevada, and hopefully open up these clinics to service
Nevadans?
Commissioner Rettig. I am not aware that the last clinic in
Nevada closed, but I will look into that. But we need
appropriated funding for the clinics. I am a tremendous
supporter of the clinics and have done a tremendous amount of
Zoom interactions with clinics all around the country.
One of the benefits of Zoom is the ability to do that. But
we will look into it. The Low-Income Taxpayer Clinics are
critical to the operations of the Internal Revenue Service.
They are in the communities that we need to operate in. The IRS
could not effectively do tax administration, particularly in
these communities, without LITCs, without the VITA sites,
without tax counseling for the elderly. It is a critical
function, and that is why, in part, the IRS is involved in the
operation, if you will, of these programs.
Senator Cortez Masto. I agree, and thank you. And we look
forward to working with you. And please let us know your needs,
for the very reasons you talked about. They are critical
services.
Let me jump to another topic: tax scams. It is an area that
I worked on as a former Attorney General. I worked with IRS
Enforcement. They were just incredible in helping us address
the tax scams that we see across the country.
My question to you is, what are you seeing? And with the
limited amount of resources now, and the struggles you are
having with the staffing, how are you addressing those needs to
really educate the public on the types of scams that are out
there so that they can also be aware and prevent themselves
from becoming victims?
Commissioner Rettig. Our partner in the tax scam world, if
you will, is the Treasury Inspector General for Tax
Administration, TIGTA. And like us, they are very aggressive.
We do run undercover operations. I think that is pretty well-
known. I am not saying something that is not already public.
And we do a lot of outreach.
Every local office of the IRS is engaged in outreach. The
majority of these scams that we see tend to go to underserved,
more vulnerable communities. And we are very active in those
communities, together with community groups, trying to focus on
what they are. We try to get on the cutting edge. With the
EIPs, the three rounds of EIPs, 1, 2, and 3, we saw the scams
with that increase significantly. But we did not reduce
resources in oversight of those scam type of operations at all.
We did not pause any interactions during the pandemic. And you
know we have to make certain decisions, and priority decisions,
but certainly that is a huge priority. And we have maintained
that.
Senator Cortez Masto. That is great to hear. Commissioner,
thank you.
Commissioner Rettig. Thank you.
Senator Crapo. Thank you.
Senator Hassan?
Senator Hassan. Well, thank you, Ranking Member Crapo, and
thank you, Commissioner, for your work and for testifying
today. And before turning to my questions, I would like to
emphasize, as a number of my colleagues have, the importance of
the IRS prioritizing delivery of the Child Tax Credit starting
in July. Based on issues with roll-outs of other programs over
the past years, IRS really needs to ensure that it is able to
deliver these benefits in a timely way.
Commissioner, Granite Staters continue to contact my office
about the backlog of unprocessed 2019 and 2020 tax returns,
which has delayed tax refunds for families who need economic
assistance and cash flows.
My office has also been contacted by constituents who tell
us that they are going to be denied a mortgage because the
mortgage company cannot verify their information with the IRS.
These constituents submitted their tax returns months ago, and
now they are worried that they will be unable to buy their
house or will lose their deposit.
At our April hearing on the filing season, you committed to
clearing the backlog this summer by dedicating more employee
hours to processing returns. Can you update us on the IRS's
progress since April in clearing the backlog? And, when in this
summer will you have the backlog cleared?
Commissioner Rettig. At that hearing I said that we would
do it within 60 days, and I think I may have indicated that
might have been a lawyer answer, given the curve. We have
processed every return received at this point before January 1,
2021, so every return received during 2020. And a lot of those
were prior-year returns, not just 2019, but 2016, 2017, 2018.
There are people who catch up, if you will.
But we caught up, and we are very proud of that. We also
have caught up on our mail. You may remember the mail backlog.
Senator Hassan. Right.
Commissioner Rettig. All mail is now being opened within a
week of receipt. Some is being opened within 2 weeks. Our four
mail processing centers, Austin, Fresno, Kansas City, and Ogden
are operating at full speed. We last week received 1.2 million
pieces of mail. We tend to receive between 1 and 1.5 million,
and we are current in our operations on opening the mail.
Our Error Resolution System, where some of your--and I
would like to coordinate a call, maybe later today, or this
week, or sometime to discuss one of the issues you discussed,
and maybe we can provide some assistance. But the Error
Resolution System--we currently have about 9.4 million returns
in that process. The top reasons that the issues are being
called out is people having difficulty--our difficulty--
reconciling what they say they received in EIP1 and 2, with the
return recovery rebate.
We have people who used 2019 for their EITC, and we need to
verify that. So it is not an automated process that gets called
out. We have people with the Advance Child Tax Credit that does
not match what we have as the ACTC. We have math verification
issues, and also we have a tremendous amount of folks who
failed to file the Form 8962 for the Advance Premium Tax
Credit. And, interestingly, the private software even directs
you to provide that form.
So we are not able to process. Those are the top five,
which leads to 9.4 million. We are operating at full capacity
to get those taken care of.
Senator Hassan. Well then, I will look forward to following
up with your office on these particular issues, because we have
people who are obviously needing to confirm their information
so that they can buy a home.
So let us move on to a topic that I asked you about for the
record in April. The American Rescue Plan contained my
bipartisan bill with Senator Braun to provide assistance to the
Employee Retention Tax Credit to new businesses that were
started during the pandemic.
Startups will be eligible to receive this assistance
beginning in July. It is obviously crucial that the IRS issue
guidance as soon as possible so that new businesses are able to
quickly access this assistance next month.
When will the IRS issue updated guidance for the Employee
Retention Tax Credit?
Commissioner Rettig. Let me say that the response to your
questions for the record--and I mentioned this one earlier--
they are in clearance. And you know, we all would have hoped
that you would have received them timely. It is not--we are
backed up on a lot of different things, but we are very
respectful and try to get those out as quickly as possible. But
they are in clearance, and they are outside of our building.
Senator Hassan. So let's just get to the issues that we
have. Businesses that started during the pandemic that need the
guidance about how they can claim the Employee Retention Tax
Credit----
Commissioner Rettig. We should get that out--I have to give
you a lawyer term, and I apologize, and you can call me on it--
promptly. You know, we are working as hard as we can. And I do
have, and I sent the response to you on the statistics of what
we have received and where we are, and how we are processing.
Senator Hassan. Okay. They are just looking for guidance,
right, because they are trying to decide whether they are
hiring, who they can get a credit for, what their cash flow is
going to look like.
Commissioner Rettig. I come from that community.
Senator Hassan. Yes, I know you do. I know. I am almost out
of time, so I am just going to say that I am encouraged that
your 2022 budget request mentions the IRS's plan to retire and
decommission its legacy systems, including those that use
antiquated programming languages, something I have been really
focused on on the Emerging Threats and Spending Oversight
Subcommittee of Homeland Security, and I will look forward to
learning more about your project there. Thank you.
Thank you, Mr. Chairman.
Commissioner Rettig. Thank you.
Senator Crapo. Thank you, Senator Hassan.
We have a number of--we have two votes underway right now,
Commissioner, which is why you see----
Commissioner Rettig. I did not take it personally.
Senator Crapo. I am not aware of any Senators who are back
from the vote yet. Are there any? If there are any remotely,
would you speak up?
Commissioner Rettig. I am available for one-on-ones with
members and staff.
Senator Crapo. Understood. We do expect a couple more are
on their way, so I will ask a couple of questions that I did
not get to ask you during my first round, until one of them
gets back.
Commissioner, what I wanted to do is to go through with you
some of the tax gap information. As you know, I have sent you
two letters on it, and we have already talked about the fact
that you are in the process of getting those back. We got one
yesterday, but it did not really provide the kind of detail
that I was asking for. So I would like to ask you to follow up
with more detail on what I asked in my May 10th letter about
the tax gap.
And let me get into what that is, right now. When you
testified earlier before the committee, you estimated, if I
recall correctly, that the gap could be as high as a trillion
dollars. Is that----
Commissioner Rettig. Let me say that your letter--and I
think you have seen my response to your letter because you made
comments about how others said I said it, and that is why I put
the quote in there of what I said. And so you had that right.
But yes, a trillion dollars is the number that got picked up.
Senator Crapo. All right. And then I see Senator Warren is
back. Senator Warren, I am just going to finish a statement
here, and then I will--I will not ask you to respond to this
right now, but I would like you to respond back with more
clarity.
When you testified before us, you mentioned that some of
the reasons for the increase in the $441-billion tax gap
estimate that was 10 years old were inflation, cryptocurrency,
and at that time you indicated unreported or concealed income
offshore, and in pass-through entities. I just wanted you--and
I would like to ask you, not now, but I would like to ask you
to parse out how you get to that trillion-dollar figure in
terms of where we are losing the collections of lawfully due
taxes, so that we can have a better idea about how we can
assist you in getting those taxes collected.
[The question appears in the appendix.]
Senator Crapo. Senator Warren?
Senator Warren. Thank you, Mr. Acting Chairman. And I agree
with that question. It is a good question. We should do that.
So thank you. A decade of budget cuts have hollowed out the
IRS, so it just does not have the resources to go after wealthy
tax cheats. And that is why I have introduced the Restoring the
IRS Act to provide $31.5 billion in mandatory annual funding to
allow the IRS to fairly enforce the tax code, to modernize its
IT systems, and to improve taxpayer services.
I am glad that President Biden and you, Commissioner
Rettig, agree with me on the importance of making big
investments in the IRS. But it is crucial to make sure that
this money is going towards making our tax enforcement fairer,
not reinforcing inequities like the racial wealth gap.
So, Commissioner Rettig, what data and analysis has the IRS
developed on how its enforcement activities effect low-income
black Americans?
Commissioner Rettig. Treasury's Office of Tax Policy and
Office of Tax Analysis are the ones that handle that. IRS is
the tax administration agency, if you will. So we provide data
to Treasury.
I can say that Treasury has multiple working groups in this
space, and the appropriate thing would be to have Treasury
interact with you and give you a heads-up on really what they
are looking at, what they have looked at, data they have
received. But the IRS itself does not collect data with respect
to race, as you know.
Senator Warren. Okay, so you are not collecting race data
right now. But you know I was glad to see President Biden issue
an executive order on racial equity back in January, including
a call for more data. But I want to see some concrete actions
coming out of it, and that includes concrete actions at the
IRS.
This is important because the IRS does not just
mechanically enforce our tax rules. The IRS has significant
discretion, for instance, when it comes to audits. Research
shows that the IRS disproportionately targets poor black
communities in the South for audits.
We also know that an estimated 20 percent of eligible
taxpayers do not receive the Earned Income Tax Credit, which
provides social support to low-income working families. Likely,
many of these families who are not getting this lifeline are
families of color, but we need more analysis to know for sure
that is happening.
So, Commissioner Rettig, let me ask: will you commit the
IRS to conducting a thorough analysis of the racial impacts of
IRS services and enforcement activities?
Commissioner Rettig. I think I need to dispute your first
comment. I think the data are contrary to that, but we can go
into that----
Senator Warren. They are contrary to what?
Commissioner Rettig. That we disproportionately look at
lower-income taxpayers or people of color. The data are
contrary to that.
Senator Warren. So it is not the case? I thought your data
showed that there are more audits in poor areas in the South
than there are, for example, of rich people in the North.
Commissioner Rettig. The IRS--the only lower-income
individuals audited by the Internal Revenue Service are with
respect to the Earned Income Tax Credit, which is about a 1.1-
percent rate. And the reason that we even look in that
direction--we have a $17.4-billion improper payment rate
there--the only reason we look in that is, because of IPERA we
are required to report an improper payment rate, and our RAAS
group, our research group, are the ones that come up with what
that is. And they require us essentially to have a 1-percent
audit rate for them to be able to extrapolate off of that to
what it would be.
Senator Warren. Fair enough, on what may be the reason for
the audit, but I guess the question--let me just go back to the
question that matters the most to me. And that is, will you
commit the IRS to conducting thorough analyses of the racial
impacts of IRS services and enforcement activities?
Commissioner Rettig. And I will come back to my original
comment, which is, Treasury is doing that.
Senator Warren. So you think Treasury is collecting enough
data? You have no more data collection responsibilities or
opportunities? Is that what you are saying to me?
Commissioner Rettig. Not at all. I'm Bureau of Treasury; I
report to the Secretary, and we work with Treasury. And they
have the economists and others who do this type of work.
Senator Warren. So they are the ones who will decide if you
collect this data or not?
Commissioner Rettig. I would assume Treasury would make all
the information public, and if not, then, maybe you ask.
Senator Warren. But the question I am asking, though, is
are you collecting these data so we can do the analysis of
the----
Commissioner Rettig. We do not have race data.
Senator Warren. That is my point. So are you committed to
providing the kind of data collection that you can to be able
to study the racial impact of the decisions you make?
Commissioner Rettig. With what we are doing, we give data
to Treasury, and Treasury gets other data, and then their
Office of Tax Analysis matches that. And I think, I don't mean
to play semantics with you, because it might sound like that,
but that is where the work is being done. And there is a
significant effort. There are a lot of people looking at this
within the administration, including at IRS. We are working
with Treasury on this. So the answer is, ``yes.''
Senator Warren. I just want the IRS to be a good partner in
this. The paper I was talking about earlier found that the IRS
disproportionately audits poor black communities in the South.
It was written by a former IRS economist in 2019. And if this
is what a former IRS employee can show with existing publicly
available data, it seems to me that the IRS both can and should
deploy its own resources to examine racial inequities in its
enforcement and other activities, and then move to address
those inequities.
You know, I believe in data. And armed with better data, a
revitalized IRS can make sure that it is pursuing its audits
fairly, and that expanded tax credits and taxpayer services are
reaching the American families that most need their help. And I
hope we can be partners in this.
Commissioner Rettig. I share your concerns, and I think, as
we have indicated on the phone, we look forward to ongoing
communications with you in this space. I do believe that when
people write articles, they should write them on actual data.
And everybody is invited to look at our 2019 and our 2020 data
books that have the actual numbers in there. If you look at the
2019 data book, page 34, Table 17-A, it breaks out exactly the
numbers there. And you will see.
If I could go on?
Senator Warren. It's up to the chairman.
Senator Crapo. Briefly, please.
Commissioner Rettig. I apologize. But quite quickly, when
we look at what is loosely referred to as the ``heat map'' on
EITC examinations, if you will, which are correspondence
examinations where we ask people, ``Did this child reside with
you for 6 months?'', we look at it--and we do not have race
data, and I am not discounting what you are saying, and I do
not want anybody to think that the IRS is insensitive to this
issue. I am not, and we are not. But also, when we look at a
heat map personally, we look at it from the perspective of, we
need to do more outreach and be more on the ground in these
communities, and we need to make sure that people know what
they are eligible for, and to get them the payments that we all
want them to get.
Our people live in these communities----
Senator Warren. Mr. Commissioner, I understand. I just hope
that ``on the ground'' does not mean more audits. And when I
look at what a former IRS employee has put together with
existing publicly available data, I am deeply troubled by the
reports there. And I hope that the IRS is not part of the
problem, but part of the solution.
Commissioner Rettig. Page 34, Table 17-A----
Senator Crapo. We need to move on.
Senator Warren. We will take a look. Thank you.
Commissioner Rettig. Thank you.
Senator Crapo. Next is Senator Young.
[Pause.]
Senator Crapo. Are you with us, Senator Young?
Senator Young. Can you see me, Mr. Chairman?
Senator Crapo. Not yet, but I hear you.
Senator Young. Okay; here we go. Okay, I think I am----
Senator Crapo. All right, we can see you now.
Senator Young. Okay. Thank you, Mr. Chairman.
Mr. Commissioner, in your last hearing in April, you
testified that the IRS was up to date on opening its mail.
However, that very same day the Taxpayer Advocate Service
representative informed my staff that the processing center in
Kansas City was still opening mail from June 2020.
Now, my Hoosier constituents continue to be told by the
Internal Revenue Service employees that the IRS is currently
opening and processing mail from July 2020. What is going on
here?
Commissioner Rettig. That is false.
Senator Young. Who in not telling the truth?
Commissioner Rettig. The information you are getting from
the Taxpayer Advocate Service is not accurate. I would
encourage you, if you or your people--and I put this to all the
members--get information that does not make sense to you,
please reach out to me. Most of you have my cell phone number.
My cell phone is available to all of you. We will schedule one-
on-one meetings with you.
The IRS has four mail services, and those mail services are
processing mail currently within days of receipt. So whatever
information the Taxpayer Advocate or local taxpayer advocate is
getting to you, they do not have the current information. And I
can tell you, we have four services. Austin is opening mail--as
of May 29th, was opening mail from May 24th; Fresno, on May
29th, opening mail received May 28th; Kansas City on May 29th,
opening mail received May 24th; Ogden, on May 29th, opening
mail received May 28th.
We receive between 1 and 1.5 million----
Senator Young. Commissioner, I understand----
Commissioner Rettig [continuing]. Pieces of mail a week. We
process all the mail within a week of receipt. So I apologize
that the information is not accurate, but my request, sir,
would be to please reach out to me.
Senator Young. I will, indeed. I am going to get to the
bottom of this on behalf of my Hoosier constituents, and I
thank you for addressing that, sir.
It is curious to me, it is peculiar that the Taxpayer
Advocate Service would be so wrong so consistently. If this has
been a problem, and if indeed this is a matter of conviction
for you, as it seems to be, have you had dialogue with them to
ensure that their discrepancies and their inaccuracies can be
remedied? They would have no reason to promulgate inaccurate
information, presumably.
Commissioner Rettig. The Taxpayer Advocate is thoroughly
engaged with every facet of the Internal Revenue Service. And,
as you would imagine, the Taxpayer Advocate herself is
significantly engaged with our processing centers and the wage
and investment, which is where all the processing happens.
So what gets into the field for Taxpayer Advocate in the
local offices I am unaware of. But I am aware that they do have
the information. And I am not sure when your folks got that
information, but I can tell you--and I would look forward to
the opportunity to talk to you on the phone, so maybe we could
get additional information and figure out how that happened.
But I can tell you that we are current, and this did not just
happen yesterday.
Senator Young. We received that information in April, again
the same day you testified before this hearing. So we are going
to have to get clarity on this. You indicated that the Taxpayer
Advocate Service has visibility into all aspects, but it is not
getting--some of that information is not finding its way into
the field.
Commissioner Rettig. That would be my impression. They are
an independent operation within the Internal Revenue Service,
so I do not know how their information flows. But they want to
get the right information to you and your people as well. We
are all-in trying to make everything as best as possible for
taxpayers, for members of Congress, for your staff, and
whatnot. So again, I would appreciate the opportunity to follow
up. And I would encourage the members to interact directly with
the Taxpayer Advocate herself--you know, interact with me and,
separately, interact with her.
Senator Young. Okay. Would you, sir, or a member of your
team, follow up with the IRS processing center in Kansas City,
just to ensure that nothing has been overlooked with respect to
the opening of mail and outstanding paper returns from 2019?
Commissioner Rettig. The 2019 returns are current, if you
are referring to Kansas City. If you are referring to the Error
Resolution Service, which is out in Kansas City, that is a
separate issue from the mail. And I may have indicated earlier
that in Errors currently we have about 9.4 million individual
returns. And that was the May 28th date. And the majority of
those were pulled out for one of five reasons, which are
reconciliation of return recovery rebate, which is the EITC
reconciliation; additional Child Tax Credit math verifications;
missing Form 8962; and whatnot. But we can give you specifics.
But that may be a separate issue than physical mail.
Physical mail is current. In the Errors, what we are trying to
do is to work with the taxpayers that we need additional
information from to free those up. And it is those items we are
missing on the return processing, and they cannot be
automatically processed, and it gets kicked out to manual, and
the manual process is to verify and to reconcile the issues
that were there.
And I would appreciate the opportunity maybe that we walk
you through that with your people.
Senator Young. Well, I am grateful. I am going to take you
up on that opportunity of you, Mr. Commissioner, and my office,
and, if necessary, the Taxpayer Advocate Service so we will get
some answers for my constituents, because they are being told
that their paper 2019 returns have not even been opened or
processed yet. That is the bottom line. And----
Commissioner Rettig. Also, when we talk one-on-one, if your
folks could be prepared, assuming you have the authority, with
the authorization to give us some specific information, that
would help.
Senator Young. If we are lacking in any authorizations, we
will----
Commissioner Rettig. Right. That was a heads-up to try to
get that before the call, because there are a lot of things we
can resolve when we have that.
Senator Young. Thank you, sir.
Lastly, and I will keep this one tight----
Senator Crapo. We need to wrap up pretty quickly.
Senator Young. Okay. About half of the U.S. population over
the age of 12 was fully vaccinated against COVID-19, and almost
90 percent of vulnerable seniors have received at least one
dose. Now that Americans have broad access to COVID-19
vaccines, how is the IRS planning to get employees back in the
office and reopen those in-the-field taxpayer assistance
centers to help more Americans resolve their tax troubles?
Senator Crapo. And if you could be brief.
Commissioner Rettig. We expect to reopen any closed centers
that we have staffing for promptly. And the President's budget
provides staffing for us to actually reopen all centers, which
would be significant.
Senator Young. That would be helpful, as----
Senator Crapo. Thank you.
And next will be Senator Daines, followed by Senator
Whitehouse.
Senator Daines?
Senator Daines. Great. Thanks, Mr. Chairman. Thanks,
Commissioner Rettig, for being here.
I want to start by joining Ranking Member Crapo and others
who have been expressing my shock about the leak of individual
IRS tax data in the ProPublica article this morning. To see 15
years' worth of confidential individual and business data
leaked is most concerning, particularly at a time when the
administration is proposing a massive increase in the amount of
data the IRS will collect from individuals and businesses.
I am very glad to hear you are investigating the source of
the leak, and that you will prosecute any violation of law in
this instance, because violations of individual privacy and
confidentiality could easily happen to ordinary Americans and
small businesses, probably more than anything else. So thank
you.
Turning to my question, we had a hearing earlier this year
on the tax gap, at which witnesses spoke about how to close it,
and we examined whether President Biden's proposals were
realistic.
The Congressional Budget Office projects increasing IRS
funding by $40 billion would net $63 billion in increased
revenue. But the Biden administration estimates that $80
billion in funding would produce an additional $637 billion in
additional revenue.
Commissioner Rettig, can you explain why there might be
such a really massive difference between the administration's
revenue collection estimate and the estimate from CBO?
Commissioner Rettig. The administration's estimate was
performed by the Office of Tax Analysis within Treasury, which
are essentially their career economists. And as you were
commenting, I was thinking that, from the outside, what we used
to try to do is get all the experts in a room and have them
work together and figure out who is on target.
The IRS is not involved in forecasting what we can recover.
We go after everything to the best of our ability, which
includes funding, modernization, staffing, training, and the
rest. And we would look forward to the opportunity to do so. We
will recover as much as we possibly can both from enhanced
taxpayer services--relationships, communications, and whatnot--
as well as enforcement, which I mentioned earlier I am a huge
advocate of, and for almost 40 years now, inside and outside, I
have said that enforcement supports compliant taxpayers.
And similarly, we need to not be examining taxpayers that
we should not be. We need to lessen the burden on taxpayers and
take the resources we do have and focus them appropriately. And
I think that, with the oversight of this committee and other
committees in Congress, we have the ability to do so.
I do see all of this as an opportunity, collectively, for
us to provide enhanced tax administration to the people of this
country at a level, nature, and quality that they deserve. I
think we are close to that, and I think that--you know, I
understand and share the bipartisan look that the IRS should
collect the fair amount of tax from taxpayers. And it should
not burden, and unduly burden taxpayers, and we should do the
best we can. And I can tell you, from being on the inside,
employees think like I do.
Senator Daines. Yes; it is a thoughtful answer.
Just to follow up on that, former IRS Commissioner Koskinen
recently stated that he is not sure that the IRS could use $80
billion effectively. Do you disagree with that statement? And
if so, is there a dollar amount that you think would be about
the right amount that the IRS could basically digest and use
effectively?
Commissioner Rettig. The IRS, as I indicated earlier--we
actually months ago started working on our workforce plans, if
you will, moving forward, which include modernization. Just the
modernization plan in the house alone could use a substantial
amount of money. I think former Commissioner Rossotti recently
mentioned that what we spend--about $2 to $2.5 billion in terms
of modernization--the largest banks in the world that have a
fraction of the information we do spend $10 to $12 billion per
year, and we are doing between $2 and $2.7 billion total.
And so, you know, the modernization side of the house could
use a lot of help. And that helps both compliant taxpayers, and
it helps us focus, appropriately, on the compliance-challenged
taxpayers.
At the appropriate time, I look forward to coming up and--
either in front of the committee or our folks briefing staff of
the committee--talking about what we see as the workforce plan.
We have put a lot of effort into it. You know, I will say--let
me go back to the EIPs.
We worked really hard on those. That was a new line of work
for us. We did not always get it right, but to the extent we
made mistakes, it was because we were trying our best. We are
here trying our best as well, and I hope that untimately,
Congress and history look at the IRS that, in a very difficult
environment, meaning pandemic and otherwise--the people of the
IRS performed admirably. People can say what they want about
me, but the respect for our employees, I think, is among the
highest of any Federal agency.
Senator Daines. But back to your earlier point, I am
concerned that, on the enforcement, we might present undue
burdens on law-abiding businesses. And I am not sure that this
would actually produce the amount of revenue the administration
believes it will. And then lastly--I have to be quick because I
am over--can you tell us the steps the IRS would take to make
sure it is not putting undue burdens on small businesses who
are paying their taxes right, and so forth, as part of their
enhanced enforcement efforts?
Commissioner Rettig. I made a comment earlier. I come from
a small business family. Basically, my dad had a truck. I was a
participant in small businesses when I was on the outside,
before I got to the Internal Revenue Service. I have a very
strong line-of-sight into the small business communities, as
well as supporting them with appropriate services.
Often they are challenged. They do not have the resources.
Their effort is to try to get income, and less of an effort
goes into sort of the back end of the house--you know, the
accounting and whatnot. Part of our job at IRS is to issue
clear, timely, meaningful guidance in terms that people can
understand.
It is not appropriate to point to a 700-page regulation
maybe at IRS.gov, maybe not, and say, ``Well, we told you so.''
But the outreach to the small business communities will be
enhanced under the President's proposal. And certainly I have a
strong focus, and other people in the IRS share that. And I
have said numerous times today that I have a 17-month runway,
but people in the IRS share the concerns that I have. And
supporting the small business community and not burdening the
small business community, particularly during a pandemic, I
think should be important for every American.
Senator Daines. Commissioner Rettig, thanks for your
thoughtful answers. I appreciate it.
Senator Crapo. Thank you.
And next is Senator Whitehouse. Are you with us?
Senator Whitehouse. Yes, I am, Mr. Chairman. Thank you very
much. And thanks, Commissioner, for being back with us again.
When you were before us earlier you said that money stashed
in foreign accounts could be part of why the tax gap may be
more than twice as large as official IRS estimates. There has
been some skepticism expressed about that in the committee, and
I just wanted to give you a chance to add any clarification or
amplification, and ask whether or not you still stand by the
point that you made.
Commissioner Rettig. I still stand by the point I made. Our
Director of Research separately testified in a House hearing,
built with the same blocks, and before he got to illegal-source
income--the transcript is out there--his comment was that the
comments of the Commissioner are not unreasonable. And I do
stand by that. And we do not know what we do not know, but
these are educated guesses.
Senator Whitehouse. So the Treasury Inspector General for
Tax Administration noted at a hearing that the IRS had taken
virtually no compliance actions to meaningfully enforce the
Foreign Account Tax Compliance Act.
What can we do to help improve that record? Are there
resources or regulations? What focus do we need to do to----
Commissioner Rettig. Absolutely. FATCA was passed with the
idea that the U.S. Government, the IRS, would receive data with
respect to foreign accounts for individuals throughout the
world. And unfortunately, we did not get the resources to
implement a modernization of our systems to be able to
appropriately use the data that we receive under FATCA.
And part of the President's budget provides us with the
resources to modernize our systems to get there. And I think it
can be instrumental, what we might find, as well as, you know,
if we find out that there is no ``there'' there, that would
also be instrumental. And I think everybody should support that
effort.
Senator Whitehouse. Do you know if that is a separate line
item in the President's budget proposal, or do we have to go in
to break it out? I will ask for the record for somebody on your
team to let us know whatever we can do to break out the
elements of FATCA enforcement.
So on to kleptocracy. The President has issued a memorandum
on establishing the fight against corruption as a core United
States national security interest. We have just passed good
beneficial ownership disclosure laws. Are you comfortable with
the Treasury process and the IRS aspects of implementing that
rule? Any report you can give? It is really important that
Treasury, the DOJ, and the IRS all be happy with where we are.
Are you?
Commissioner Rettig. The IRS will do the best that it can
with the resources that it receives to implement the
legislation that impacts areas that are in the IRS's domain.
And so as to--I am a believer in transparency and full
disclosure, and all the rest. And you know, I can confirm and
commit to the fact that we will do our best, and certainly
try----
Senator Whitehouse. And are you comfortable that you are
being heard in the regulatory process of developing the rules
to enforce and implement the legislation?
Commissioner Rettig. We have weekly--excuse me, bi-weekly
meetings with the Office of Tax Policy at Treasury that, not
only myself but our leadership team and counsel, are engaged
in. So, yes.
Senator Whitehouse. Okay, last question, and you are
welcome to take this one for the record. It relates to
501(c)4s. You answered just a few days ago a question that I
had about the number of referrals that the IRS has made to the
Department of Justice for investigations involving nonprofit
organizations. There were about 200 over the last 5 or 6 years.
Could you--again, you can take this for the record. I would
like to know if any of those, and if so how many of those,
involved potential false statements made by nonprofits
regarding political activity. And I would also like to know if
you are aware of whether any of them actually were taken to
prosecution, what the record was of them being taken up over at
DOJ. Would you be able to get me that info?
Commissioner Rettig. With appropriate safeguards, we will
reach out to DOJ and try to get the information for you.
Senator Whitehouse. Great. At this point, I think I am just
looking for numbers. So there should not be any problem with
it. How many of the 200 involved potential false statements
about political activity, and how many were actually taken up
by DOJ of the 200.
Commissioner Rettig. It is not always so easy for us to get
information when the lawyers get involved, but--being a
lawyer----
Senator Whitehouse. I just want to make it a question for
the record. Thank you very much.
[The question appears in the appendix.]
The Chairman. Thank you.
Commissioner, we are winding down here from a long morning.
Just a couple of comments, first with respect to tax
enforcement, which has come up repeatedly over the course of
the morning. And I know this does not surprise you, my interest
is making sure that this is not just another chapter in the
tale of two tax codes in America. When a nurse--a nurse is sure
to owe a penalty if her W-2 does not match her return, but a
millionaire can arrange their assets through a sophisticated,
complex web of partnerships and can abuse the system with no
risk of detection. That is the status quo today. And that is
what I want to change.
So we are going to be talking to you more about
enforcement, and you said you would get us some information
with respect to your targets. But that is what I am really
concerned about, and it undergirds my whole view with respect
to the tax code in America.
Then, with respect to, again, the ProPublica information of
today, I am going to ask about this repeatedly, because I want
it understood that the IRS has a responsibility to protect
taxpayer data. And you have confirmed this morning that this
matter is being investigated.
And then from the policy side, the big picture is, this
data shows that the country's wealthiest, who profited
immensely during the pandemic, have not been paying their fair
share. And they can essentially line up their lawyers and
accountants and their professionals and can defer and postpone
and put off paying, and to a great extent live off money
borrowed against their assets while not paying any taxes for
very long periods of time.
And the nurses and firefighters I represent in Oregon
cannot play those games. They pay their taxes with every
paycheck.
I am just going to close. We will be talking with you and
others in the future, because I am going to have a proposal to
fix this broken system and have it ready to be released soon.
With that, the committee also notes that questions for the
record have to be delivered by next Tuesday, a week from today.
And with that, the committee is adjourned.
[Whereupon, at 12:37 p.m., the hearing was concluded.]
A P P E N D I X
Additional Material Submitted for the Record
----------
Prepared Statement of Hon. Mike Crapo,
a U.S. Senator From Idaho
Thank you, Mr. Chairman, and thank you, Commissioner Rettig, for
joining us again today. It is safe to say we all support efforts to
administer our Nation's tax laws and collect taxes that are legally
due. Today, we will hear from Commissioner Rettig about proposals to
massively increase the budget at IRS, aimed largely at increased
compliance and enforcement efforts.
Commissioner Rettig, you have the chance to provide your
perspective on an array of issues, including any updated tax gap
analysis your agency is preparing, various compliance- or enforcement-
related proposals contained in the President's budget, and recently
enacted spending programs that the IRS will soon begin implementing.
Focusing on the administration's discretionary funding request for the
IRS, I look forward to hearing about how the IRS would spend the $1.2
billion in additional funding in FY 2022, including the specific
activities the funds would go toward and what the expected outcome from
these activities will be.
The President's Fiscal Year 2022 budget proposes not only a
significant increase in IRS funding, but also a dedicated, mandatory
flow of funding for the IRS over a 10-year period, based partly on some
speculative and questionable assumptions and analysis. Multiyear,
guaranteed appropriations like this are rare, and it is important to
understand whether the circumstances actually warrant it. It is also
important to understand how much additional funding the IRS can
efficiently use, as well as the specific implementation plans the IRS
has to put any additional funding it receives to good use.
Much has been said about the decline in IRS funding from the 2010
fiscal year. Less has been said about data suggesting the IRS has
become at least somewhat more efficient in the aftermath of these
declines, such as the fact that IRS gross revenue collections have
increased every year, year over year since 2010, from $2.34 trillion in
2010 to $3.56 trillion in 2019.
Further, the IRS's costs of collection have decreased every year,
year over year since 2010, from $0.53 in costs per $100 collected in
2010 to $0.33 in costs per $100 collected in 2019. Moreover, we need to
better understand the actual correlation between the IRS's enforcement
budget and the enforcement revenue it collects.
For example, IRS data shows that enforcement revenues actually
increased between fiscal years 2012-2013, 2013-2014, 2015-2016, 2016-
2017, and 2017-2018, despite actual enforcement spending decreasing
between each of these periods. Similarly, between fiscal years 2019-
2020, enforcement revenues declined by $6.4 billion despite actual
enforcement spending increasing by $317 million.
Suffice to say, we need to better understand the facts at play
here, particularly before we rush to adopt multi-billion-dollar funding
increases. And as we all know, revenue comes from the economy, and
revenue collected is far more sensitive to the state of the economy
than it is to the size of the IRS budget or scope of its enforcement.
When the economy grows, revenues rise; and when the economy shrinks or
grows sluggishly, revenues fall or grow slowly.
The administration's budget proposes several new reporting,
compliance, and enforcement regimes, including a proposal to require
near-universal disclosure to the IRS of gross inflows and outflows for
both traditional and non-traditional financial accounts for businesses
and for individuals, as well as for third-party settlement entities. I
have long been critical of big data collection activities, and oppose
turning banks and brokers into government tax collectors. I also have
strong concerns about the proposed IRS big data requirements.
According to the budget request, ``This requirement would apply to
all business and personal accounts from financial institutions,
including bank loans and investment accounts, with the exception of
accounts below a low de minimis gross flow threshold of $600 or fair
market value of $600.''
Commissioner Rettig, you may recall that expanded 1099 information
reporting was enacted in the Affordable Care Act to include any payment
of over $600, and the American people soundly rejected that provision,
leading to its rapid repeal a year later. Absent bipartisanship in
developing enhanced compliance and enforcement activities and public
acceptance of their legitimacy, the administration's proposals will not
be durable.
The key issue for the IRS, and for those of us who oversee it, is
to strike the appropriate balance between rigorous enforcement of the
tax laws and heavy-handed, stifling intrusiveness. I am concerned about
the implications of many of the President's budget proposals, including
requiring additional, and highly burdensome, information reporting when
some existing reporting is duplicative, and much is still not being
utilized to the fullest extent.
Proposals to increase compliance and enforcement can have merit,
but there is the risk of turning the IRS, and perhaps even private
financial institutions, into feared gatherers of information that is
not necessary for tax administration. Also, in regard to compliance, I
would be remiss if I did not indicate my continued disappointment in
the lack of responsiveness of the IRS and Treasury to my inquiries.
You last appeared before this committee on April 13th, and I have
not yet received responses from you to questions that I asked for the
record. I also sent you a letter on May 10th with a series of questions
about the speculative and questionable tax gap projections that you
have recently put forward. I only received a partial response to my
questions late yesterday afternoon.
It is somewhat surprising for the administration to request
outsized and mandatory funding for the IRS, while at the same time not
complying with basic transparency and accountability responsibilities.
Commissioner Rettig, I look forward to your testimony, and thank
you for appearing today.
______
Prepared Statement of Hon. Charles P. Rettig,
Commissioner, Internal Revenue Service
introduction
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you for the opportunity to discuss the IRS budget and provide you
with an update on IRS operations.
I am pleased to report the 2021 filing season, which was extended
to May 17th, went smoothly in terms of tax return processing and the
operation of our information technology (IT) systems. Through May 28,
the IRS received more than 149.6 million individual Federal tax returns
and issued more than 101.2 million refunds totaling more than $281.4
billion. In 2021, we have had had more than 1.4 billion visits to
IRS.gov and have received more than 150 million taxpayer phone calls
(more than 300 percent of normal; at one point we were receiving calls
at the rate of 1,500 per second) and have answered more than 37 million
calls through our automated systems and live phone assistors. Although
the filing deadline has passed, I would note that the work of the
filing season goes on well beyond the deadline--IRS employees continue
to process tax returns, including amended returns and returns for which
taxpayers had requested an extension beyond May 17th.
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 11th. Through June 4th, we
have disbursed more than 169 million payments totaling approximately
$395 billion. We have printed and mailed more than 175 million reminder
notices, answered more than 30 million EIP calls, issued more than 105
FAQs, and coordinated our outreach efforts with more than 11,000
external partners and 400 Federal and State agencies.
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 is working hard to deliver
this program quickly, efficiently and on time. We recently announced
the advance CTC will be disbursed in monthly payments beginning July
15th. We have already issued nine news releases and started sending
more than 30 million outreach letters to inform potentially eligible
taxpayers of the advance CTC payment and to promote awareness of the
CTC page on IRS.gov that will provide additional relevant information.
The letter is educating taxpayers who filed a processed 2019 or 2020
return that claimed the CTC about the advance CTC and options for the
future. We will soon provide Congressional members with outreach
packages so that they build awareness of the advance CTC with their
constituents.
Now in my third year as Commissioner, I remain extremely proud of
our employees, and I'm excited about the future of our agency. My
experiences as Commissioner have strengthened my belief that a fully
functioning IRS is critical to the success of our Nation. In Fiscal
Year (FY) 2019, the IRS collected $3.56 trillion in taxes and generated
almost 96 percent of the funding that supports the Federal Government's
operations. As such, in part, the success of our country depends upon a
successful IRS. 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.
Decisions significantly impacting the people of this country should
not be
resource-driven. Like all Federal agencies, the IRS is best suited to
provide the services Americans deserve and appropriately enforce the
tax laws in support of compliant taxpayers when it receives the
resources it needs to do so. At a time when the IRS has faced
consequential resource challenges, it has also been called upon to take
on new responsibilities impacting almost every American. Our response
to the unprecedented COVID-19 challenges illustrates the importance of
every American to the IRS and the importance of the IRS to every
American.
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 more than $800 billion in Economic
Impact Payments together with more than $500 billion in individual
refunds 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 FY 2021 funding level (excluding these additional
resources) represents a 3.6-percent increase over FY 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
multiyear 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. 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.
the president's fiscal year 2022 discretionary budget
The President's Fiscal Year (FY) 2022 discretionary budget proposal
for the IRS provides $13.2 billion, an increase of $1.2 billion, or
10.4 percent, above the 2021 enacted level, to administer the Nation's
tax system fairly, collect $3.5 trillion in taxes to fund the
government and strengthen tax compliance.
In addition to the base appropriations request, the budget proposes
a program integrity allocation adjustment that would provide an
additional $417 million in FY 2022, to fund investments in expanding
and improving the effectiveness and efficiency of the IRS's overall tax
enforcement program, for a total of $13.6 billion for the agency in FY
2022.
The President's budget proposal supports fair and equitable tax
administration for all Americans, including increasing oversight of
high-wealth individuals and corporations to ensure compliance and move
toward closing the tax gap. It also improves the taxpayer experience by
providing new and improved online tools for taxpayers to communicate
with the IRS easily and quickly. The budget also supports the IRS's
efforts to continue improving telephone and in-person taxpayer customer
service, as well as expansion of the agency's outreach and assistance
to underserved communities. These increased resources represent a
significant investment in tax administration, because the IRS has an
overall return on investment (ROI) of about $5 for every $1 invested,
excluding significant deterrence effects.
Specific Funding Areas
The FY 2022 budget requests a total program increase of $915.5
million, including the following:
Taxpayer First Act (TFA): $176.1 million for implementing
major TFA initiatives, including a Taxpayer Experience Strategy to
improve the American taxpayer's experience with the IRS through
expanded digital services, increased multilingual services, and an
increased presence in hard-to-reach, historically underserved
communities. Another major TFA initiative involves enhancing identity
proofing and authentication tools, to ensure taxpayers have secure
access to online services.
Enforcement: $340 million for continuing to establish
enforcement strategies that will ensure a fair tax system, by allowing
the IRS eventually to double its compliance efforts on partnerships and
high-wealth returns and devote more resources to examining large
corporations with balance sheet assets greater than $10 million. Other
initiatives supported by this investment include: the Cross Border and
Treaty and Transfer Pricing Operations; expansion of oversight efforts
against cybercrime; increased use of applied data analytics in
enforcement activities; and enhancing taxpayer confidence in the tax-
exempt sector.
Taxpayer Service: $318 million to increase taxpayer assistance
via the various communication channels taxpayers use to reach us,
including phone calls, correspondence, and in-person visits. This
investment provides a projected phone level of service (LOS) of 75
percent in FY 2022, assuming phone demand returns to pre-pandemic
levels and the IRS is able to provide in-
person services at pre-pandemic levels. These funds will also be used
to reduce the current projected FY 2022 ending correspondence inventory
by about 400,000 pieces.
Modernization: $78.1 million for IT modernization activities.
This investment will support IRS efforts to continue implementing its
Integrated Modernization Business Plan for upgrading IT systems and
retiring legacy applications. With this funding, the IRS will be able
to take the next steps on such significant modernization initiatives as
Enterprise Case Management, Taxpayer Digital Communications and
customer callback on its taxpayer phone lines.
The IRS dedicates itself to improving the taxpayer experience so
that taxpayers and their representatives can understand and meet their
tax obligations with minimal burden. The IRS's aim is to increase
voluntary compliance through simplifying the tax filing, correction,
and payment processes. To help achieve this, the IRS will focus on
improving education and outreach on taxpayer rights and obligations and
enhancing service channels to meet taxpayer needs.
Efforts to Narrow the Tax Gap
We are proud to serve our country and want to provide meaningful
services of a nature and quality every American deserves. In support of
compliant taxpayers, we must pursue meaningful enforcement efforts,
appropriately balanced with our support of taxpayer service, taxpayer
rights, and privacy rights. The IRS continues to develop innovative
approaches to understanding, detecting, and resolving potential
noncompliance to maintain taxpayer confidence in the tax system.
Section 61 of the Internal Revenue Code generally defines ``gross
income'' as ``all income from whatever source derived. . . .'' Taxable
income is that portion of gross income that is properly subject to
taxation under applicable provisions of tax law. The tax gap is defined
as the difference between the amount of tax owed by taxpayers for a
given year and the amount that is actually paid voluntarily and timely.
The tax gap is intended to represent, in dollar terms, the annual
amount of tax noncompliance with our tax laws. It does not distinguish
between underreporting, non-filing or underpayment of tax based on a
good faith misunderstanding of the tax law, intentional evasion of
filing or reporting obligations, domestic or foreign source income,
legal or illegal source income, etc.
However, given restrictions in data availability, it is extremely
difficult to empirically estimate the level of tax gap associated with
all noncompliance activities in the current state of the economy. Our
most recently published tax gap estimates for calendar years 2011-2013
are not intended to represent an all-inclusive, current measure of
global tax non-compliance by U.S. taxpayers. They are outdated, under-
inclusive, and are based on limited types of detected information. The
2021 digital world economy is significantly different from the world
economy of 2011-2013. Published estimates have traditionally relied on
historical audit and collection data for certain identified non-filers,
underreporters, and underpayers. For at least the past 18 months, we
have been working on updating and enhancing the underlying approach and
methodology, improving the currency of the estimates and considering
how to better identify and incorporate additional information that may
assist us in forecasting emerging compliance issues.
We will soon be implementing new tax gap approaches and
methodologies, including more operational audit data and identifying
additional sources contributing to more inclusive estimates that are
reflective of the actual tax gap. In addition, advancements in
artificial intelligence, advanced data, and analytic strategies have
enhanced our capabilities to identify areas of noncompliance in ways
that were not remotely possible just a few years ago. These new tax gap
data and methodologies will assist us in determining and coordinating
the deployment of our limited enforcement-related resources, both to
minimize burden on compliant taxpayers and to concentrate on reaching
noncompliant taxpayers.
While a portion of the unpaid tax obligations that make up the tax
gap result from a lack of knowledge or ambiguity and complexity in tax
law, willful evasion is also a significant contributing factor. The
2022 budget includes a program integrity allocation adjustment, which
includes targeted investments in enforcement activities to help IRS
address this evasion.
The tax gap has many underlying causes, including complexity,
opaque sources of income and insufficient IRS enforcement. Budget cuts
over the past decade have resulted in an agency that lacks the capacity
to address sophisticated tax evasion efforts. Appropriations for the
IRS have fallen by about 20 percent (adjusted for inflation) since FY
2010. The decline in the overall IRS budget has resulted in a 15
percent decline in the number of full-time employees at the agency
since FY 2010.
The effect of personnel lost is most visible in enforcement
activities. Among the 33,378 full-time personnel lost between FY 2010
and FY 2020, more than 13,388 were enforcement personnel. These losses
included revenue agents and revenue officers who audit tax returns and
perform collection activities, as well as special agents who
investigate tax-related crimes and other issues.
There's no single solution to achieving a meaningful reduction in
the tax gap or one type of taxpayer responsible for it. Reducing the
tax gap requires a comprehensive, multifaceted strategy and effective
execution from the IRS, coupled with appropriate safeguards and
accountability to taxpayers. Investment in our service, enforcement,
and compliance efforts is extremely important. Multiyear, consistent,
timely, and adequate funding helps us deliver meaningful services to
taxpayers, conduct critical enforcement initiatives, and support long
term IT modernization efforts that help improve compliance. Greater
investment in technology can help us properly assist compliant
taxpayers. Modernization of our systems coupled with technological
advances in artificial intelligence, data and analytics will continue
to enhance services to compliant taxpayers and make tax avoidance by
others more visible and more difficult.
Efforts necessary to raise compliance levels are resource-
intensive. We remain committed to ensuring that the tax system is
enforced fairly, taxpayers receive the nature and quality of services
they deserve, and that no one at any income level feels safe cheating
on their taxes. In addition to the need for the IRS to run a balanced
enforcement program, the tax gap--and the underlying components--
illustrate that we also need to continue focusing on solid, meaningful
taxpayer service to help people understand and satisfy their filing and
reporting obligations.
the president's long-term plan to improve tax administration
As a part of the American Families Plan, the President recently
made a series of proposals that would overhaul tax administration and
provide the IRS with the resources and information it needs to address
tax evasion over the long term. All told, these reforms will generate
an additional $700 billion in tax revenue over the course of a decade,
net of the investments made. A key component of this initiative is the
provision of a sustained, multiyear stream of funding for tax
administration. Receipt of consistent, timely, multiyear funding is
critical to the future success of tax administration.
This proposal directs nearly $80 billion to the IRS over a decade
to hire new specialized enforcement staff, modernize antiquated
information technology, and invest in meaningful taxpayer service--
including the implementation of the newly expanded credits including
newly expanded Child Tax Credit and Child and Dependent Care Tax
Credits aimed at providing support to American families.
Components of the Plan
The proposal to provide the IRS with nearly $80 billion over 10
years has two primary components:
A multiyear program integrity allocation adjustment of $6.7
billion over a decade. It is estimated to generate $38.6
billion in new direct revenue and protect $11.6 billion over 10
years. This ROI is likely understated because it does not
reflect the effect that enhanced enforcement has on deterring
non-compliance.
Approximately $72.5 billion in mandatory funding over the
budget window. A portion of these proposed IRS resources would
fund improvements and expansions in enforcement and compliance
activities. The proposed mandatory funding would also provide
the IRS with resources to enhance its information technology
capability--including implementation of the proposed financial
information reporting regime described later in this
testimony--and to strengthen taxpayer service. The proposal
would direct that additional resources go toward enforcement
against those with the highest incomes, rather than Americans
with actual income of less than $400,000.
Absorbing Additional Resources Over the Next Decade
The proposal includes year-by-year estimates of the additional
resources that will be directed toward the agency as well as the
specific activities that these resources would support. The plan
allocates the mandatory funds over a 10-year period, and the plan
design ensures that the IRS is able to absorb and usefully deploy
additional resources over the entire 10-year horizon.
The plan provides enforcement resources, including a significant
investment in revitalizing the IRS's examination of large corporations,
partnerships, and global high-wealth individuals. It also includes
funding for other important IRS priorities that support tax
administration. It includes nearly $6 billion for IT modernization.
Modernization funding will allow the IRS to address core technology
challenges and transform IRS provision of meaningful taxpayer services
and tax enforcement efforts. It also includes $4.5 billion to implement
a new information reporting regime as well as additional resources to
protect against imminent threats to the security of the tax system,
like cyberattacks.
Additional IT tools will help support a staff capable of deploying
new analytical techniques and ensure that enforcement personnel have
the most up-to-date tools to support their work to enhance compliance.
Investing in developing machine learning capabilities will enable the
IRS to leverage the information it collects to better identify tax
returns for compliance review.
Initial Hiring Plans and Estimates for Return on Investment
The IRS is committed to appropriately, efficiently and wisely using
the resources we receive from Congress. The IRS is developing a hiring
plan that will allow us to hire the necessary people with the right
skills. We will hire people with a mix of experience; that is, along
with people just or recently out of college or graduate school, we will
also hire people at the mid-point and beyond in their careers who would
have greater levels of experience and expertise, so that we could
greatly accelerate the impact their hiring would have in the
enforcement and service areas for which they are selected.
We will hire enforcement staffing to support our base enforcement
functions but also hire a balanced mix of staffing, including employees
in our research division, our Criminal Investigation division, Chief
Counsel, Appeals and the Taxpayer Advocate Service.
the president's legislative proposals
In addition to the multiyear IRS funding plan in the American
Families Plan, the budget includes several important proposals that
would improve tax administration and provide the IRS with a blueprint
to address various facets of the tax gap. These proposals align with
the President's plan for sustained, multiyear funding of the IRS. The
major tax compliance and administration proposals include the
following:
Increase oversight of paid tax return preparers. Paid tax
return preparers have an important role in tax administration because
they assist taxpayers in complying with their obligations under the tax
laws. The proposal would amend title 31, U.S. Code (Money and Finance)
to provide the Secretary with explicit authority to regulate all paid
preparers of Federal tax returns, including by establishing mandatory
minimum competency standards. The proposal would be effective on the
date of enactment.
Increase penalties on ghost preparers. So-called ghost
preparers are compensated for preparing returns but refuse to identify
themselves on the returns purposely to avoid detection. The proposal
would increase the penalty amount to the greater of $500 per return or
100 percent of the income derived per return by a ghost preparer. The
proposal would also increase the limitations period during which the
penalty may be assessed from 3 years to 6 years. The proposal would be
effective for returns required to be filed after December 31, 2021.
Introduce comprehensive financial account information
reporting. This proposal would create a comprehensive financial account
information reporting regime. Financial institutions would report data
on financial accounts in an information return. The annual return will
report gross inflows and outflows with a breakdown for physical cash,
transactions with a foreign account, and transfers to and from another
account with the same owner. This requirement would apply to all
business and personal accounts from financial institutions, including
bank, loan, and investment accounts, with the exception of accounts
below a low de minimis gross flow threshold of $600 or fair market
value of $600. Other accounts with characteristics similar to financial
institution accounts will be covered under this information reporting
regime. In particular, payment settlement entities would collect
Taxpayer Identification Numbers (TINs) and file a revised Form 1099-K
expanded to all payee accounts (subject to the same de minimis
threshold), reporting not only gross receipts but also gross purchases,
physical cash, as well as payments to and from foreign accounts, and
transfer inflows and outflows. Similar reporting requirements would
apply to crypto asset exchanges and custodians. Separately, reporting
requirements would apply in cases in which taxpayers buy crypto assets
from one broker and then transfer them to another broker, and
businesses that receive crypto assets in transactions with a fair
market value of more than $10,000 would have to report such
transactions. The Secretary would be given broad authority to issue
regulations necessary to implement this proposal. The proposal would be
effective for tax years beginning after December 31, 2022.
Expand authority to require electronic filing for forms and
returns. Under this proposal, electronic filing would be required for
returns filed by taxpayers reporting larger amounts or that are complex
business entities, including: (1) income tax returns of individuals
with gross income of $400,000 or more; (2) income, estate, or gift tax
returns of all related individuals, estates, and trusts with assets or
gross income of $400,000 or more in any of the 3 preceding years; (3)
partnership returns for partnerships with assets or any item of income
of more than $10 million in any of the 3 preceding years; (4)
partnership returns for partnerships with more than 10 partners; (5)
returns of real estate investment trusts, real estate mortgage
investment conduits, regulated investment companies and all insurance
companies; and (6) corporate returns for corporations with $10 million
or more in assets or more than 10 shareholders. Further, electronic
filing would be required for the following forms: (1) Forms 8918,
``Material Advisor Disclosure Statement''; (2) Forms 8886, ``Reportable
Transaction Disclosure Statement''; (3) Forms 1042, ``Annual
Withholding Tax Return for U.S. Source Income of Foreign Persons''; (4)
Forms 8038-CP, ``Return for Credit Payments to Issuers of Qualified
Bonds''; and (5) Forms 8300, ``Report of Cash Payments Over $10,000
Received in a Trade or Business.'' Return preparers that expect to
prepare more than 10 corporation income tax returns or partnership
returns would be required to file such returns electronically. The
Secretary would also be authorized to determine which additional
returns, statements, and other documents must be filed in electronic
form in order to ensure the efficient administration of the internal
revenue laws without regard to the number of returns that a person
files during a year.
Improve reporting for payments subject to backup withholding.
The proposal would treat all information returns subject to backup
withholding similarly. Specifically, the IRS would be permitted to
require payees of any reportable payments to furnish their TINs to
payors under penalty of perjury. The proposal would be effective for
payments made after December 31, 2021.
IRS Centralized Services Fund/Working Capital Fund. The budget
includes appropriations language to establish a working capital fund
for IRS centralized services. The fund will allow the IRS to achieve
cost savings, promote economies of scale, establish more consistent
processes and policies, and improve how it delivers facility services,
technology, and other centralized services for its business units. For
FY 2022, the fund proposes to start with several pilot projects that
would test use of the fund, including, potentially, IT development and
operations projects, facilities projects, and/or postage funding.
conclusion
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you again for the opportunity to discuss the IRS budget and
update you on IRS operations. The agency remains 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.
______
Questions Submitted for the Record to Hon. Charles P. Rettig
Questions Submitted by Hon. John Barrasso
Question. On June 8, 2021, ProPublica published an article titled,
``The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How
the Wealthiest Avoid Income Tax.'' The article states that ProPublica
has obtained IRS data on the tax returns of thousands of Americans.
This could be the largest breach in the IRS's history, represents a
serious breach of privacy, and is a criminal violation of our tax laws.
It damages the American taxpayers' confidence that the IRS will keep
their personal information confidential.
While I appreciate that the Federal Bureau of Investigation is now
investigating the breach, I hope that the IRS will fully cooperate with
that investigation. After the recent IRS scandal involving the agency's
targeting of conservative groups, thousands of IRS emails were
destroyed despite a preservation order and congressional subpoenas.
Once again, at the very least, there is a perception that the IRS is
being used for political ends. This erodes American taxpayers'
confidence in the agency.
The American people have a right to know how and why confidential
information was allegedly obtained or leaked from the IRS.
Do you commit to fully cooperate with Congress and Federal
investigators on this serious breach of American taxpayer's
confidential information?
Answer. The IRS will fully cooperate with each and every
congressional and Federal investigation into the ProPublica article.
Congress may wish to reach out directly to any investigative
organization that may be conducting an investigation.
Question. I believe the Taxpayer Advocate service is an important
tool the IRS has to help taxpayers. Dealing with the IRS can be
intimidating, confusing, stressful, and never-ending. The Taxpayer
Advocate does not have the resources or authority to resolve every
problem taxpayers encounter with the IRS. The issues they can help with
are limited, but their assistance and guidance can be invaluable.
If the IRS is sincere in its desire to treat taxpayers fairly
throughout the process, I believe it is important that the IRS maintain
a robust and effective Taxpayer Advocate office.
What needs to be done to enhance the visibility and role of the
Taxpayer Advocate's office? Can you detail how the IRS will ensure that
the Taxpayer Advocate has the necessary resources to improve their
ability to advocate for and provide guidance to taxpayers?
Answer. The IRS works to ensure the visibility of the Taxpayer
Advocate Service (TAS) in a variety of ways. Although the TAS is
independent in the IRS, key communications are shared through broader
IRS communications channels, including IRS.gov, news releases, social
media, partner outreach, and information shared to local congressional
offices.
The mission of the Taxpayer Advocate's office is an important one,
and the IRS has a good working relationship with the National Taxpayer
Advocate. The TAS exists to assist taxpayers in circumstances of
economic hardship or when a case has not been handled properly, while
advocating with both the IRS and Congress for systemic changes,
taxpayer rights, and improved service.
A key aspect of the Taxpayer First Act (TFA) reorganization was the
creation of the Chief Taxpayer Experience Office. The National Taxpayer
Advocate and the Taxpayer Experience Officer are holistically focusing
on taxpayer service and taxpayer rights from the taxpayer's
perspective. This joint effort recognizes the important role of the
Taxpayer Advocate's office and should further enhance its visibility
within the agency.
The minimum funding levels for TAS provided in the appropriations
acts are important to ensuring its independence and that it has the
resources necessary to successfully advocate on behalf of taxpayers
without the need to request additional funds from the Commissioner.
Question. The IRS traditionally requires handwritten signatures on
a wide array of forms. Last year, because of the COIVD-19 situation,
the IRS started accepting electronic or digital signatures for a number
of these forms.
From a taxpayer's standpoint this was a welcome change. The ability
to use a digital signature can somewhat streamline what is frequently a
confusing and time-consuming process.
Have you found that accepting digital documents and signatures has
streamlined administration on the IRS's side?
Answer. Yes, accepting digital documents and signatures contributed
significantly to the IRS's ability to process information during the
COVID-19 pandemic. The expanded digital options not only promoted
efficiency but also helped preserve health and safety. Digital options
for taxpayers, tax professionals, and IRS employees are fundamental to
effective tax administration.
Question. Is the IRS considering implementing permanent changes
based on this experience? It seems to me that this kind of
modernization would help makes the processes more efficient overall.
Answer. While these flexibilities created efficiencies, they do not
fully satisfy the standards for electronic signatures as established by
the National Institute of Standards and Technology or the IRS
Electronic Signature (e-signature) Program. Therefore, rather than
making these exceptions permanent, we are currently preparing to extend
them through 2023, pending the development of new tools that will
satisfy the requirements for electronic signatures and secure document
exchange.
______
Questions Submitted by Hon. Sherrod Brown
Question. The IRS is currently accepting applications to serve on
the IRS Advisory Council (IRSAC) for 3-year terms beginning in January
2022. Many low- and
moderate-income workers and families do not access tax credits that
they are eligible for, and the IRS is currently rolling out critical
Earned Income Tax Credit and Child Tax Credit expansions under the
American Rescue Plan.
Will you ensure that the IRS prioritizes selecting applicants for
the IRSAC who have expertise on tax administration and compliance
issues affecting low- and
moderate-income families?
Answer. The IRSAC Membership Balance Plan emphasizes the selection
of members representing a diverse set of taxpayers. Balance factors
identified as important for IRSAC membership are geographic, work
sector, and taxpayer diversity.
As you recall, before joining the IRS, I proudly served on the
IRSAC, ultimately serving as the IRSAC Chair. You likely also recall my
significant priority as Commissioner in the IRS: appropriately serving
lower-income and historically underserved communities. Together with
various outreach programs and initiatives, the IRSAC is a critical link
between the IRS and our efforts to enhance the awareness and education
of individuals who may be eligible for the Earned Income Tax Credit,
the Advance Child Tax Credit, and other benefits.
The IRS will continue to prioritize the selection of applicants for
the IRSAC who have expertise in tax administration and compliance
issues affecting low- and
moderate-income families. This year, the IRS received applications from
some individuals who daily work with low- and moderate-income families
through the IRS VITA program. Wherever possible, special consideration
is given to these applicants.
Question. IRSAC membership should reflect the full spectrum of
racial, ethnic, and gender identities found among the American
taxpayers that the IRS serves. IRSAC should also have the expertise
needed to provide input on the IRS's implementation of Executive Order
13985 (EO 13985), which asks Federal agencies to pursue equity, meaning
``consistent and systematic fair, just, and impartial treatment of all
individuals,'' including those in various underserved communities as
outlined by EO 13985.
Will the IRS prioritize selecting a diverse cohort of new members
for the IRSAC and applicants with expertise needed to evaluate the
racial equity implications of Federal tax policy and administration?
Answer. The IRSAC was established to provide an organized public
forum between IRS officials and representatives of the public for
discussing relevant tax administration issues. Its duties are to
research, analyze and make recommendations to the IRS on a wide range
of issues affecting Federal tax administration and IRS operations.
Specific subject matter and technical expertise in Federal tax
administration issues, Circular 230, information reporting or tax-
exempt and government entities are generally required to accomplish the
tasks of the IRSAC. Each IRSAC member is appointed to represent the
point of view of a customer segment, with the goal of having as great a
diversity of views as possible.
The IRS will continue to prioritize the selection of a diverse
cohort of new members for the IRSAC, including applicants with
expertise needed to evaluate the racial equity implications of Federal
tax policy and administration. IRSAC members are selected through a
structured application process that seeks individuals with substantial,
disparate experiences and diverse backgrounds. Wherever possible,
special consideration is given to selecting members who can reflect and
represent a diverse set of taxpayers.
______
Questions Submitted by Hon. Benjamin L. Cardin
Question. Fire and EMS chiefs have sought relief from tax policies
that classify unmarked vehicles issued to fire chiefs as taxable
income. These unmarked vehicles are needed to ensure the safety of a
fire chief, their family, and home. These vehicles often are covered by
policies that prohibit their use for personal reasons. Given these
restrictions and need for fire chiefs to respond to emergencies outside
normal business hours, fire departments hope they would be included in
the same ``non-
personal use'' exemption afforded to unmarked cars issued to law
enforcement officers. Simply put, the same vehicle issued to a fire
chief and a police chief would have different tax liabilities.
You have previously indicated your agreement with these concerns
and a willingness possibly to include unmarked fire and EMS chief
vehicles in the ``Non-Personal Use'' designation. Can you share a
status update on the IRS's assessment of the issue?
Answer. As you are aware, an employee's personal use of an
employer-provided vehicle is generally treated as a taxable fringe
benefit. Personal use includes use of the vehicle to commute to and
from work. However, under the code, an employee's authorized personal
use of a vehicle that meets the definition of a qualified nonpersonal
use vehicle is not treated as a taxable fringe benefit. A qualified
nonpersonal use vehicle is any vehicle the employee isn't likely to use
more than minimally for personal purposes because of its design. All
employee use of a qualified nonpersonal use vehicle is treated as a
tax-free working condition benefit.
According to final Treasury Regulations published in 2008, the
following vehicles are treated as qualified nonpersonal use vehicles:
Clearly marked, through painted insignia or words, police,
fire, and public safety vehicles, provided that any personal use of the
vehicle (other than commuting) is prohibited by the governmental unit.
Unmarked vehicles used by law enforcement officers if the use
is officially authorized. Any personal use must be authorized by the
employer, and must be related to law-enforcement functions, such as
being able to report directly from home to an emergency situation. Use
of an unmarked vehicle for vacation or recreation trips can't qualify
as an authorized use.
Note that a fire chief and a police chief would not necessarily
have different tax liabilities relative to their work vehicles. Both
clearly marked fire and police vehicles can qualify for the same tax-
free treatment as qualified nonpersonal use vehicles. Also, not all
police officers or other law enforcement personnel are permitted to
make tax-free personal use of unmarked vehicles. Only personal use of
such vehicles that is incident to specific law enforcement functions
including reporting directly from home to a stakeout or surveillance
site, or to an emergency situation, can be treated as tax-free.
We are continuing to study the important issue of whether it is
necessary and appropriate to issue regulatory guidance amending the
definition of qualified non-
personal use vehicle to include unmarked fire and EMS chief vehicles
under the same or similar standard as unmarked law enforcement
vehicles. When the regulations were last amended in 2008, the
Department of the Treasury and IRS declined to adopt commenters'
suggestions to eliminate some of the requirements pertaining to
qualified nonpersonal use vehicles, including the requirements that the
vehicles be clearly marked and specially equipped. In declining to
adopt these suggestions, we stated ``[i]f the vehicle is not required
to be specially equipped or clearly marked, the vehicle will function
easily as a personal use vehicle and is not readily distinguishable
from vehicles routinely used for personal purposes.'' T.D. 9483, 75
F.R. 27934, 27935.
We note that the tax treatment of unmarked law enforcement vehicles
as qualified nonpersonal use vehicles is, in part, an acknowledgment of
the fact that, for both safety and practical reasons, law enforcement
personnel who engage in undercover work or conduct surveillance require
the use of an unmarked vehicle that is equipped for police work. As we
consider any expansion of the regulatory framework to include unmarked
fire and EMS vehicles, we welcome additional information as to how
unmarked vehicles are used for fire and EMS chief purposes, including
how the qualified nonpersonal use vehicle exclusion would apply to
voluntary fire departments and what kind of specialized equipment is
required to be installed in fire and EMS vehicles to allow the
personnel to effectively do their jobs. Please be assured that we are
diligently revisiting this issue as it applies to unmarked fire and EMS
chief vehicles.
Question. The President's budget request for the IRS includes a
plan to hire thousands of new employees. Typically, when establishing
multiyear agreements to find office space, agencies will use the GSA
leasing process, both to establish certainty and to ensure fair
competition and cost effectiveness.
How does the IRS plan to house or locate newly hired employees
across the Nation quickly and efficiently? Is the agency considering
alternatives to traditionally acquired GSA office space?
Answer. The IRS plan to house new hires is a layered approach
including (1) using existing underutilized space, (2) leveraging
existing telework programs to move out-of-office employees to shared
workstations and free up space for new hires, (3) using existing shared
conference and/or training space, and (4) acquiring space using
traditional and non-traditional methods where applicable.
______
Question Submitted by Hon. Robert P. Casey, Jr.
Question. My office has heard reports of increased tax scams over
the past year. These scammers seek to take advantage of countless
Americans, including vulnerable seniors, and often reference Economic
Impact Payments or other tax benefits related to COVID-19.
How would this proposed budget help the IRS address tax scams and
protect taxpayers, including these new COVID-related tax scams?
Answer. The IRS takes tax scams seriously, especially when those
scams attempt to abuse resources and benefits designed to help people
during the COVID-19 pandemic. The IRS set up intentional screening of
Forms 7200, Advance Payment of Employer Credits Due to COVID-19, and
was able to block $133 million in refunds from being issued to
scammers.
Increasing the IRS's budget would allow for more resources to reach
taxpayers regarding tax scams. We will be able to hire additional
front-line employees such as revenue agents, revenue officers and
contact representatives. Revenue agents and revenue officers make face-
to-face contacts with taxpayers, their representatives, and third
parties in the field. During those contacts, they are available to
answer questions about tax scams. Hiring additional contact
representatives will increase the number of taxpayer telephone calls we
are able to answer, increasing our opportunities to answer questions
and to educate taxpayers on tax scams.
Proposed budget increases will also allow the IRS to keep pace with
rapid changes in technology and acquire the best available tools to
identify and stop schemes as early as possible, protecting vulnerable
segments of the U.S. population, including seniors, from fraud.
The IRS.gov webpage on scams (https://www.irs.gov/newsroom/tax-
scams-consumer-alerts) provides reporting information, including
contact information for the Treasury Inspector General for Tax
Administration (TIGTA) and the email address [email protected]. We
provide alerts and information to taxpayers about scams to be aware of
through such publications as the annual Dirty Dozen listing.
As the law enforcement arm of the IRS, the Criminal Investigation
(IRS-CI) division plays a leading role in protecting taxpayers and the
integrity of the tax system against scams and illegal activity. This
includes combating fraud related to Advance Child Tax Credit, Economic
Impact Payments, Paycheck Protection Program, and Employee Retention
Credit. Since the CARES ACT, IRS-CI has investigated more than 550 tax
and money laundering cases nationwide totaling upwards of $820 million
in fraud. These investigations covered a broad range of criminal
activity including fraudulently obtained loans, credits, and payments
meant for American workers, families, and small businesses.
Additional funding would allow us to significantly increase our
investigative technology and data analytics capabilities and hire more
employees to prevent, identify, and aggressively investigate criminals
engaged in illegal activity. This includes significantly increasing our
capabilities to pursue the illicit use of digital assets and
cryptocurrencies to commit tax and financial crimes. More information
on how IRS-CI would utilize increased funding on technology, data
analytics, and personnel can be found in pages 18-20, 24-25, 63-67 and
137-139 of the IRS FY22 budget request.
______
Questions Submitted by Hon. Mike Crapo
Question. In your April 13th appearance before the committee, you
indicated that it was realistic that the current tax gap equals $1
trillion per year, and gave several possible reasons for that number.
While I have previously asked for additional details on how you arrived
at the $1 trillion figure, I have not received a clear, direct
response.
The most recent official tax gap estimates relate to tax years
2011-2013, and were released in 2019. The published gross tax gap for
those years is $441 billion.
To get from $441 billion official estimate for 2011-2013 to your
hypothesized estimate of $1 trillion for today involves, according to
what you have said: inflation in the value of the dollar; the rise of
cryptocurrency; and unreported or concealed income offshore and in
pass-through entities--none of which were included in the official
estimate.
How much of the roughly $600 billion difference between the $1
trillion tax gap you hypothesize and the 2011-2013 value of $441
billion is attributable to each of those factors: one, inflation in the
value of the dollar; two, the rise of cryptocurrency; three, unreported
or concealed income offshore; and, four, unreported or concealed income
in pass-through entities?
Answer. The tax gap represents, in dollar terms, the annual amount
of tax noncompliance with our tax laws. It does not distinguish between
intentional and unintentional noncompliance with tax laws. Further, it
does not report obligations, domestic or foreign, legal or illegal
source income, etc. In addition, because our published estimates are
based on available information there are acknowledged gaps that prevent
it from serving as an all-inclusive measure of global tax non-
compliance by U.S. taxpayers.
The 2011-2013 estimates apply to returns filed for tax years 2011-
2013 and subsequently audited. They therefore cannot fully represent
the compliance landscape in 2021. The 2021 digital world economy is
significantly different from the world economy of 2011-2013 and
therefore it would be incorrect to think that these estimates fully
capture the current scope of the tax gap. At the May 11, 2021 hearing
on the tax gap before the Senate Finance Committee, Subcommittee on
Taxation and IRS Oversight, Barry Johnson, Acting Chief of RAAS,
testified that simply using asset and price growth information to
adjust the 2011-2013 gross tax gap estimates would yield an initial
estimated adjusted gross tax gap for Tax Year 2019 of approximately
$600 billion.
Further, an IRS research team working with others used operational
audit data to review sophisticated tax evasion by certain taxpayers
though the use of offshore bank accounts and/or complex pass-through
business structures. This information is not fully captured by our
legacy tax gap estimation methodology. IRS researchers estimated
evasion limited to the use of offshore bank accounts and/or complex
pass-through business structures contributed an additional $33 billion
to the 2011-2013 tax gap. Adjusting this estimate would increase the
Tax Year 2019 tax gap by an additional $46 billion. With this increase,
Mr. Johnson estimated the overall gross tax gap for Tax Year 2019 is
approximately $646 billion.
This estimate does not account for factors including the rise of
cryptocurrency, additional undetected income offshore or concealed in
pass-through entities not identified in the referenced research,
additional areas of noncompliance including conservation easements, or
illegal source income (which is not included in the tax gap estimate).
Cryptocurrency alone has grown to a world-wide market of $2 trillion.
Reporting compliance falls far short of what would be expected given
the number of users, transactions, and value that virtual currency
exchanges publicize on an annual basis. Recognizing compliance
challenges, the IRS has focused significant enforcement resources over
the past 2 years in the virtual currency environment.
In addition to most taxable virtual currency transactions, the tax
gap estimate for tax years 2011-2013 also doesn't fully reflect
noncompliance related to various undetected international or foreign-
based taxable transactions and activities, illegal source income (which
is taxable and is pursued by the IRS often in coordination with other
Federal and State agencies), and other types of undetected, concealed
taxable income. Previous Tax Gap estimates only generally measured
international activities by domestic tax return filers but not from
taxpayers with addresses abroad, foreign businesses and others. The IRS
is generally aware of significant noncompliance associated with the
foregoing but does not currently have an estimate of how much it would
impact the tax gap; however, we are committed to conducting the
research necessary to produce estimates in the future.
Finally, Mr. Johnson noted that it has been well publicized that
IRS audits have significantly declined. RAAS research consistently
finds that audits have a deterrent effect and noted that the recent
decline in audits is likely to have the opposite effect, leading to an
increase in the tax gap.
In consideration of the foregoing points, it would not be
unreasonable to believe that the actual tax gap could approach and
possibly exceed $1 trillion per year.
To address some of the above challenges, Mr. Johnson confirmed that
for at least the past 18 months, RAAS has been working on updating and
enhancing the underlying tax gap methodology, the goal of improving the
currency of the estimates by considering how to identify and
incorporate additional information and emerging compliance issues.
Question. In his May 11th testimony before the Subcommittee on
Taxation and IRS Oversight, Acting IRS RAAS Chief Barry Johnson
indicated that, on a preliminary basis, the IRS believes the 2019 tax
gap is $646 billion.
I believe you sited this figure in your testimony before the
committee. I have a few questions related to this.
(a) Can you confirm whether or not $1 trillion is your estimate of
the current tax gap? If not, whose estimate was/is it?
(b) If so, please break down by dollar amounts what accounts for
the more than $350-billion difference between Acting RAAS Chief
Johnson's 2019 estimate and your current estimate?
(c) If the 2019 estimate is as preliminary as Acting RAAS Chief
Johnson testified, and in light of the fact that the IRS only intends
to publish an updated official 2014-2016 tax gap in 2022 (with 2019 to
obviously come after this), how is it possible for you to even arrive
at an estimate of the current tax gap?
Answer. See the response to question 1. The tax gap represents, in
dollar terms, the annual amount of tax noncompliance with our tax laws.
It does not distinguish between underreporting, non-filing, or
underpayment of tax based on a good faith misunderstanding of the tax
law, intentional evasion of filing or reporting obligations, domestic
or foreign source income, legal or illegal source income, etc. However,
our published estimates are based on limited types of information and
are not intended to represent an all-inclusive measure of global tax
non-compliance by U.S. taxpayers. The potential current tax gap is an
extrapolation of the RAAS estimate for 2019 of about $646 billion and
is also based on a specific awareness of much of what is, and is not,
included in our most recent ``official'' tax gap estimate for tax years
2011-2013.
Question. The IRS has been tasked with delivering Advance Child Tax
Credits for 2021.
When you last appeared before the committee, you noted the IRS was
working to ensure that the information portal for parents to provide
additional information or opt out of receiving advance credits for 2021
would be fully operational, with robust outreach underway, before the
checks would be sent out.
More recently, we have heard that advance payments will start to be
sent on July 15th, notwithstanding that the portal will have only
limited functionality. At that point, the IRS will use systems and
processes that it has never used before and there will not have been
robust outreach. We have also heard that the IRS is currently
unprepared to handle the likely significant volume of taxpayer outreach
it will receive with respect to the credit.
Given that, are you concerned that we are going to see a
significant number of advance payments issued that are inaccurate and
even unwanted, and that this could lead to families seeing unexpected
tax obligations or smaller than expected tax refunds during next year's
filing season?
Answer. Per the American Rescue Plan Act of 2021 (American Rescue
Plan), we determined eligibility using information from the taxpayer's
2020 tax return (or 2019 tax return if a return was not filed for
2020). This includes information entered into the Non-filer tool. We
implemented a robust communication strategy to inform taxpayers about
the Advance Child Tax Credit (CTC) payments and how they can unenroll
from these payments or report changes that impact their advance payment
amount.
We hosted Advance CTC Free Tax Prep Days and CTC outreach events in
select cities across the country in June and July to supplement our
ongoing communications. During these events, IRS employees, key
community stakeholders, and volunteers helped eligible families file a
2020 tax return, if needed, to begin receiving their monthly Advance
CTC payments. More events are planned for the future.
Communications, outreach, and assistance will continue through the
2022 filing season. To provide the latest information, we developed a
special Advance CTC 2021 page on IRS.gov to provide the most up-to-date
information about the credit and the advance payments. The site
includes direct links to the CTC Update Portal as well as two other
online tools (the Non-filer Sign-up Tool and the Child Tax Credit
Eligibility Assistant), a set of frequently asked questions, and other
useful resources.
The IRS launched new online tools designed to help taxpayers
determine eligibility and manage Advance CTC payments. The Non-filer
Sign-up Tool helps families not normally required to file an income tax
return to quickly register for the CTC. The new CTC Eligibility
Assistant allows families to answer a series of questions to determine
whether they qualify for the advance credit. The CTC Update Portal
allows families to verify their eligibility for the payments and if
they choose to, unenroll from receiving the monthly payments so they
can receive a lump sum when they file their tax return next year. If
needed, families have the option to update their bank account
information and receive their monthly Advance CTC payment through
direct deposit quickly and easily. Families also have the option to
quickly and easily update their mailing address using the portal. This
feature will help any family that chooses to receive their payment by
paper check avoid mailing delays or even having a check returned as
undeliverable. More functionality will be added later this year to the
CTC Update Portal.
Question. How many fully trained customer service reps are
currently available who are focusing on this issue? How many additional
CSRs will be ready and working as of July 15th? And what is the
ultimate number expected to be working on this issue, and when will
they all be fully trained and ready to go?
Answer. The IRS has fully trained approximately 3,800 Customer
Service Representatives (CSRs) to handle Advance CTC payment calls. We
estimate the expected daily phone line need will be approximately 1,800
CSRs. Having 3,800 fully trained CSRs, which is 2,000 beyond our
expected need, will allow us to apply additional resources as
necessary. While there are no plans to train additional CSRs at this
time, the training is less than two hours, and we can quickly skill up
additional CSRs at any given moment if required.
Question. Does the IRS currently have all necessary and vetted
strategic and operational plans in place to accommodate opening the
funding floodgates to the degree proposed by President Biden's budget
request? If not, what plans remain outstanding?
Answer. Almost 75 percent of the IRS's funding request in the FY
2022 President's budget and the IRS's portion of the American Families
Plan is labor which, in addition to technology, is a key component to
increasing tax enforcement and overall tax administration. We are
developing and deploying focused strategies to ensure we are well-
positioned to recruit, hire, train, support and retain the highly
skilled, agile workforce needed to achieve the IRS mission. We have
started the following activities to prepare for increased staffing from
either the FY 2022 President's budget or American Families Plan
funding:
In the 3rd quarter of FY 2021, all IRS business organizations
used the OPM 5-Step Workforce Planning Model to develop a holistic view
of FY 2022 (planned) hiring projections. We are analyzing the data to
inform a comprehensive IRS FY22 Recruitment and Hiring Strategy.
To prepare for anticipated hiring needs, we are deploying
deliberate rebranding, marketing, and recruitment strategies through
social media, student and graduate programs, and collaboration with
unemployment offices, educational institutions, and Federal employment
programs. We are also developing internal and external hiring
strategies to navigate challenges in an extremely competitive hiring
market.
To support increased hiring efforts, we are implementing
internal operating plans to increase hiring capabilities, optimize
efficiencies, streamline onboarding, and obtain contractor support
(where applicable).
To support onboarding and employee development, we are
implementing a comprehensive training strategy, as outlined in the
Taxpayer First Act report to Congress. This strategy will instill the
importance of taxpayer service in all employees, develop employee skill
sets, improve morale, increase productivity, enhance knowledge transfer
between employees, and foster innovation.
We are also investing in several efforts to enhance the IRS
employee experience through enhanced technology solutions, thoughtful
human capital solutions, and workforce strategies informed by ``Future
of Work'' efforts aimed at transforming the IRS workplace, optimizing
operations, and modernizing employee, partner, and taxpayer experiences
to position the IRS as an ``employer of choice.''
In addition to increasing staff, we are also busy planning for
where these people will sit and augmenting the information technology
(IT) infrastructure to support the new hires across the IRS network.
The FY22 President's budget seeks to reduce the tax gap, improve
level of service, implement improvements as outlined in our Taxpayer
First Act report to Congress, continue to modernize our IT technology
as outlined in our IT Modernization Business Plan, and begin to replace
our vehicle fleet with electric vehicles. With the American Families
Plan Tax Compliance Agenda, the administration proposes 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.
Question. What specific steps would the IRS take to ensure that
additional funding of this magnitude is used in a productive as opposed
to a reactive manner--for example, to develop modernized systems and
streamlined and efficient process as opposed to simply maintaining
outdated infrastructure and further enshrine red tape?
Answer. Greater investments in technology can help us properly
assist compliant taxpayers. Modernization of our systems coupled with
technological advances in artificial intelligence, data and analytics
will continue to enhance services to compliant taxpayers and make tax
avoidance by others more visible and more difficult. The President's
budget requests $144 million to build the technology components of
three program increases included in the President's budget--Taxpayer
Experience Strategy, Ensure Fairness of the Tax System, and Improve
Live Assistance.
In April 2019, we released the Integrated Modernization Business
Plan (Modernization Plan). The 6-year plan outlines the major
components necessary to transform IRS technology and enhance the
taxpayer experience. We have implemented the Modernization Plan over
the years delivering meaningful taxpayer and IRS business benefits
across four modernization pillars--Taxpayer Experience, Core Taxpayer
Services and Enforcement, Modernized IRS Operations, and Cybersecurity
and Data Protection.
While the current Modernization Plan has been successful in
improving the taxpayer experience and launching transformative IT
initiatives, it is constrained by both time and funding. The American
Rescue Plan modernization funds will allow us to accelerate existing
Modernization Plan initiatives, address most initiatives scheduled to
begin in ``Phase 2,'' and introduce new initiatives based on emerging
needs and technologies. However, given our significant modernization
needs, ongoing funding is still necessary to keep pace with cyber
threats, technology advances, compliance trends, and taxpayer service
needs.
The American Families Plan requests $7,171 million to modernize IRS
systems and maintain the new systems. It includes funding to complete
and go beyond the current IRS Modernization Plan, including funds for
expanding Case Selection and Anomaly Detection to leverage information
to improve identification of potential non-compliance, detect issues
earlier, reduce the tax gap, generate revenue, and enable employees to
work cases more efficiently.
We are building a comprehensive modernization portfolio that we
will continue to effectively manage independent of the funding source
or origin. The proposed IRS budget will provide consistent funding for
us to boost voluntary compliance and narrow the tax gap. This
investment will support our efforts to increase the size of our
workforce, increase audit, collection, and criminal investigation
coverage, introduce new financial account information reporting, and
address core technology challenges by upgrading IT systems and retiring
legacy applications.
We will continue to be transparent in reporting on our
modernization progress and evolution in the quarterly Omnibus IT
Investment Report and the Annual Key Insights Report (AKIR).
Question. Particularly in light of the apparent, historical breach
of sensitive taxpayer information that just came to light, I have
several additional questions about the bank reporting proposal in the
President's budget:
First, how would the IRS utilize the information it received from
this proposal?
Answer. Information reporting received by the IRS is typically used
in our compliance activities within our Examination and Collection
functions.
Question. Second, is this type of information already available in
another place, for example, through the BSA/AML regime, and if so what
is preventing the IRS from utilizing such information?
Answer. The information related to the proposed reporting
requirement is not currently available. The new proposed reporting
requirement would impact financial institutions that are not governed
by the Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) program. The
IRS is delegated authority for enforcement and regulation of BSA
compliance with respect to Non-Banking Financial Institutions (NBFI)
and banks and credit unions that do not have a Federal Regulator per 31
CFR section 1010.810 Enforcement.
Question. Third, how long would it take before IRS is in a position
to make sense of the information it would receive under this proposal,
and what technological hurdles must one assume are overcome to reach
this outcome?
Answer. The time depends on how quickly the IRS can acquire the
technology and specialists, such as data scientists, data analysts, and
cybersecurity experts.
Question. Fourth, how can the IRS assure Americans that the
information it would receive under this proposal would be used for
proper purposes and what specifically would be done to safeguard it
from improper use, disclosure or theft?
Answer. Protecting taxpayer information is a fundamental IRS
principle. Every employee takes annual training on unauthorized
disclosure of taxpayer information. This training clearly defines when
a disclosure is authorized and clarifies the consequences of an
unauthorized disclosure under section 6103 of the Internal Revenue
Code. Those consequences include potential termination of employment,
fines, and imprisonment.
The IRS has strong protections in place to safeguard taxpayer
information. TIGTA regularly audits employee access to taxpayer
information. The IRS provides an annual report to the Joint Committee
on Taxation that describes all disclosures of taxpayer information
during the year and the statutory authorization for each disclosure.
The Government Accountability Office also provides oversight on the
protection of taxpayer information.
Question. As you have testified more than once, our tax system is
founded upon the principle of voluntary compliance, and without
voluntary compliance it simply could not work. This view is shared by
wide swathes of stakeholders, including my colleagues, the broader
community of tax professionals, and all taxpayers more generally.
Voluntary compliance requires, among many things, trust. Taxpayers
must trust that the IRS will do ``the right thing'' and also that the
sometimes extremely personal and sensitive information they provide
taxing authorities is safe from abuse of any kind (e.g., targeting,
leak, etc.).
In your view, how much harm does the apparent release of upwards of
15 years of sensitive taxpayer information of all kinds do to the trust
that Americans have in the IRS?
Answer. Historically, the IRS has been extremely effective in
protecting the taxpayer data we collect because of the various levels
of security, oversight and training discussed in response to the
question above. It is among our highest duties, and one we take
personally and seriously. We strive every day to live up to the level
of trust that the public has bestowed upon us. The IRS has and will
continue to fully cooperate with each and every congressional and
Federal investigation into the ProPublica article. We will immediately
take action to respond to any risks identified through an
investigation.
Question. The administration is proposing significant tax increases
on U.S.-based multinationals by doubling the GILTI minimum tax rate and
other changes that would apply the rules more harshly to U.S.
companies. One such change is applying GILTI on a ``jurisdiction-by-
jurisdiction basis.'' Based on the limited information provided in the
Greenbook, this change would require taxpayers to calculate their
effective tax rate and available foreign tax credits separately for
each country, imposing significant new compliance burdens on taxpayers
and the IRS. For some companies this could mean hundreds of separate
calculations, where currently, GILTI allows an aggregate approach to
avoid this kind of complexity. What additional costs and resources
would be required to administer the proposed GILTI regime, including
personnel and programming costs, developing necessary forms and
instructions, and hiring and training personnel to handle the review
and audit of companies' effective tax rate calculations by
jurisdiction?
Answer. In general, the implementation of legislative enactments,
including changes such as the proposed changes to Global Intangible
Low-Taxed Income (GILTI), require IRS resources--including personnel,
technology, and systems--to effectuate and enforce the change to the
tax code. We have a framework for adapting to changes in tax law. This
framework includes developing formal and informal guidance; updating
tax forms, instructions, and educational materials; training our
employees; ensuring stakeholder outreach; and developing a compliance
strategy. Also, our implementation efforts proceed in a manner that is
informed by our taxpayers' experience, responsive to stakeholder
feedback, and maintains the appropriate balance between compliance
burden and risk.
Depending on the extent of legislative changes overall, these
efforts would require additional IRS resources or reallocation of
existing resources in terms of people, systems, and technology.
Specifically with respect to the proposal to apply GILTI on a
jurisdictional basis, we do not yet have complete information to
develop detailed direct or indirect cost estimates related to the
change; however, we will closely monitor and continue to assess the
proposals as they are considered by Congress. While potentially less
costly than the initial adoption of GILTI, the proposed modification
could require revisions to the foreign tax credits rules and expense
allocation and apportionment. Consequently, we would need to apply the
framework described above for addressing tax law changes. From the
taxpayer's perspective, we would likely anticipate additional guidance
and changes to several forms, including Forms 5471, 8992, 1116, 1118,
and 8975.
Question. The administration has also proposed an entirely new
regime, called the Stopping Harmful Inversions and Ending Low-Tax
Developments or ``SHIELD.'' The proposal seems to acknowledge that U.S.
companies would once again be driven to invert or could become
attractive targets for foreign acquisition. Similar to the GILTI
proposal, the SHIELD proposal would require U.S. companies that make
payments to any foreign-related parties to calculate the effective tax
rates of all members included in its financial reporting group. Based
on the limited information provided in the Greenbook, this provision
would require taxpayers to calculate the effective tax rate separately
for each member, imposing significant new compliance burdens on both
taxpayers and the IRS. What additional costs and resources would be
required to administer the proposed SHIELD regime, including personnel
and programming costs, developing necessary forms and instructions, and
hiring and training personnel to handle the review and audit of
companies' effective tax rate calculations by jurisdiction?
Answer. Like any change to the Internal Revenue Code, Stopping
Harmful Inversions and Ending Low-Tax Developments (SHIELD) would
require additional IRS resources to implement and administer the new
code provision.
At this point, we do not have complete information on the proposal
to develop detailed cost estimates related to the potential adoption of
SHIELD; however, we will closely monitor and continue to assess the
proposals as they are considered by Congress.
As with any new legislation, such as the 2017 tax legislation,
SHIELD would require development of new forms, instructions, and formal
guidance, thus requiring additional personnel, systems, and IT
resources. Moreover, because of the potential need to develop
personnel, systems, and IT resources relating to, for example, foreign
financial accounting standards, we anticipate the need for additional
new resources. Consequently, the IRS would need to apply the framework
described above for addressing tax law changes. Because the Greenbook
proposes to replace the Base Erosion and Anti-Abuse Tax (BEAT) with
SHIELD and eliminate Foreign Derived Intangible Income (FDII), the IRS
could reallocate resources from those regimes to SHIELD. Additionally,
from a taxpayer perspective, repeal of BEAT and FDII could, to some
extent, reduce the taxpayer compliance burden, at least for those
taxpayers that are subject to BEAT but would not be subject to SHIELD.
Question. The Taxpayer First Act included a provision (section
2201) to modernize the disclosure of taxpayer information for third-
party income verification. Third-party income verification, as you
know, is a critical step in ensuring that a consumer is qualified for a
mortgage. The modification of this process, which is being funded
completely by transaction fees charged to users of the system (mostly
residential lenders), requires the solution to be fully automated and
accomplished in as close to real time as practicable. My understanding
is that the typical way of providing real time access to information is
via application programming interfaces, or APIs. It has come to my
attention that the solution that the IRS has developed requires a
convoluted, multistep process that will not provide the real time
access intended by Congress when the law was passed. Could you explain
how the designed process fulfills the intent of Congress for a real
time automated process?
Answer. In accordance with National Institute of Standards and
Technology guidance, the IRS is required to verify the identity of the
taxpayer to prevent the unauthorized release of Federal Tax
Information. For the Income Verification Express Service (IVES) Target
State, this verification is done through the creation of an IRS Online
Account that will allow the taxpayer to electronically sign the Form
4506 request submitted by the IVES Participant. Once the taxpayer signs
the Form 4506 electronically, the IVES fully automated process will
begin. It is expected that the automated process will reduce the
delivery time of the transcript to the IVES Participant from the
current time frame of within 3 business days to close to real time.
Question. Please provide names, affiliations, and terms of service
of anyone external to the IRS who was made an IRS employee through the
Intragovernmental Personnel act of 1970 (5 U.S.C. 3371-3376) and who
worked through the Joint Statistical Research Program of the Statistics
of Income Division of the IRS on projects in any period within the past
15 years involving confidential taxpayer information, including work
performed at IRS facilities and/or on IRS computers.
Answer. See below. Note, the Joint Statistical Research Program did
not begin until 2012.
------------------------------------------------------------------------
First Inactive/
Last Name Name Affiliation Status Active Expired
------------------------------------------------------------------------
Abraham Katharine University of IPA YES
Maryland
------------------------------------------------------------------------
Agarwal Ashish University of IPA/Student YES
Texas at Austin Volunteer
------------------------------------------------------------------------
Alm James Tulane University IPA YES
------------------------------------------------------------------------
Altshuler Rosanne Rutgers IPA YES
University
------------------------------------------------------------------------
Armstrong Daphne University of Student YES
North Carolina Volunteer
------------------------------------------------------------------------
Balsam Steven Temple University IPA YES
------------------------------------------------------------------------
Bass Steven Investment IPA YES
Company
Institute
------------------------------------------------------------------------
Battles Joseph University of Student YES
Chicago Volunteer
------------------------------------------------------------------------
Belnap Andrew University of IPA/Student YES
North Carolina Volunteer
------------------------------------------------------------------------
Boller Lysle Duke University Student YES
Volunteer
------------------------------------------------------------------------
Bourne Jennifer Carleton College IPA YES
------------------------------------------------------------------------
Brady Peter Investment IPA YES
Company
Institute
------------------------------------------------------------------------
Burd Samuel University of IPA YES
``Drew'' Chicago
------------------------------------------------------------------------
Campbell Richard University of Student YES
Illinois at Volunteer
Chicago
------------------------------------------------------------------------
Chen Shannon University of IPA YES
Arizona
------------------------------------------------------------------------
Conway Karen University of New IPA YES
Hampshire
------------------------------------------------------------------------
Dadey Reigne University of Student YES
Chicago Volunteer
------------------------------------------------------------------------
Denes Matthew Carnegie Mellon IPA YES
University
------------------------------------------------------------------------
Dunbar Amy University of IPA YES
Connecticut
------------------------------------------------------------------------
Duxbury Andrew James Madison IPA YES
University
------------------------------------------------------------------------
Dvis- Asher University of Student YES
Djerassi Michigan Volunteer
------------------------------------------------------------------------
Favreault Melissa Urban/Brookings IPA YES
Tax Policy
PCenter
------------------------------------------------------------------------
Feenberg Daniel National Bureau IPA YES
of Economic
Research
------------------------------------------------------------------------
Galle Brian Georgetown IPA YES
University
------------------------------------------------------------------------
Garin Andrew University of IPA YES
Illinois at
Urbana-Champaign
------------------------------------------------------------------------
Gelman Michael Claremont McKenna IPA YES
College
------------------------------------------------------------------------
Ghilarduc Teresa New School for IPA YES
ci Social Research
------------------------------------------------------------------------
Grozovsky Max Dartmouth College IPA YES
------------------------------------------------------------------------
Gurley- Tami University of IPA YES
Calvez West Virginia
------------------------------------------------------------------------
Haidorfer Anton Center for IPA YES
Housing Risk
PResearch
------------------------------------------------------------------------
Harris Erica Villanova IPA YES
University
------------------------------------------------------------------------
Harris Timothy Illinois State IPA YES
Univ
------------------------------------------------------------------------
Hartley Caitlin Carnegie Mellon IPA YES
University
------------------------------------------------------------------------
Heckman James University of IPA YES
Chicago
------------------------------------------------------------------------
Henry Erin University of IPA YES
Arkansas
------------------------------------------------------------------------
Hoopes Jeff University of IPA YES
North Carolina
------------------------------------------------------------------------
Horton Emily University of Student YES
Michigan Volunteer
------------------------------------------------------------------------
Houck Oskar University of IPA YES
Chicago
------------------------------------------------------------------------
Hoxby Caroline Stanford IPA YES
University
------------------------------------------------------------------------
Isaac Elliott Tulane University IPA YES
------------------------------------------------------------------------
Iselin John University of IPA/Student YES
Maryland PVolunteer
------------------------------------------------------------------------
Jackson Emilie Stanford/National IPA YES
Bureau of
Economic
Research
------------------------------------------------------------------------
Kaas Tobey University of Student YES
Minnesota Volunteer
------------------------------------------------------------------------
Kancherla Sreeraahu University of Student YES
l California, Volunteer
Berkeley
------------------------------------------------------------------------
Koustas Dmitri University of IPA YES
Chicago
------------------------------------------------------------------------
Manoli Dayanand Georgetown IPA YES
University
------------------------------------------------------------------------
Marx Benjamin University of IPA YES
Illinois--Urbana
------------------------------------------------------------------------
May Thomas University of Student YES
Minnesota Volunteer
------------------------------------------------------------------------
McClellan Robert Urban/Brookings IPA YES
d Tax Policy
PCenter
------------------------------------------------------------------------
McGrattan Ellen University of IPA YES
Minnesota
------------------------------------------------------------------------
McPherson Carl University of Student YES
California, Volunteer
Berkeley
------------------------------------------------------------------------
Meiselman Ben University of MD IPA YES
Baltimore County
------------------------------------------------------------------------
Menzer Tyler University of Student YES
Iowa Volunteer
------------------------------------------------------------------------
Moffitt Robert Johns Hopkins IPA YES
University
------------------------------------------------------------------------
Mullaney Michele University of IPA YES
North Carolina
------------------------------------------------------------------------
Nessa Michelle Michigan State IPA YES
University
------------------------------------------------------------------------
Neupane Krishna George Mason Student YES
University Volunteer
------------------------------------------------------------------------
Novgorods David University of Student YES
ky Chicago Volunteer
------------------------------------------------------------------------
Nunns James Urban/Brookings IPA YES
Tax Policy
Center
------------------------------------------------------------------------
Organ Paul University of Student YES
Michigan Volunteer
------------------------------------------------------------------------
Patel Elena University of IPA YES
Utah
------------------------------------------------------------------------
Plesko George University of IPA YES
Connecticut
------------------------------------------------------------------------
Prisinzan Richard Penn-Wharton IPA YES
o Budget Model
------------------------------------------------------------------------
Quinby Laura Boston College IPA YES
------------------------------------------------------------------------
Rao Nirupama University of IPA YES
Michigan
------------------------------------------------------------------------
Reck Daniel London School of IPA YES
Economics
------------------------------------------------------------------------
Richmond Jordan Princeton Student YES
University Volunteer
------------------------------------------------------------------------
Risch Max Carnegie Mellon IPA YES
University
------------------------------------------------------------------------
Robbins Jacob University of IPA YES
Illinois at
Chicago
------------------------------------------------------------------------
Rork Jonathan Reed College IPA YES
------------------------------------------------------------------------
Rosenberg Joseph Congressional IPA YES
Budget Office
------------------------------------------------------------------------
Sacerdote Bruce Dartmouth College IPA YES
------------------------------------------------------------------------
Sacher Maxwell Carnegie Mellon IPA YES
University
------------------------------------------------------------------------
Sanzenbac Geoffrey Boston College IPA YES
her
------------------------------------------------------------------------
Setzler Bradley University of IPA YES
Chicago
------------------------------------------------------------------------
Shaheen Joseph George Mason Student YES
University Volunteer
------------------------------------------------------------------------
Siliciano Robert Boston College IPA YES
------------------------------------------------------------------------
Slemrod Joel University of IPA YES
Michigan
------------------------------------------------------------------------
Smith Karen Urban/Brookings IPA YES
Tax Policy
Center
------------------------------------------------------------------------
Soltes Eugene Harvard IPA YES
University
------------------------------------------------------------------------
Song Zhiyan University of IPA YES
(Jane) Georgia
------------------------------------------------------------------------
Stallwort Phillip Urban/Brookings IPA YES
h Tax Policy
Center
------------------------------------------------------------------------
Standridg Kevin Duke University Student YES
e Volunteer
------------------------------------------------------------------------
Strauss Robert Carnegie Mellon IPA YES
University
------------------------------------------------------------------------
Stuart Ellen University of Student YES
Michigan Volunteer
------------------------------------------------------------------------
Stuart Bryan George Washington IPA/Student YES
University Volunteer
------------------------------------------------------------------------
Suarez Juan Duke University IPA YES
Serrato Carlos
------------------------------------------------------------------------
Towery Erin University of IPA YES
Georgia
------------------------------------------------------------------------
Tsoutsour Margarita Cornell IPA YES
a University
------------------------------------------------------------------------
Utke Steven University of IPA YES
Connecticut
------------------------------------------------------------------------
Vernon Mary University of Student YES
Wisconsin Volunteer
------------------------------------------------------------------------
Waldock Katherine Georgetown IPA YES
University
------------------------------------------------------------------------
Webb Anthony New School for IPA YES
Social Research
------------------------------------------------------------------------
Wettstein Gal Boston College IPA YES
------------------------------------------------------------------------
Wilde Jaron University of IPA/Student YES
Iowa Volunteer
------------------------------------------------------------------------
Wilking Eleanor Cornell IPA YES
University
------------------------------------------------------------------------
Williams Braden University of IPA YES
Texas at Austin
------------------------------------------------------------------------
Yagan Danny University of IPA YES
California,
Berkeley
------------------------------------------------------------------------
Zahn Matt Johns Hopkins Student YES
University Volunteer
------------------------------------------------------------------------
Zidar Owen Princeton IPA YES
University
------------------------------------------------------------------------
Zinsser Dawn University of IPA YES
Michigan
------------------------------------------------------------------------
Zwick Eric University of IPA YES
Chicago
------------------------------------------------------------------------
Question. Please provide a clear and complete description of all
protocols and protections to guard private and confidential taxpayer
data from being shared externally by researchers, from within IRS and
those hired from outside the IRS but who had or have been made IRS
employees through the Intragovernmental Personnel Act of 1970 (5 U.S.C.
3371-3376).
Answer. The IRS utilizes a wide variety of security controls and
data loss prevention tools to prevent sensitive data from being shared
inappropriately. In addition, the Office of Management and Budget (OMB)
Circular A-130, Managing Information as a Strategic Resource, and IRS
policy require IRS personnel (including contractors, interns,
volunteers, Intragovernmental Personnel Act (IPA) employees, etc.) to
complete training and a background check before gaining access to
sensitive data. IRS personnel must complete all required training (IRS
annual and role-based privacy, information protection, and disclosure
training requirements, Unauthorized Access (UNAX) awareness briefings,
records management briefings, and all other specialized privacy
training) and a background investigation before access to Sensitive But
Unclassified (SBU) data (including personally identifiable information
(PII) and Federal Tax Information) may be granted.
As a baseline, all IPA employees are required to meet the same
standards applicable to IRS employees and contractors, including
standard background checks and the annual completion of all data
security training, including UNAX training. UNAX training explicitly
notes the penalties for violations of any UNAX requirements. IPA
employees can only access data using IRS issued laptops, which connect
to IRS systems through the IRS VPN and are subject to standard IRS
cybersecurity protections and protocols. All access to various IRS data
systems requires management approval through a centralized access
control system. Access to PII data is controlled through a separate
access request and granted on a limited basis. PII access requests
require elevated managerial approval only after demonstrating that such
access is integral to the project. All database accesses are captured
in system audit logs following Federal Information Security
Modernization Act standards. Historically, Joint Statistical Research
Program (JSRP) participants have been required to perform all work in
IRS facilities. As a temporary response to the pandemic evacuation
order, a limited number of exceptions allowing remote access were made
for JSRP project teams whose work was deemed time critical. In these
cases, protocols identical to those that apply to IRS employees were
followed.
In addition, JSRP project proposals are reviewed by IRS Research,
Applied Analytics and Statistics (RAAS) staff and leadership, the
Treasury Office of Tax Analysis, and relevant IRS business functions
prior to acceptance. On approval of a JSRP project, the project is
assigned to a senior employee in RAAS who is responsible for project
oversight. This role includes reviewing project progress to ensure that
the work conforms to the approved proposal, reviewing all output to
ensure IRS statistical disclosure standards are met, and coordinating
subject matter review of any research discussion of IRS processes, as
needed, with relevant business functions.
______
Questions Submitted by Hon. Steve Daines
Question. There are several hundred abusive syndication deals
either being audited or in litigation, involving billions in improper
deductions costing the Treasury more than $20 billion in revenue. Can
you detail the progress IRS has made? We are now in the 5th year of a
coordinated effort in combating this problem. So, of the billions in
lost revenue, how much has the IRS been able to recoup through
enforcement or settlement?
Answer. Efforts necessary to raise compliance levels are resource
intensive. We remain committed to ensuring that the tax system is
enforced fairly, taxpayers receive the nature and quality of services
they deserve, and that no one at any income level feels safe cheating
on their taxes.
We are committed to putting an end to abusive Syndicated
Conservation Easement (SCE) transactions. We continue to commit
significant examination and investigative resources to vigorously audit
and investigate the entities and individuals involved in this scheme,
including those who promoted the transaction and those who failed to
properly disclose their participation as required. We have made
progress with at least 18 percent of the tax year 2016-2018 identified
SCE transaction cases in appeal and/or litigation. The remaining
population is in Examination, and all potential enforcement tools are
being utilized, including applicable appropriate penalties, fraud
considerations and criminal investigations. The IRS is also vigorously
pursuing promoters of the SCE transaction.
The full life cycle of an examination is lengthy. As the
examination closes, taxpayers can agree to the examination adjustments
or dispute the adjustments and go to Appeals, the United States Tax
Court, or appropriate United States District Court. Revenue is not
recouped until either (1) the taxpayer agrees to the adjustments, (2)
the taxpayer choses to enter into, and finalizes, a Chief Counsel
settlement, or (3) all litigation and appeals are completed.
To date, either through settlement, concession, or the opinion of
or decision entered by the Tax Court in unsettled litigation cases,
approximately $343 million in adjustments to claimed section 170
deductions in SCE cases have been agreed to by the taxpayer or
determined by the Tax Court. This amount does not include penalties on
the tax resulting from these adjustments. Chief Counsel expects an
increase to this amount once additional settlements are finalized and
as litigation proceeds.
The Office of Chief Counsel is responsible for the majority of SCE
litigation and has successfully pursued these abusive transactions in
the United States Tax Court. Chief Counsel expects its inventory of
abusive SCE cases to continue to rise as Examination pursues all
available compliance options.
To date, the promoters and investors in these SCE shelters have
chosen to litigate their cases. The IRS has prevailed in Federal
appellate court on issues related to grossly inflated easement values
and the conservation easement's failure to comply with the requirements
for qualified conservation contributions under section 170. The IRS has
also succeeded in thwarting attacks on the validity of the regulations
under section 170. There are taxpayer appeals on this issue currently
pending in the Federal appellate courts. The IRS has also successfully
challenged SCE transactions for violations of section 170. In calendar
year 2020, we received 13 opinions from the Tax Court and numerous
orders holding in the government's favor. Many of these opinions and
orders were issued to address motions for partial summary judgment and
do not resolve the cases in their entirety since the valuation of the
easement, for purposes of the 40-percent gross valuation misstatement
penalty, must be litigated.
The Office of Chief Counsel offered to settle certain SCE cases
docketed in the United States Tax Court with the taxpayer fully
conceding the section 170 deduction, the IRS allowing certain out-of-
pocket expenses, and the application of a reduced accuracy-related
penalty. For more information about the settlement, see Chief Counsel
Notice 2021-001, Settlement of Syndicated Conservation Easement
Transactions in Cases Docketed Before the U.S. Tax Court Additional
Information.
While Chief Counsel is working through the settlements, many
taxpayers are undeterred and are opting for litigation, clogging up the
Tax Court with litigation. In 2020, there were a total of 107 petitions
filed involving SCE transactions. So far in 2021, there have been 54
such petitions filed. The Office of Chief Counsel anticipates that 2021
petitions will outnumber those from 2020.
In addition to the volume of docketed cases, these cases are
expensive and time consuming to litigate, often involving voluminous
discovery and expert reports. At a minimum, these cases require
valuation expert testimony to support the 40-
percent gross valuation misstatement penalty, and could require other
experts, such as mining experts. The time between the completion of the
audit and a decision from the Tax Court in a litigated case can be
lengthy. For example, it is not uncommon for cases in litigation to
take multiple years to resolve, not including any potential appeal from
a Tax Court decision. Cases docketed in Tax Court involve tax years
2009 through 2017.
IRS Criminal Investigation (IRS-CI) is not involved in the civil
collection process, but IRS-CI is integral to calculating court ordered
restitution at sentencing. To date there have been no SCE defendants
sentenced. As a result, restitution has not been ordered.
Question. Could you provide an overview of the number of IRS exams,
appeals, and litigation of syndicated conservation easement
transactions?
Answer. Efforts necessary to raise compliance levels are resource-
intensive. We remain committed to ensuring that the tax system is
enforced fairly, taxpayers receive the nature and quality of services
they deserve, and that no one at any income level feels safe cheating
on their taxes. The IRS has conducted or is in the process of
conducting examinations for the following tax years:
Tax Year 2016: 249 pass-through entities claiming total
charitable contributions in the amount of $5.9 billion.
Tax Year 2017: 245 pass-through entities claiming total
charitable contributions in the amount of $6.8 billion.
Tax Year 2018: 297 pass-through entities claiming total
charitable contributions in the amount of $9.2 billion.
Tax Year 2019: The IRS has identified 179 pass-through entities
claiming total charitable contributions in the amount of $5.7 billion.
For tax year 2019, the IRS is in the process of beginning the
examinations and completing the identification of any remaining 2019
entities that may have claimed charitable contribution deductions.
These numbers are expected to increase as additional analysis is
completed.
As of June 1, 2021, we have asserted penalties under Internal
Revenue Code (IRC) section 6695A for substantial and gross valuation
misstatements attributable to incorrect appraisals in the amount of
$3,639,500. We have also asserted penalties under IRC section 6707A for
failure to include reportable transaction information with return in
the amount of $210,000.
The Office of Chief Counsel has 213 cases docketed in the United
States Tax Court, with several on appeal. There are three refund suits
pending in United States district courts. Referrals to the Office of
Professional Responsibility are made, when applicable.
In coordination with the IRS civil business operating divisions,
IRS-CI is pursuing criminal violations related to abusive SCEs. As of
June 30, 2021, three individuals were charged via Information/Criminal
Complaint or Indictment and there are 24 active investigations. Links
to the cases involving the charged individuals can be found in the
links below:
https://www.justice.gov/usao-wdnc/pr/atlanta-tax-professionals-
plead-guilty-promoting-syndicated-conservation-easement-tax.
https://www.justice.gov/opa/pr/georgia-cpa-indicted-promoting-
syndicated-conservation-easement-tax-scheme-involving.
______
Questions Submitted by Hon. Chuck Grassley
Question. The President's budget calls for unprecedented amounts of
funding for IRS enforcement to tackle the tax gap. Nina Olson, the
former Taxpayer Advocate, recently expressed some misgivings about the
recent increased focus on the tax gap. In testimony before this
committee, Ms. Olson noted that the tax gap wasn't necessarily equal to
tax evasion and that the distinction was important because, ``if you
treat every single taxpayer the same way, you really risk converting
compliant taxpayers into non-compliant taxpayers because they feel like
they have been treated badly, poorly.'' Are you concerned that a new
focus on enforcement could alienate honest taxpayers who want to pay
what they owe? Would you also agree enforcement mustn't come at the
expense of customer service and a respect for taxpayer rights?
Answer. The tax gap is defined as the difference between the amount
of tax owed by taxpayers for a given year and the amount that is
actually paid voluntarily and timely. The tax gap represents, in dollar
terms, the annual amount of tax noncompliance with our tax laws. It
does not distinguish between underreporting, non-filing, or
underpayment of tax based on a good faith misunderstanding of the tax
law, intentional evasion of filing or reporting obligations, domestic
or foreign source income, legal or illegal source income, etc.
We strive to serve those taxpayers who are trying to comply with
the tax laws but need assistance with their return or a tax issue. We
must earn the trust and respect of every American by providing
meaningful support and assistance on behalf of compliant taxpayers
while effectively pursuing non-compliant taxpayers. We remain committed
to ensuring that the tax system is enforced fairly, all taxpayers
receive the nature and quality of services they deserve, and that no
one at any income level feels safe cheating on their taxes. Due to
funding and the need to protect our employees during the pandemic, we
have recently been unable to satisfy our goal. The FY 2022 budget
contains $318 million to increase the level of service on our phones as
well as in-person visits. Greater investments in technology can help us
properly assist compliant taxpayers. Modernization of our systems
coupled with technological advances in artificial intelligence, data
and analytics will continue to enhance services to compliant taxpayers
and make tax avoidance by others more visible and more difficult.
We are proud to serve our country and want to provide meaningful
services of a nature and quality every American deserves. Receipt of
consistent, timely, multiyear funding is critical to the future success
of tax administration. In support of compliant taxpayers, we must also
pursue meaningful enforcement efforts, appropriately balanced with our
support of taxpayer service, taxpayer rights and privacy rights.
Working with Congress and the administration, we will increase the
services that we provide while protecting taxpayer rights.
Question. TIGTA has identified the premium tax credit as a high-
risk program. In fiscal year 2019, the IRS estimated the premium credit
to have an improper payment rate of 27.4 percent, the highest rate of
any credit. Yet, for fiscal year 2020 the IRS did not calculate an
improper payment rate for the program. The decision not to report an
improper payment rate on the premium credit is highly suspect. The
premium credit was greatly expanded in the administration's COVID
relief bill and the President's budget would extend its expansion. Can
you commit to me that going forward the IRS will report the improper
payment rate for the premium credit so Congress can fully evaluate the
effect of its expansion on improper payments?
Answer. The IRS's Tax Gap Estimate Program and Enterprise Risk
Management program better equip the IRS to analyze and address
noncompliance throughout the Federal tax system. This includes
monitoring refundable credits claimed on tax returns, including the Net
Premium Tax Credit.
The IRS determines the error rate for IRS programs that are
susceptible to improper payments and reports these to the Department of
the Treasury (Treasury). Treasury reports improper payment rates via
its annual Agency Financial Report (AFR). In 2019, the IRS conducted a
risk assessment over the Net Premium Tax Credit program and determined
the program was susceptible to improper payments. Per the Payment
Integrity Information Act of 2019 and OMB Circular A-123, Appendix C,
Treasury was not required to report an estimated improper payment error
rate via its AFR until the year after conducting the risk assessment or
beginning with fiscal year 2020. This was noted in the TIGTA audit
report 2020-40-025. However, in 2019, the IRS estimated a Net Premium
Tax Credit improper payment rate as a corrective action from a
Government Accountability Office (GAO) report.
Furthermore, as determined by both GAO and TIGTA, refundable tax
credit errors are not IRS internal control weaknesses, financial
management deficiencies, or reporting failures. As a result, refundable
tax credit errors are not improper payments that we can improve with
better controls, management, or reporting.
In FY 2020, OMB issued a memorandum on June 17, 2020, Risk Based
Financial Audits and Reporting Activities in Response to COVID-19,
instructing agencies to leverage Enterprise Risk Management to
prioritize work. With the enormous responsibility both the IRS and
Treasury had in ensuring COVID-19 relief got distributed, Treasury
notified OMB that it was delaying reporting the Net Premium Tax Credit
improper payment estimate to focus resources toward COVID-19
activities.
With ongoing implementation of COVID-19 relief activities, Treasury
notified OMB of a delay to FY 2021 reporting as well. However, the IRS
continues to work with the Centers for Medicare and Medicaid Services
(CMS) on a joint methodology for estimating premium tax credit improper
payments. While the IRS administers the Net Premium Tax Credit through
the tax system, CMS administers the advance payments of the tax credit.
Compatible methodologies for Advance Premium Tax Credit and Net Premium
Tax Credit will ensure a complete and comprehensive picture of payment
errors.
Question. The premium tax credit is fairly unique as until recently
it was the only existing advanceable credit. In this respect it's the
credit most analogous to the recently enacted Advance Child Tax Credit
program. Given IRS's experience with improper payments in the premium
credit program, would you expect the new advance feature of the Child
Tax Credit to result in an increase in its already high improper
payment rate?
Answer. Per the American Rescue Plan, we determined eligibility
using information from the taxpayer's 2020 tax return (or 2019 tax
return if a return was not filed for 2020). This includes information
entered on the Non-filer tool. We implemented a robust communication
strategy to inform taxpayers about the Advance Child Tax Credit (CTC)
payments and how they can unenroll from advance payments or report
changes that impact their advance payment amount.
Taxpayers must reconcile their Child Tax Credit when they file
their 2021 tax return. They will need to compare: (1) the total amount
of the Advance CTC payments received during 2021; with (2) the amount
of the CTC that they can properly claim on their 2021 tax return.
Excess CTC Amount: If the amount of CTC exceeds the total amount of
Advance CTC payments, taxpayers can claim the remaining amount of CTC
on their 2021 tax return.
Excess Advance CTC Payment Amount: If they receive a total amount
of Advance CTC payments that exceeds the amount of CTC that they can
properly claim on your 2021 tax year, they may need to repay to the IRS
some or all of that excess payment depending on whether they qualify
for repayment protection.
In January 2022, the IRS will send Letter 6419 to provide the total
amount of Advance CTC payments that were disbursed to the taxpayer
during 2021. Taxpayers can refer to this letter when they file their
2021 tax return during the 2022 tax filing season.
Although we can't guarantee the improper payment rate will not
increase under the new system, there is no reason to believe that the
advancement feature alone will increase improper payments. Also, we are
taking every step possible to address overclaims, including education
and outreach to taxpayers and tax preparers. Through our efforts, we
explain RTC availability and eligibility requirements. When there is
non-compliance, the IRS uses enforcement tools, including audits, to
recover RTCs paid in error or prevent their issuance in the first
place.
The payment integrity provisions of the Protecting Americans from
Tax Hikes Act of 2015 and provisions in the Tax Cuts and Jobs Act of
2017 have helped the IRS combat RTC noncompliance. However, we need
more assistance from Congress to significantly reduce RTC overclaims.
The administration's past or current budget includes the following
legislative proposals:
Provide the IRS with greater flexibility to address
correctable errors. This proposal would expand the instances in which
the IRS could correct a taxpayer's return, including cases where: (1)
the information provided by the taxpayer does not match the information
contained in government databases or Form W-2, or from other third-
party databases as the Secretary of the Treasury determines by
regulation; (2) the taxpayer has exceeded the lifetime limit for
claiming a deduction or credit; or (3) the taxpayer has failed to
include with their return certain documentation that is required to be
included on or attached to the return. This proposal would make it
easier for the IRS to correct obvious taxpayer errors, directly
improving tax compliance and reducing Earned Income Tax Credit and
other RTC overclaims without intrusive and resource-intensive audits.
Provide the IRS increased oversight of paid tax return
preparers. This proposal would grant the IRS the authority to require
minimum standards for an estimated 400,000 paid tax return preparers
currently without credentials, which would reduce the number of
unscrupulous preparers filing erroneous and fraudulent tax returns. In
administering RTCs, we have two primary goals--increasing anticipation
for those entitled to the credits and reducing errors that lead to
improper payments. We take our role in administering RTCs seriously.
We're constantly considering new ways to ensure eligible taxpayers
claim the credits and ineligible taxpayers do not. Our strategy is to
block overclaims early in the filing process. The IRS addresses
overclaims through its compliance programs, as well as through
expansive outreach and education efforts to taxpayers and preparers.
Additional information about our corrective actions and barriers are
discussed in the Fiscal Year 2020 Agency Financial Report.
______
Questions Submitted by Hon. James Lankford
funding levels
Question. Can you please provide additional information regarding
the more than $1-billion funding increase that the IRS is seeking for
FY 2022?
What exactly will these funds be used for?
Answer. The FY 2022 budget requests $915.5 million in program
increases including: $176.1 million for continuing the implementation
of the Taxpayer First Act; $340.3 million for establishing enforcement
strategies that will ensure a fair tax system; $318.0 million to
increase live assistance including telephone level of service,
correspondence, and in-person visits; $78.1 million for IT
modernization activities; and $3.0 million to lease and maintain a
fleet of electric vehicles.
In addition to the base appropriations request of $13.2 billion,
the budget proposes a $417-million discretionary program integrity
allocation adjustment (PIAA) in FY 2022 to fund investments in
expanding and improving the effectiveness and efficiency of the IRS's
overall tax enforcement program. The budget proposes $287.5 million for
the Enforcement account and $129.4 million for the Operations Support
account. If funded throughout the 10-year program, these investments
will generate $38.6 billion in new direct revenue and protect $11.6
billion over 10 years, while costing a total of $6.7 billion. This
return on investment (ROI) is likely understated because it does not
reflect the effect that enhanced enforcement has on deterring non-
compliance.
Question. Regarding the proposed $80-billion request over the 10-
year budget window, I understand that a significant portion of these
funds would go towards enforcement and compliance activities and
implementation of the proposed financial information reporting regime.
What portion of funds will go towards improving customer service?
Answer. We remain committed to ensuring that the tax system is
enforced fairly, all taxpayers receive the nature and quality of
services they deserve, and that no one at any income level feels safe
cheating on their taxes. The President's budget requests $318 million
to increase live assistance including telephone level of service,
correspondence, and in-person visits. It also requests $149 million to
implement a Taxpayer Experience Strategy which includes expanding
digital service (such as digitizing more forms and expanding payment
options), expanding the Automated Callback service, and developing
strategies to reach underserved communities. These customer-focused
initiatives complement the enforcement requests that are part of the FY
2022 President's budget and the AFP. The $89-billion American Families
proposal also includes $253 million for research that includes efforts
to understand the taxpayer experience, $373 million for Wage and
Investment and Taxpayer Advocate to assist with the expected increases
in cases associated with increased enforcement, $2,809 million to
improve telephone and in-person assistance, and $3,979 million for
administering a permanent Advance CTC payment.
Question. What portion of funds will go towards the modernization
of existing systems?
Answer. Greater investments in technology can help us properly
assist compliant taxpayers. Modernization of our systems coupled with
technological advances in artificial intelligence, data and analytics
will continue to enhance services to compliant taxpayers and make tax
avoidance by others more visible and more difficult. The President's
budget requests $144 million to build the technology components of
three program increases included in the President's budget: Taxpayer
Experience Strategy, Ensure Fairness of the Tax System, and Improve
Live Assistance.
Modernizing IRS systems is a key component of the American Families
Plan request. It includes $7,171 million to modernize IRS systems and
maintain the new systems. It includes funding to complete and go beyond
the current IRS Modernization Plan. It also includes funds for
expanding Case Selection and Anomaly Detection to leverage information
to improve identification of potential non-compliance, detect issues
earlier, reduce the tax gap, generate revenue, and enable employees to
work cases more efficiently.
Question. It's my understanding that the IRS has over 200 ``open''
recommendations from GAO, with at least 15 ``priority'' recommendations
not yet addressed.
What portion of the budget request will go towards addressing
outstanding recommendations from GAO and TIGTA?
Answer. The IRS determines and sets due dates for corrective
actions associated with recommendations it accepts from GAO and TIGTA
based on the nature of each recommendation, and in consideration of the
estimated level of complexity, time, and resources required to
implement each recommendation. Other factors may also impact the
implementation time frames, including whether the recommendation
requires further research and analysis, whether coordination with other
entities or stakeholders is required, and whether guidance, regulation,
or legislation is needed. The IRS communicates to both TIGTA and GAO
its planned corrective actions to recommendations with which it agrees
and inputs those actions into a database. Progress in completing
corrective actions is monitored on an ongoing basis, with status
updates provided to IRS senior leadership and to TIGTA and GAO. Any
delays to the completion of corrective actions are also communicated to
the aforesaid stakeholders.
Under my direction, the IRS began placing additional focus and
effort in FY 2019 to address GAO Priority Open Recommendations and we
regularly apprise GAO of our progress. Of the 40 recommendations cited
by GAO in their 2019, 2020, and 2021 letters, we have closed 16, and
two more have been submitted to GAO for review and closure. Five have
planned completion dates in the future, five are from recent reports
for which corrective actions are still being determined, and nine are
being reworked by the IRS and GAO. The remaining three are under review
by the IRS. Because of the range of factors associated with attaining
closure of each recommendation, we do not have a total estimate of the
budgetary resources that would be required to close all of the
outstanding recommendations from GAO and TIGTA. However, if we are
provided with additional funding, we anticipate accelerating the
completion of corrective actions that may have been deferred or delayed
for budgetary reasons. It would also allow us to consider shorter
timeframes for the enactment of future recommendations from GAO and
TIGTA.
financial account reporting proposal
Question. I understand that the Greenbook and the President's FY
2022 budget articulate a new reporting requirement on financial
accounts. This would require financial institutions to report data on
financial accounts with a de minimis gross flow threshold of $600.
It's my understanding that financial institutions are already
required to provide various 1099s and comply with reporting
requirements under the Bank Secrecy Act, including the filing of a
currency transaction report for every deposit or withdrawal of more
than $10,000, as well as suspicious activity reports (or SARs).
Can you provide additional information regarding what information
the IRS already collects?
Answer. Current regulations require financial institutions to file
information reporting for specific types of income such as interest,
dividends, proceeds from broker and barter exchange transactions, and
pension or retirement distributions. In addition to the currency
transaction report and suspicious activity reports, Bank Secrecy Act
(BSA) legislation requires the following information reporting.
Form 8300, Report of Cash payments Over $10,000 Received in a
Trade or Business is required to be filed by a trade or business that
receives more than $10,000 in cash or cash equivalents.
Financial Crimes Enforcement Network (FinCEN) Form 114,
Foreign Bank Account Reporting is required to be filed by a U.S. person
that has financial interest, signature, or other authority over certain
foreign financial accounts, the aggregate value of which exceeded
$10,000 at any time during the calendar year.
Designation of Exempt Persons is a form which relinquishes the
Currency Transaction Reports (CTR) filing requirement by the financial
institutions.
IRS Criminal Investigation (IRS-CI) has access to all BSA
information maintained by the FinCEN, including Suspicious Activity
Reports (SARs), CTRs, Forms 8300, Reports of International
Transportation of Currency or Monetary Instruments, Registration of
Money Services Business, and others. During investigations with a tax
nexus, IRS-CI has access to information reports filed with the IRS by
financial institutions, such as Forms 1099 reporting interest and
dividend income. Additionally, IRS-CI has the authority to issue
summonses and serve subpoenas (in grand jury investigations) for
financial information in established investigations.
Question. What information mismatches do you identify in what you
currently collect?
Answer. The IRS utilizes the various Forms 1099 and Form W-2 to
determine if a taxpayer underreported income or overreported
withholdings. However, FinCEN does not receive information that can be
reconciled or matched to other tax returns. FinCEN compares data
sources such as CTRs and SARs to identify irregularities or
inconsistencies in filings. FinCEN is prohibited from using title 26
information to conduct BSA title 31 examinations without special
approval.
Question. What exact information are you lacking?
Answer. We are lacking comprehensive information reporting on the
inflows and outflows of financial accounts, which will increase the
visibility of gross receipts and deductible expenses to the IRS.
Increased visibility of business income will enhance the effectiveness
of IRS enforcement measures and encourage voluntary compliance.
The combination of additional third-party information reporting for
cryptocurrency transactions and account inflows and outflows from
financial institutions would provide insight on areas where the IRS
does not have information today. This additional information will
improve our ability to effectively administer the tax code leading to
higher rates of compliance--especially those whose sources of income
are not currently subject to information reporting. Given the IRS's
past experience with information reporting, this is an effective means
of increasing the compliance rate.
Critical to the success of any new information reporting regimes is
providing budget support for the IRS to acquire the tools and analysts
necessary to use the information effectively. These tools include
modernized systems intaking, storing, and analyzing data we have and
may receive to identify potential cases for examination leading to
improved enforcement outcomes, and hiring additional experts to improve
our ability to best use these tools. Modernization of our systems
coupled with receipt of meaningful information reporting will continue
to enhance services to compliant taxpayers and make tax avoidance by
others more visible and more difficult.
Question. Does the IRS have access to FinCEN information or any
other relevant account information already provided to banking or
financial regulators?
Answer. IRS has access to BSA data collected by FinCEN.
Question. In our hearing on June 8th, you stated ``Well, similar
with what happened with when FATCA came in and we got FATCA reporting,
we did not get the funding to modernize our systems to handle the
reporting that we were receiving. So we remain behind the curve on our
ability to use that information.''\1\
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\1\ See https://plus.cq.com/doc/congressionaltranscripts-6250581?2.
Are you currently not able to utilize all of the FATCA information
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that you collect?
If that's the case, do you believe that more granular information
is needed?
If yes, how do you know?
Do you believe it makes sense to provide the IRS with more
information--massive amounts of taxpayer information--if the IRS cannot
use or process the information that it already receives?
Answer. Our ability to utilize FATCA information, including
conducting data analysis of, as well as comparisons between, Forms 8938
filed by U.S. account holders and Forms 8966 (or FATCA reports) filed
by or on behalf of foreign financial institutions (FFIs) has been
adversely impacted by the following factors:
Forms 8938 and 8966 apply divergent reporting thresholds,
foreign currency conversion standards, and exceptions and alternatives
to reporting that significantly complicate analysis and use of FATCA
data and preclude straightforward form-to-form matching as a means to
identify non-compliance. These data do not lend themselves to the
automated matching models of the Automated Under Reporter system, but
rather require resource-intensive review and comparison of the data.
Moreover, current law (including intergovernmental agreements with
other countries that provide FATCA information to the United States)
does not require that FFIs report their Global Intermediary
Identification Numbers (GIINs) to their U.S. account holders, and
similarly current regulations do not require U.S. account holders to
report the GIINs of the FFIs with whom they maintain reportable
accounts on their Form 8938 filings because of concerns that it might
be difficult for individuals to obtain GIINs without such reporting
from FFIs. Similarly, guidance has allowed for the deferral of taxpayer
identification number (TIN) reporting by FFIs on Forms 8966 in many
instances through the 2019 tax year. The absence of these reporting
requirements significantly increases the resource load on the IRS, both
in terms of information technology and employees, in making optimal and
timely use of data relevant to FATCA enforcement. Accordingly, enhanced
TIN reporting and reporting of GIINs by individual account holders
would improve the ability to utilize the data currently being received.
IRS information technology limitations have made it difficult
to conduct queries and analysis of data relevant to FATCA enforcement.
By way of example, development of new capabilities for the primary
database intended to house data from Forms 8938 and 8966 was halted in
2018 due to budget and resource constraints prior to deployment of
functionality that would have made it easier to query, extract, and
analyze FATCA data. An interim reporting solution has produced more
limited and less usable output. More effectual utilization of FATCA
data currently requires highly specialized and trained IRS employees
who must develop complex code.
Both information technology and human resource limitations
have caused delays in the time it takes to make FATCA data available
for analysis and use. Moreover, taken together, the constraints set
forth above have precluded the development of fully automated data
matching capabilities.
Further, after the data are available for use, resource constraints
in our compliance functions have impacted the magnitude of compliance
activities we are able to conduct regarding both the individual and
financial institution populations.
Question. Under the proposal, this new requirement would apply to
all business and personal accounts from financial institutions, with
the exception of accounts below a de minimis gross flow threshold of
$600 or fair market value of $600.
Are you concerned about the pure volume of data that this would
produce, not all of which could be useful?
Do you have any concerns about the amount of personal taxpayer
information that would be flowing into the IRS?
Can you assure the American people that their information will not
leak out?
Are you confident the IRS could use, track, and process all of this
information?
Could you please provide specific information regarding the level
of funding necessary to process this level of information?
Answer. The 2022 President's budget provides for modernizing many
IRS systems, which would make it easier for us to address a new
reporting requirement on financial accounts but did not include funding
for this project. The administration's American Families Plan did
include a rough, order of magnitude estimate of $4.5 billion over 10
years for financial account information reporting capability. As the
requirements for this capability are further developed, our estimate
may change accordingly.
improper payments: earned-income tax credit and child tax credit
Question. The President's FY 2022 budget and corresponding
Greenbook call for extensions and expansions of the Earned-Income Tax
Credit (EITC) and Child Tax Credit (CTC), including making permanent
the EITC childless worker expansions included in the American Rescue
Plan, extending the expanded CTC for an additional 5 years, and making
the CTC permanently refundable.
In a Treasury Inspector General for Tax Administration (TIGTA)
report from May 10th of this year, TIGTA noted that ``the IRS has made
little progress in reducing the improper payments associated with the
refundable tax credit programs that it administers.''\2\ For example,
for FY2020, the IRS estimated 24 percent of EITC payments were
improper, totaling $16.0 billion.
---------------------------------------------------------------------------
\2\ See https://www.treasury.gov/tigta/auditreports/2021reports/
202140036fr.pdf.
In the hearing on June 8th, you told my colleague Senator Grassley
that, with regard to improper payments, ``Those figures are
significant, as you're aware if you've seen the report. With respect to
EITCs, the rate is about 25 percent, about $17 billion per year. CTC,
it's about 15 percent, 4.5-12 percent, excuse me, $4.5 billion per
year.''\3\ You are correct that this is not an insignificant amount of
funds.
---------------------------------------------------------------------------
\3\ See https://plus.cq.com/doc/congressionaltranscripts-6250581?2.
Given this, do you believe it prudent to expand these refundable
tax credits at a time when the IRS has struggled to address error rates
---------------------------------------------------------------------------
and improper payments?
What is the IRS doing to mitigate improper payments within these
recently expanded programs?
Answer. The IRS stands ready to deliver and serve the American
taxpayers, much like we did when implementing major provisions of the
Coronavirus Aid, Relief, and Economic Security Act and the COVID-
Related Tax Relief Act of 2020. As an administrative agency, the IRS
will work to deliver all that the law requires. We leveraged our
experience successfully delivering three rounds of Economic Impact
Payments (EIPs) under similar circumstances. We recognize the
importance of enforcing tax laws, properly distributing tax credits and
payments, and collecting the revenue necessary to fund essential
programs and services for our country.
Per the American Rescue Plan, we determined eligibility using
information from the taxpayer's 2020 tax return (or 2019 tax return if
a return was not filed for 2020). This includes information entered
into the Non-filer tool. We implemented a robust communication strategy
to inform taxpayers about the Advance CTC payments and how they can
unenroll from advance payments or report changes that impact their
advance payment amount.
Taxpayers must reconcile their Child Tax Credit when they file
their 2021 tax return. They will need to compare: (1) the total amount
of the Advance Child Tax Credit (CTC) payments received during 2021;
with (2) the amount of the CTC that they can properly claim on your
2021 tax return.
Excess CTC Amount: If the amount of CTC exceeds the total amount of
Advance CTC payments, taxpayers can claim the remaining amount of CTC
on their 2021 tax return.
Excess Advance CTC Payment Amount: If they receive a total amount
of Advance CTC payments that exceeds the amount of CTC that they can
properly claim on their 2021 tax year, they may need to repay to the
IRS some or all of that excess payment depending on whether they
qualify for repayment protection.
In January 2022, the IRS will send Letter 6419 to provide the total
amount of Advance CTC payments that were disbursed to the taxpayer
during 2021. Taxpayers can refer to this letter when they file their
2021 tax return during the 2022 tax filing season.
Refundable Tax Credits (RTCs) provide benefits to millions of
taxpayers. However, the nature of the RTCs themselves, as well as a
lack of information needed to verify taxpayer eligibility at the time
of filing, makes it challenging to administer them through our
voluntary tax system. It is important to note that improper payments
are not necessarily fraudulent. The complexity of RTC eligibility
criteria, particularly those pieces that are difficult for IRS to
verify, are a significant contributor to RTC improper payments. For
example, IRS' inability to verify whether a taxpayer is eligible for an
RTC is considered an improper payment even if that taxpayer ultimately
is eligible for the RTC. The improper payment rate also does not take
into account post-return recoveries of improper payments.
Although we can't guarantee the improper payment rate will not
increase under the new system, we are taking every step possible to
address overclaims, including education and outreach to taxpayers and
tax preparers. Through our efforts, we explain RTC availability and
eligibility requirements. When there is noncompliance, the IRS uses
enforcement tools, including audits, to recover RTCs paid in error or
prevent their issuance in the first place.
The payment integrity provisions of the Protecting Americans from
Tax Hikes Act of 2015 and provisions in the Tax Cuts and Jobs Act of
2017 have helped the IRS combat RTC noncompliance. However, we need
more assistance from Congress to significantly reduce RTC overclaims.
The administration's past or current Budget includes the following
legislative proposals:
Provide the IRS with greater flexibility to address
correctable errors.
This proposal would expand the instances in which the IRS
could correct a taxpayer's return, including cases where: (1) the
information provided by the taxpayer does not match the information
contained in government databases or Form W-2, or from other third-
party databases as the Secretary of the Treasury determines by
regulation; (2) the taxpayer has exceeded the lifetime limit for
claiming a deduction or credit; or (3) the taxpayer has failed to
include with his or her return certain documentation that is required
to be included on or attached to the return. This proposal would make
it easier for the IRS to correct obvious taxpayer errors, directly
improving tax compliance and reducing Earned Income Tax Credit and
other RTC overclaims without intrusive and resource-intensive audits.
Provide the IRS increased oversight of paid tax return
preparers.
This proposal would grant the IRS the authority to require
minimum standards for an estimated 400,000 paid tax return preparers
currently without credentials, which would reduce the number of
unscrupulous preparers filing erroneous and fraudulent tax returns. In
administering RTCs, we have two primary goals: increasing anticipation
for those entitled to the credits and reducing errors that lead to
improper payments. We take our role in administering RTCs seriously.
We're constantly considering new ways to ensure eligible taxpayers
claim the credits and ineligible taxpayers do not. Our strategy is to
block overclaims early in the filing process. The IRS addresses
overclaims through its compliance programs, as well as through
expansive outreach and education efforts to taxpayers and preparers.
Additional information about our corrective actions and barriers are
discussed in the Fiscal Year 2020 Agency Financial Report.
______
Questions Submitted by Hon. Robert Menendez
Question. The Washington Post reported last May that thousands of
Americans received incorrect Economic Impact Payments. They identified
taxpayers who received checks that did not correctly reflect the number
of dependent children under the age of 17 or a dependent that was born
in 2019.
How has the IRS improved its systems and information reporting to
ensure that thousands of Americans who are eligible to receive the
Advance Child Tax Credit (CTC) are able to do so on July 15th and every
month thereafter? How has the agency improved its systems to ensure
that these amounts reflect the correct number of dependents in their
household?
Answer. Per the American Rescue Plan, we determined eligibility
using information from the taxpayer's 2020 tax return (or 2019 tax
return if a return was not filed for 2020). This includes information
entered into the Non-filer tool. If eligible, taxpayers will receive
the Advance CTC payments automatically without needing to take any
additional action.
For tax year 2021, the CTC is increased from $2,000 per qualifying
child to $3,600 for children ages 5 and under at the end of 2021, and
$3,000 for children ages 6 through 17 at the end of 2021.
The CTC Update Portal allows families to verify their eligibility
for the payments and if they choose to, unenroll from receiving the
monthly payments so they can receive a lump sum when they file their
tax return next year. If needed, families have the option to update
their bank account information and receive their monthly Advance CTC
payment through direct deposit quickly and easily. Families also have
the option to quickly and easily update their mailing address using the
portal. This feature will help any family that chooses to receive their
payment by paper check avoid mailing delays or even having a check
returned as undeliverable. More functionality will be added later this
year to the CTC Update Portal.
Question. You responded to my question about outreach around the
Advance CTC by stating that the IRS was working with thousands of
organizations to provide historic outreach for the Advance CTC,
including outreach in Spanish, based off of the agency's Economic
Impact Payment outreach.
Could you please provide my office with documentation regarding
this outreach? I am specifically interested in the nationwide
organizations that the IRS is working with to provide this outreach,
the organizations the IRS is working with in New Jersey, and the
various languages the IRS is providing this outreach in.
Answer. Throughout 2021, the IRS has conducted a multipronged
national outreach effort related to COVID-19 pandemic relief for
taxpayers. These efforts included the third round of Economic Impact
Payments (EIP3), the 2020 Recovery Rebate Credit (RRC), the Earned
Income Tax Credit (EITC) and the CTC.
We asked partners and organizations to ``help us help others'' by
providing information on EIP3, RRC, EITC and CTC to clients and
audiences, posting information on their web pages and social media, and
to act as a trusted partner. One example is allowing homeless persons
to use a trusted partner's physical address to receive the EIP3. If an
organization agreed, we performed a series of checks to determine if
the organization could be considered a trusted partner. Approximately
7,300 organizations were contacted to provide information to more than
6.9 million underserved or displaced individuals. More than 350
organizations agreed to become trusted partners.
For the Advance CTC, we developed a comprehensive outreach plan,
implementing a far-reaching education and awareness campaign to ensure
taxpayers understand the benefits of the credit and how it will work.
IRS outreach encompasses four key components.
Leverage existing and establish new communication and outreach
outlets. Expand existing relationships and build new ones to enhance
efforts to inform and educate this targeted audience.
Focus on multilingual partners and organizations and seek new
relationships with multilingual groups and organizations. Many IRS
products to be translated into several languages including English,
Spanish, Russian, Chinese Traditional, Chinese Simplified, Korean,
Vietnamese, and Haitian Creole.
Coordinate outreach with tax practitioners/preparers and equip
them to help taxpayers understand the details of the Advance CTC.
Collaborate with State revenue departments, Federal Government
agencies (including Treasury, the Department of Education, the
Department of Health and Human Services (HHS), the Department of
Agriculture (Supplemental Nutrition Assistance Program), and other
child-focused agencies), and other groups with potential reach into
these communities like organizations that work with schools and
teachers
Outreach Partners and Organizations
As soon as the American Rescue Plan was enacted in March, we began
enlisting current partners and bringing on new ones to help the agency
inform the taxpaying public about the Advance Child Tax Credit. We
fostered relationships with tens of thousands of organizations, tax
practitioner groups, State and local governments, community groups, and
a host of other businesses across the country. The charts below
represent a small sample of the lists we have compiled and continue to
compile to deliver information to American families.
Partner Lists--Specific Segments
Partners for Reaching Specific Audience Segments
(high-level view; others will be added)
Homeless/ Underserved Military/ Seniors with
Transitional Veterans qualifying
living children
(including non-
filers)
------------------------------------------------------------------------
United States 211.org (200 American AARP
Interagency counties Legion, VFW & United Way
Council on nationwide DAV
Homelessness assisting low- Department of
National Low- income Veterans
Income Housing residents) Affairs
Coalition AARP HQ and State Veterans
Foundation State offices Affairs
Communities Local/Regional Code of
Men of Valor Grocery stores Support
(newly released (example: La Foundation
prisoners) Superior (serving all
Shelters for Mercado's) members of the
abused women, Chambers of military,
men, children Commerce veterans and
United Way families)
Wounded
Warrior Project
Coalition to
Salute
America's
Heroes
Fisher House
Foundation
------------------------------------------------------------------------
Parent/Teacher Diverse Low income (inc. Colleges and
non-filers) Universities
------------------------------------------------------------------------
National PTA Black Economic No Kid Hungry Large colleges
National Foster Alliance Feeding and
Parent Black Futures America universities
Association Lab California and their Small
National Color of Change Association of Business
Education National Food banks, Development
Association Council of Asian Food Bank for Centers
American Pacific New York City, HBCUs
Federation of Americans and other local
School Native American and regional
Administrators Finance Officers food banks
American Association Action Against
Association of Center for Hunger
Teachers of Community Change Bread for the
Spanish and and Community World Institute
Portuguese Change Action Freedom from
National Congressional Hunger
Association of Black Caucus The Hunger
Parents Congressional Project
National Hispanic Caucus Heifer
Association of Congressional International
Independent Asian Pacific Meals on
Schools American Caucus Wheels
Food for the
Hungry
World Central
Kitchen
So Others
Might Eat
------------------------------------------------------------------------
Tax Professionals Advisory HR and Payroll Government
and PCommittees POrganizations PAgencies
Organizations
------------------------------------------------------------------------
CERCA/Tax IRSAC American 241 government
Industry ETAAC Payroll organizations
partners Taxpayer Association across the
Tax Advocacy Panel National country
practitioner Payroll Federal,
organizations: Reporting State, and
500+ Consortium Local
Individual (NPRC) Government
unaffiliated tax Independent partners: 224
practitioners Payroll 541
Latino Tax Pros Providers congressional
AAA-CPA Association offices, with a
National (IPPA) total staff of
Conference of Society for approximate
CPA Human Resources 33,530 in the
Practitioners Management Legislative
AICPA Tax (SHRM) Branch
Section HUD
American Bar HHS
Association Tax Department of
Section Education
National Department of
Society of Agriculture
Accountants (SNAP)
(NSA) Department of
NAEA Transportation
NATP (State level)
NSTP City Councils
TEI National U.S.
Association of Conference of
State Boards of Mayors
Accountancy
(NASBA)
------------------------------------------------------------------------
Private Companies/ Faith-Based Think Tanks Children's
Large Employers/ POrganizations PHospitals and
Employee Charities
Organizations/
PFinancialP
Institutions
------------------------------------------------------------------------
75 with Jewish Roosevelt St. Jude's
potential to Federations of Institute Shriners
reach over 100 North America Earth Make-a-Wish
million Catholic Institute Save the
taxpayers Charities USA Kaiser Family Children U.S.
105 large Civitan Foundation
industry and International
association Habitat for
partners Humanity
potentially International
reaching 41.8 Jewish Founders
million Network
individuals Lutheran
IRS Security Services in
Summit Financial America
Institution Volunteers of
partners America
Retailers YMCA and YWCA
Grocery Stores Southern
Pharmacies Baptist
Gig economy Convention
companies American
Baptist Churches
United
Methodist Church
Presbyterian
Church in
America
Seventh-day
Adventist Church
United Church
of Christ
The Church of
Jesus Christ of
PLatter-Day
Saints
Church of the
Nazarene
Theological
Seminaries
------------------------------------------------------------------------
Outreach Events
The IRS, in conjunction with Volunteer Income Tax Assistance (VITA)
partner sites, is hosting Advance CTC outreach events to offer free tax
preparation services to eligible individuals who haven't filed a 2020
tax return or were not aware of a filing requirement. Events were held
in 12 cities on June 25th, June 26th, July 9th, and July 10th. More are
planned for the future.
New Jersey Outreach
The IRS has connected with and provided educational materials to
more than 50 partners and organizations in New Jersey, including nine
multilingual partners. We contacted and provided information to faith-
based organizations, community groups, retailers, media outlets,
support services groups, and others across the State.
Examples include:
Center for Family Services
Women's Rights Information Center
Catholic Charities of the Archdiocese of Newark
New Brunswick Housing Authority
Trenton Area Soup Kitchen
New Jersey 211
Family Focused Treatment Association
Family Promise
Subaru of America
Wakefern
AARP New Jersey
The Boys and Girls Clubs of Monmouth
Latin American Economic Development Association, Inc. in
Camden
Question. You stated during your testimony to Senator Bennet that
the IRS did not have enough funding to conduct the historic outreach
related to economic impact payments and that the agency does not have
the necessary funding to conduct the necessary outreach for the
advanced CTC.
How much more funding would the agency need to conduct proper
outreach on the advanced CTC?
What metrics will the agency use to ensure that the payments are
reaching all eligible taxpayers? How will the agency troubleshoot its
efforts if it realizes that its efforts are not successful?
Answer. We are doing everything we can with the resources
immediately available to reach as many potential recipients of the
Advance CTC as possible. Part of this includes a sweeping outreach and
communications effort to raise awareness around the CTC, with a special
focus on those people who normally aren't required to file a tax
return. We are working closely with partners and organizations from
coast to coast--including non-profit organizations, churches, community
groups and others--to help people get the assistance they need as well
as providing special tools on IRS.gov.
As I testified, we are reaching beyond traditional groups in the
tax community. This involves thousands of organizations on the ground,
and we're building on our experiences from delivering Economic Impact
Payments (EIPs) in 2020 and 2021 to reach people who don't normally
file tax returns.
The IRS and partners in non-profit organizations, churches,
community groups and others hosted events in 12 cities in June and July
to help people who don't normally file a Federal tax return to register
for the monthly Advance CTC payments. More of these events are in the
works.
In addition, the IRS is working with partners inside and outside
the tax community to share information as widely as possible to people
who may be eligible for CTC and EIPs. This effort includes various
community and online events. The IRS and Treasury are also partnering
with a variety of agencies across the government on this effort,
including the Consumer Financial Protection Bureau, Federal Deposit
Insurance Corporation, HHS, Small Business Administration, and Social
Security Administration, as well as State and local governments.
We encourage our partners to use available online tools and
toolkits to help non-filers, low-income families and other underserved
groups sign up to receive the Advance CTC. To help reach more people,
much of the information is available in multiple languages.
Key metrics we will be watching are the number of people using our
different IRS.gov online tools. This will help us determine how many
non-filers are coming in and how many people are accessing our CTC
Update Portal to manage their payments.
Going forward, we will continue to assess the success of these
outreach efforts and determine what additional staffing or budget
resources are needed in the future.
Question. You responded to my question about telephone customer
service at the IRS by informing me that this is an appropriated item.
You also stated that the agency's target rate was 75 percent.
Could you please provide us the requested and allocated budgets for
telephone customer service at the IRS for the last ten fiscal years? At
the same time, could you please provide us with the telephone service
rates for the last 10 fiscal years?
Answer. Note: The funding levels below represent actual
expenditures (not allocations) for 2011-2020. Numbers have been
rounded.
[GRAPHIC] [TIFF OMITTED] T0821.002
.epsQuestion. The National Taxpayer Advocate has listed--for
years--telephone customer service in its annual ``purple book'' of the
10 most serious problems encountered by taxpayers each year. The
National Taxpayer Advocate recommends implementing estimated wait times
and automated callback features in order to better serve taxpayers.
How much more in appropriations would the IRS need to improve its
telephone customer service rates, as suggested by the National Taxpayer
Advocate?
Answer. An investment of approximately $287 million with an
increase in full-time employees of approximately 4,000 will allow us to
increase the telephone level of service (LOS) and significantly reduce
the correspondence inventory. The IRS toll-free telephone customer
service operation is a key part of our service delivery. This
investment provides a projected LOS of 75 percent in FY 2022, assuming
phone demand returns to pre-pandemic levels and the IRS can provide in-
person services at pre-pandemic levels. These funds will also be used
to reduce the current projected FY 2022 ending correspondence inventory
by about 400,000. The FY 2022 projection is down from a projected FY
2021 ending correspondence level of about 1.4 million. Providing
quality taxpayer service is crucial to ensuring voluntary compliance.
______
Questions Submitted by Hon. Rob Portman
Question. It is critical that the IRS is able to adapt as
technology evolves, and I'm optimistic about the potential for
modernization to improve both the experience for taxpayers and the
ability of the IRS to carry out its mission. As we've discussed,
Senator Cardin and I recognized these challenges and introduced the
Protecting Taxpayers Act to aid the IRS in modernizing. The IRS budget
requests $305 million, an increase of $78 million over last year, for
business systems modernization and expands the Secretary's authority to
require electronic filing of certain returns.
During the pandemic, the IRS provided temporary relief to enable
electronic signature for certain filings and some forms, including
section 83(b) elections, entity classification (Form 8832), and time
extensions due to hardship (Form 1127). These e-signatures create
efficiencies for both taxpayers and the IRS by digitizing--providing
faster filing speeds and easier processing at the IRS, with limited
risk of fraud.
This change was made due to the unique challenges of the pandemic
and is only temporary. The IRS should seize this opportunity to
modernize and continue to allow e-signatures for IRS filings and forms
on a permanent basis--an easy step towards a modernized IRS.
Do you plan to extend the ability for taxpayers to use e-signatures
for these filings, some of which do not have forms, on a permanent
basis?
If so, will you commit to continuing the temporary relief until a
more permanent solution is developed and adopted?
If not, how will the IRS prioritize its transition to electronic
modernization? Are there specific issues that arose by allowing e-
signatures which would prevent further adoption?
Answer. In January 2021, the IRS established a cross-functional
team to evaluate the long-term viability, benefits, and risks of the
temporary relief and develop recommendations as to whether these
temporary policies should be extended and the number of specific forms
available for electronic signatures expanded. Although these
flexibilities were well received by both taxpayers and employees, they
do not fully satisfy the standards for electronic signatures as
established by the National Institute of Standards and Technology or
the IRS Electronic Signature (e-signature) Program.\4\ Therefore,
rather than making these exceptions permanent, we are currently
preparing to extend them through 2023, pending the development of new
tools that will satisfy the requirements for electronic signatures and
secure document exchange.
---------------------------------------------------------------------------
\4\ See IRS Internal Revenue Manual 10.10.1.
How does the IRS plan to work with relevant stakeholders as
partners in modernizing the agency, and how would it suggest interested
---------------------------------------------------------------------------
parties engage the agency to help advance its modernization effort?
Answer. We work regularly with a wide variety of public and private
stakeholders who serve as partners in providing ideas to modernize the
agency and provide many opportunities to engage the IRS. We also
facilitate ongoing dialogue and collaboration with our partners through
regular outreach activities and communications. The Internal Revenue
Service Advisory Council and Electronic Tax Administration Advisory
Committee provide an organized public forum for IRS officials and
public representatives to discuss tax administration issues. The
Nationwide Tax Forums, the IRS's annual marquee outreach event, offer
continuing education opportunities from IRS leadership and association
partners to more than 10,000 tax professionals per year, and provide an
opportunity to collect feedback and input from diverse stakeholders. In
addition, several organizations within the IRS work closely with
various partners across the country. We develop and build relationships
with organizations outside traditional tax communities, including
partners who work with underserved communities to assist the homeless,
the underserved and underrepresented, and those with limited English-
speaking proficiencies, as well as partners who assist those in the
military.
The Taxpayer Experience Strategy, developed in accordance with the
Taxpayer First Act, focuses on moving the IRS even further toward more
customer-focused operations and creating an environment where critical
leadership decisions are driven by customer and employee insights. The
Taxpayer Experience Strategy's Community of Partners focus area builds
on our longstanding and successful partnerships and recommends
developing new ones to create a network that finds innovative and
modernized ways to reach taxpayers, improve service and reduce taxpayer
burden.
As the IRS moves forward, the platform provided by advisory
committees and stakeholder forums will continue to offer opportunities
for input on tax administration policy, programs, and initiatives,
delivering significant and relevant advice in addressing ongoing
modernization.
In addition to advisory committees and stakeholder forums, we also
request feedback from the public through multiple surveys on the
IRS.gov website, automated web applications, and through surveys of in-
person and telephone services. We encourage users to continue
participating in these forums and surveys and will continue to use
stakeholder feedback to improve our services and shape future plans.
The IRS Taxpayer Experience Office will work with both internal and
external partners to continue to identify methods of communicating
ideas for improvement and modernization of the services offered.
Question. At the hearing, we discussed IRS staffing and the plans
to expand the workforce. I asked about the ability of the IRS to train
both new and high-skilled staff and whether there is a workforce
available to tap into for these hiring needs. I was glad to hear that
the IRS is building on its outreach strategies for hiring. You noted
that one of the primary reasons for this need for hiring is due to the
decline in IRS funding over the past decade, especially considering 70
percent of the IRS budget is for labor. The lost staff included revenue
agents and revenue officers, who audit tax returns and perform
collection activities, as well as special agents who investigate tax-
related crimes and other issues.
As I understand it, the lost capacity has not solely been in the
number of people conducting audits, but in the ability to keep pace
with increasingly sophisticated tax avoidance strategies being employed
in the private sector. This suggests the IRS needs more than just
additional staff, but also requires training and new ways of addressing
evolving tax avoidance strategies.
What is involved and how long does it take to fully train a new
hire to be an effective enforcement agent, whether in an auditing or
criminal investigation role?
Answer. It takes approximately 3 to 5 years to fully train a new
hire to be an effective enforcement agent in auditing complex mid-size
and large businesses. Such audits are handled by our Large Business and
International (LB&I) Division. This training process is comprised of
the following factors: prior tax and industry experience (5 years
minimum); acclimation to government operations--work environment,
practices, and procedures; completion of LB&I formal training (52-Week
Core Curriculum); and completion of specialists training (as
applicable) and essential on-the-job experience and development.
The 52-Week Core LB&I Curriculum has 4 Learning Phases: (1)
Orientation--New Hire Administration, IRS Organization Overview, LB&I
Division Overview; (2) Flexible Blended Learning--Online Learning with
Virtual and Personal On-the-Job Instructor Assistance--101 Sessions on
Administrative, Technical, and Procedural Matters; (3) Audit Techniques
Virtual Classroom Training--Virtual Classroom Case Study Based Learning
using a facilitative delivery approach (augmenting and enhancing the
previously covered Flexible Blended Learning delivery); and (4) On-the-
Job Training--Working fundamental corporate training cases on a just-
in-time basis--commensurate with learning progression previously noted.
Upon completing the initial 52-week core curriculum, additional on-
the-job learning is executed as follows:
Revenue Agents
Securing experience on more fundamental corporate exams moving
to increasing levels of complexity and/or specific focused exams (i.e.,
campaigns, claims, etc.).
Attending local workshops and informal training sessions
delivered by the Team Manager, On-the-Job Instructor, and/or Senior
Revenue Agents.
Specialists
Core Specialists Training over a 1-3 year period (the length
varies based on area of specialty--Cross Borders (International),
Transfer Pricing, Financial Products, Engineering, Computer Audit,
Foreign Payments Practices, Individual International Compliance, etc.).
Training case assignments with in-depth emphasis on specialist
related issues and examination practices.
Beyond This Training, Field Experience Is Secured Through
Working a series of increasing complex cases and issues.
Attending 40 hours of Continuing Professional Education
annually.
Attending specialized issue training as developed and delivered.
Attending designated community network calls on specialized
issue developments.
Question. Outside of staffing, what is necessary to ensure that the
IRS is at the cutting edge of tax enforcement, and keeping pace with
evolving tax avoidance strategies?
Answer. Our ability to reach the cutting edge of tax enforcement
and keep pace with evolving tax avoidance strategies requires four
elements: timely access to accurate and relevant data; capacity to
develop and use advanced technological tools and techniques to identify
compliance risk; highly skilled employees; and relevant and high-
quality training.
Staffing has been addressed in prior IRS input, so this response
will focus on data access, technology, and training.
Data access. Identifying and responding to compliance risks
requires good data. Our ability to access timely, accurate and relevant
data will benefit greatly from an expansion of electronic return filing
and other methods of ``native digital'' data intake. In some areas,
legislative changes will be necessary to facilitate this expansion.
Additionally, both the IRS and taxpayers will benefit from augmented
capacity to validate the accuracy and completeness of data in real
time--i.e., before we accept tax and information returns for
processing. Improving and speeding data validation and error resolution
would reduce costs for the IRS and taxpayers alike.
Technology. The data needed to identify compliance risks is both
voluminous and complex. Advanced technological tools and techniques are
essential to the task of making the best use of this data. Upgrades to
information technology infrastructure and analytical tools will speed
the development, testing, validation, and deployment of increasingly
sophisticated workload selection methods that promise to do a better
job of identifying compliance risks while reducing the proportion of
``false positives.'' Judicious use of external experts in data science
and data analytics can accelerate the IRS's own learning curve.
Increasing use of technology will also serve to automate processes that
are currently done manually, thereby improving efficiency and reducing
costs.
Training. Augmented, high-quality training is necessary to properly
utilize improved access to data, better technology, and a highly
skilled workforce. For current and new IRS employees to be efficient
and effective, they must be equipped with the training necessary to
administer complex tax laws in an ever-changing environment. This
requires ongoing investment in identifying and developing training
curricula, knowledge management tools and continuing professional
education, including external training opportunities. To stay at the
leading edge of emerging tax avoidance strategies, increased
availability of external and improved internal training resources would
provide just-in-time information and data rather than chasing schemes
and strategies years after their widespread implementation.
______
Questions Submitted by Hon. John Thune
Question. When did you and your staff first learn about the IRS
data breach of confidential taxpayer information to the media outlet
ProPublica?
Answer. I first became aware of a potential ``insider threat''
violation upon reading the first ProPublica published article on the
morning of June 8, 2021.
Question. What administration officials and agencies did you
consult with about the apparent leak of personal taxpayer information
before testifying before the Senate Finance Committee hearing on June
8, 2021?
Answer. On June 8, 2021, within an hour after ProPublica published
its article, I contacted Russell George, the Treasury Inspector General
for Tax Administration (TIGTA). I asked him to open an investigation to
find out if an IRS employee was the source of the tax return
information. He immediately confirmed receipt of our referral.
On June 8th, the Department of the Treasury indicated they also
referred this matter to the Treasury Inspector General, the FBI, and
the U.S. Attorney's Office for the District of Columbia. Each of these
offices has independent authority to investigate.
Question. What steps has the IRS taken to ensure such a breach of
confidential taxpayer information does not happen again?
Answer. Protecting taxpayer information is a fundamental IRS
principle. Every employee takes annual training on unauthorized
disclosure of taxpayer information. This training clearly defines when
a disclosure is authorized and clarifies the consequences of an
unauthorized disclosure under section 6103 of the Internal Revenue Code
(Code). Those consequences include potential termination of employment,
fines and imprisonment.
The IRS has strong protections in place to safeguard taxpayer
information. TIGTA regularly audits employee access to taxpayer
information. The IRS provides an annual report to the Joint Committee
on Taxation that describes all disclosures of taxpayer information
during the year and the statutory authorization for each disclosure.
The Government Accountability Office also provides oversight on the
protection of taxpayer information.
Historically, the IRS has been very effective in protecting the
taxpayer data we collect because of the various levels of oversight and
training. At this time, the source of the information is currently
unknown. We will immediately take action to respond to any risks
identified through an investigation.
Question. What are the criminal penalties for IRS employees,
including employees made possible by the Intragovernmental Personnel
Act of 1970, who share confidential taxpayer information or tax returns
with those unauthorized to view the information?
Answer. The criminal penalties for the willful unauthorized
disclosure of returns or return information are outlined in section
7213 of the code, which provides that a willful unauthorized disclosure
``shall be a felony punishable upon conviction by a fine in any amount
not exceeding $5,000, or imprisonment of not more than 5 years, or
both, together with the costs of prosecution, and if such offense is
committed by any officer or employee of the United States, he shall, in
addition to any other punishment, be dismissed from office or
discharged from employment upon conviction for such offense.'' The
criminal penalty applies to any IRS employee, including employees made
possible by the Intragovernmental Personnel Act of 1970.
Question. Would you agree that the release of confidential taxpayer
information is an egregious violation of public trust in the IRS?
Answer. Absolutely. Any unauthorized disclosure of confidential
government information is illegal. We take such disclosures seriously;
we have and will continue to pursue all available measures. However,
the source of the information is currently unknown.
Question. Will you commit to updating me about the IRS's
investigation into the unauthorized release of taxpayer information?
Answer. TIGTA has sole jurisdiction over potential ``insider
threat'' violations should this information have originated from an IRS
employee. Since TIGTA is independent from the IRS, you may wish to send
your request to Russell George, the Treasury Inspector General for Tax
Administration.
Question. The Biden administration proposed requiring banks to
report annual account inflows and outflows to the IRS. Should the IRS
gain access to such information, is it possible that private bank and
financial information of taxpayers could be released from the IRS?
Answer. Protecting taxpayer information is a fundamental IRS
principle. Every employee takes annual training on unauthorized
disclosure of taxpayer information. This training clearly defines when
a disclosure is authorized and clarifies the consequences of an
unauthorized disclosure under section 6103 of the Internal Revenue
Code. Those consequences include potential termination of employment,
fines, and imprisonment.
The IRS has strong protections in place to safeguard taxpayer
information. TIGTA regularly audits employee access to taxpayer
information. The IRS provides an annual report to the Joint Committee
on Taxation describing all disclosures of taxpayer information during
the year and the statutory authorization for each disclosure. The
Government Accountability Office also provides oversight on the
protection of taxpayer information.
Historically, the IRS has been extremely effective in protecting
the taxpayer data it collects because of the various levels of
processes, procedures, oversight, and training. This duty is one we
take very seriously. Every day, we strive to live up to the level of
trust the public has given us.
Question. Has the IRS conducted an analysis of any new compliance
measures that taxpayers would face under the administration's bank
reporting proposal? If so, can you describe the new compliance burdens
and any related costs to taxpayers?
Answer. This question should be addressed to Treasury's Office of
Tax Policy.
Question. The administration estimates that increasing IRS funding
by $80 billion over 10 years would yield $700 billion. But the
nonpartisan Congressional Budget Office estimates that increasing IRS
funds by $40 billion over 10 years would increase revenues by $103
billion, resulting in a net $63 billion decrease in the deficit.
How does the administration's revenue projections from increased
IRS enforcement differ so significantly from the nonpartisan CBO's
projections?
Answer. IRS estimated that revenue from a 10-year investment of
approximately $80 billion will generate $316 billion in direct
enforcement and protected revenue. Treasury's Office of Tax Analysis
estimated that adding an additional reporting requirement for financial
accounts would account for the additional $463 billion, for a total net
revenue of approximately $700 billion. Although the cost to administer
this new reporting requirement is included in the $80 billion, the
additional savings is largely attributable to predicted improvement in
voluntary compliance, which rises when third parties provide financial
information to the IRS.
The CBO analysis is more directly comparable to the estimate of
$316 billion in enforcement and protected revenue. The latter analysis
implies around $4 returned to the Treasury for every $1 spent on
enforcement activity, whereas the CBO analysis implies $2.6 for every
$1 spent. Most recently, CBO estimated that the administration's
proposal to increase funding for the IRS by $80 billion over the 2022-
2031 period would increase revenues by approximately $200 billion over
those 10 years.
CBO, in its analysis, states that their starting point for their
estimates was the IRS Return on Investment (ROI) for new enforcement
initiatives, and the peak ROI, i.e., the ROI when the new hires are
fully trained, ranges from $5 to $9 for every $1 spent in recent
years.\5\ When the IRS prepares ROI for these initiatives, it uses
historical data to build up an expected return for the proposed set of
enforcement activities. In this analysis, the IRS lowers the historical
productivity by 10 percent-20 percent to account for the marginality--
the presumption that additional enforcement cases could yield lower
revenue because the most egregious cases are selected first. By further
reducing these already conservatively prepared ROIs, the CBO moved the
predictions even further below the historical rates of returns for
enforcement actions.
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\5\ https://www.cbo.gov/publication/57444.
Over the last 10 years, IRS enforcement has declined significantly.
The following table from the IRS Data Book illustrates this. There is a
very large pool of enforcement actions available to us, but we cannot
address all of them at our current staffing level. The significant
increases proposed would reverse some of these trends, but not in a way
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that can be easily extrapolated past actual experience.
[GRAPHIC] [TIFF OMITTED] T0821.001
.epsWe are confident that the methods used to estimate ROI for this
investment are sound and, if anything, are already conservative. We
disagree with the CBO's assertion that there would be a dramatic fall-
off in revenue as we restore enforcement.
Question. As a follow-up to my question at the hearing, how does
the U.S. voluntary tax compliance rate compare with other countries,
particularly OECD countries?
Answer. Because the tax regimes of OECD countries vary widely, they
are not easily comparable. For example, many of the OECD countries
include a value-added tax (VAT) as part of their tax regime, while the
United States does not. In the UK, payments for both National Insurance
and VAT are included in their tax gap estimates. In their 2020 release,
HM Revenue and Customs reports an estimated gap of 4.7 percent, that is
analogous to the net tax gap reported in the IRS tax gap report
(computed as the gross tax gap less enforced and other late payments).
This equates to a net compliance rate of 95.3 percent as compared to
the net compliance rate of 85.8 percent we reported in ``Federal Tax
Compliance Research: Tax Gap Estimates for Tax Years 2011-2013.'' The
UK does not include a measure of the voluntary compliance rate, i.e., a
compliance rate without accounting for enforced and other late
payments, in their report.
______
Questions Submitted by Hon. Mark R. Warner
Question. The Form 6166 is a letter printed on U.S. Department of
Treasury stationary that certifies that a person or company is a U.S.
resident for purposes of the income tax laws of the U.S. for the fiscal
year indicated on the form. Companies need Form 6166 to claim income
tax treaty and other tax benefits while doing business in foreign
countries. Many U.S. tax treaty partners require this proof of U.S.
residence from the IRS when a person or business entity is claiming
income tax treaty benefits. Form 6166 is also used to claim exemption
from VAT (Value-Added Tax) imposed by a foreign country. Taxpayers
generally submit IRS Form 8802 in the latter part of the year preceding
the fiscal year the Form 6166 is applicable for, and the Forms 6166
historically have been received within 60 to 90 days from the date of
submitting the Form 8802. I understand that the IRS has been facing a
backlog in a variety of areas as you have seen increased
responsibilities from recent legislation. Specifically, I have heard
from companies who operate globally and have filed their Form 8802 but
have not yet received their Form 6166. It is my understanding that
these forms are usually turned around in about 60 to 90 days, but
companies are now facing wait times almost twice that. I am concerned
about the impact this delay is having on American companies and their
ability to conduct business abroad. Without this form, companies could
be subject to double taxation or increased tax withholdings as well as
prevented from receiving vendor payments.
Are you aware of this delay in sending out Form 6166, and can you
provide me with a timeline for when the IRS will be able to address the
backlog? For a company who has filed Form 8802 at the beginning of the
year, what is their expected turnaround time?
Answer. United States Certification (US Cert) program continues to
experience delays due to the pandemic. The inventory level as of June
26, 2021 was approximately 23,000. This is an increase of nearly 9,000
(+64 percent) compared to the similar week ending in FY 2019, but a
reduction of almost 12,000 (-34 percent) compared to the similar week
ending in FY 2020. The processing site was closed for an extended
period of time in FY 2020 due to the pandemic and did not begin
processing inventory again until mid-July.
A contributing factor to the delay in processing this inventory is
the delay in processing tax returns. IRS instructions for Form 8802,
Application for United States Residency Certification, advise the
customer it may take less time to process the application if they
submit a copy of their recently filed return. However, we find that
this rarely occurs. If the return is not processed, and we do not have
a copy of the return, we have to contact the customer to obtain a
signed copy of the return. The application is held in inventory pending
the customer's response before the certification(s) can be issued.
Telework has been implemented for US Cert employees, which has
allowed us to continue processing this inventory during the pandemic,
weather related incidents, and civil disturbances. Employees are
working overtime, and we continue to pursue approval of a long-term
electronic solution, including the capability of automation for this
program.
______
Questions Submitted by Hon. Elizabeth Warren
Question. A May 2020 report by the Treasury Inspector General for
Tax Administration found that the IRS did not work the cases of nearly
900,000 high-income individuals who did not file their taxes from 2014-
2016, with estimated owed tax of $45.7 billion.\6\
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\6\ Treasury Inspector General for Tax Administration, ``High-
Income Nonfilers Owing Billions of Dollars Are Not Being Worked by the
Internal Revenue Service'' (May 29, 2020), https://www.treasury.gov/
tigta/auditreports/2020reports/202030015fr.pdf.
In the year since the report was released, how has the IRS
addressed these nearly 900,000 cases? Has the agency started to work
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any of these cases?
Answer. We are committed to ensuring our enforcement efforts are
fair across the board and that no one at any income level thinks they
are safe cheating on their taxes. Tax cheats undermine the integrity of
our tax system and addressing high-income non-filers (HINFs) is a major
enforcement priority for us. We have selected 100 percent of the HINFs
for tax years 2016, 2017 and 2018 to receive delinquency notices and,
should the HINF not respond, to be placed into a taxpayer delinquency
investigation (TDI).
Of the approximately 879,000 HINFs identified by TIGTA in its May
2020 report, 510,000 (approximately 58 percent) were selected and
pursued under one of the downstream collection enforcement efforts. We
entered 42,601 of the remaining 369,000 cases into the TDI inventory
but could not pursue them because other cases took priority. The other
326,399 cases were mostly tax year 2015 HINFs who were never entered
into the TDI inventory. At that time, we had paused our normal non-
filer process to realign resources. Ultimately, enforcement decisions
are often
resource-driven, and we must allocate available enforcement resources
among numerous enforcement priorities.
In FY 2020 we initiated ``issue based'' Revenue Officer Compliance
Sweeps (ROCS) across the country to work these HINF cases. We
reassigned experienced revenue officers (ROs) to perform these
compliance sweeps, working in-person with the affected taxpayers (and,
if applicable, their representatives). To increase the impact, we
promoted our strategy through the national media to improve future
voluntary compliance. We also routinely discuss these efforts at
national, regional and local conferences throughout the country.
We conducted a ROCS on 684 high-priority cases in parts of five
States between November 2019 and February 2020. Many of these cases
involved high-income taxpayers, both non-filers and those with
associated balances due, as part of the overall high priority taxpayer
case population. In February 2020, we conducted a ROCS focused on
egregious high-income delinquent filers. That effort resulted in 157
taxpayers contacted during a 2-week effort of RO field visits: 36
percent of these taxpayers had multiple years of high income; 95
percent of these taxpayers had income of $1 million dollars or more in
at least 1 year between 2016 and 2018; and 43 percent had an associated
balance due along with unfiled returns.
Due to COVID, we significantly limited in-person field activities
for our ROs beginning in March 2020, but continued to direct the
assignment and work of HINF and balance due cases in Field Collection
through telephone/remote contacts.
In 2021, we conducted 40 virtual ROCS between February and June,
during which we initiated virtual contacts with high priority
taxpayers, including HINFs and those with associated balances due, in
33 States. Thirteen of these ROCS were specifically focused on
addressing HINFs in 21 States. In August 2021, we initiated a second
series of ROCS to further address egregious HINFs. During this series
of ROCS, we plan to work more than 700 egregious HINF cases nationwide,
approximately 300 of which have associated balances due totaling over
$113 million.
Question. What changes has the IRS made to ensure non-filing high-
income individual cases are worked?
Answer. HINF cases are prioritized during our non-filer
identification process when we open new cases. All HINFs for tax years
2016 through 2018 were selected, and received a notice if they did not
file a return. Taxpayers who fail to respond to the notice become part
of our queue for assignment to revenue officers. We plan to continue to
select all HINFs in the future. The Director for IRS Collection
Inventory, Delivery, and Selection issued a directive to ensure that
100 percent of HINF cases for return delinquency are selected and put
into our work stream. Additionally, our automated substitute for return
case selection process was updated to prioritize high liability cases
and our field case management system continues to prioritize HINF
inventory as a high priority for field collection case selection.
Question. Would mandatory funding and new third-party reporting
from financial institutions help the IRS to work these and other cases
of nonfiling high-income individuals?
Answer. Third-party reporting enables our ROs to more effectively
and efficiently address HINF cases by making it easier for ROs to
identify these taxpayers' sources of income, assess proper amounts of
tax under authority of IRC 6020(b), and appropriately refer taxpayers
for examination/audit.
Question. Testifying before the Senate Finance Committee in April,
you noted that people have estimated that ``with resources the IRS
could probably bring in 10 percent, 15 percent, 20 percent'' of the $1-
trillion annual tax gap, but ``a modernized IRS could actually beat
that.''
How do you define a ``modernized IRS,'' and what kind of
investments are needed to modernize the IRS so it can close the tax gap
to this degree?
Answer. In our Taxpayer First Act report to Congress, we described
an aspirational vision, building on work already underway. This vision
includes high-quality, personalized service to help taxpayers
understand and comply with their filing and reporting obligations;
well-trained employees providing excellent taxpayer service; and a
streamlined organizational structure making it easier for taxpayers and
employees to navigate the agency and get the help they need when they
need it. A positive taxpayer experience increases trust in government
and promotes voluntary tax compliance. Similarly, the advanced
analytics strategies described in the report and employed to improve
taxpayer services operations would also improve our workload selection
and the effectiveness of our compliance actions. However, without the
commitment of significant multiyear funding, we cannot make the
taxpayer improvements necessary to maintain trust and confidence in the
Federal Government and its tax collection system.
Better service alone will not reduce the tax gap. Investments in
IRS staffing ensures adequate compliance coverage, which not only
directly reduces the tax gap but also has a potentially even larger
deterrent effect as the greater public is more aware that IRS tax
compliance is being applied fairly across taxpayer segments.
Increased third-party information reporting will also drive tax gap
reductions as is demonstrated by compliance rates exceeding 95 percent
on income for which we receive substantial third-party information
reporting (e.g., interest and dividends, pensions and annuities,
unemployment and Social Security payments, and State income tax
refunds). Better use of artificial intelligence and data analytics will
deliver greater accuracy in identifying potential compliance risks
which will help the IRS adapt more quickly to changes in the compliance
environment.
Modernizing IRS systems will increase efficiency of IRS operations
and productivity of the average revenue agent or special agent.
Additionally, modernization funding would enable enhancements to
information return processing and those systems that identify, select,
and ultimately enable compliance activities. The Integrated
Modernization Business Plan, delivered in April 2019, was developed to
establish the underlying infrastructure required to modernize the IRS.
Strong technology infrastructure is critical to delivering on the IRS's
vision and consistent, dependable multiyear funding is critical for us
to deliver the modernized IRS that American taxpayers deserve.
Question. Recent reporting from ProPublica showed what we already
know--the ultrarich pay little to nothing in taxes, and far less than
average Americans.
How would the administration's tax proposals help ensure that the
ultrarich pay their fair share?
Answer. This question should be addressed to Treasury's Office of
Tax Policy.
Question. In response to questioning, you indicated support for
Congress granting the IRS additional authority to collect information
on crypto assets.
Describe the consequences of a lack of reporting requirements for
cryptocurrency exchanges to ensure tax compliance, including how the
absence of such requirements has impacted the gap between the amount of
taxes collected versus the amount owed each year.
Answer. Research demonstrates that misreporting tax information is
55 percent when income amounts are subject to little or no information
reporting, compared to only 5 percent where substantial information
reporting exists. Taxpayers are less likely to accurately report and
pay taxes on income that is not independently reported to the IRS by a
third party.
Cryptocurrency transactions are inherently devoid of the identity
of the person conducting the transaction and rely instead on one or
more pseudonyms in lieu of identifying information. We currently cannot
easily identify taxpayers who engage in virtual currency transactions
due to a lack of reporting requirements. An information reporting
regime requiring reporting to the IRS on cryptocurrency transactions
would benefit tax compliance by helping to close the information gap
with respect to these assets.
Existing information reporting rules do not specifically address
how certain transactions involving cryptocurrency must be reported to
the party who disposes of the cryptocurrency in exchange for cash,
account credit, services, stored-value cards, or other property
(including a different type of cryptocurrency). In addition to
improving income reporting compliance, information return reporting
allows IRS Document Matching Programs, such as Automated Underreporter,
to conduct time- and cost-efficient compliance activities.
Question. Do you believe that the lack of reporting requirements,
particularly relative to stock brokerages, make cryptocurrencies
appealing for individuals engaging in illicit financial activities or
tax avoidance?
Answer. Generally, disparate reporting requirements may result in
bad actors moving assets from entities with reporting requirements
(e.g., stock brokerages) to entities with limited or no reporting
requirements. The peer-to-peer nature of cryptocurrencies compounded by
the pseudo-anonymous nature of publicly available transactional
information and lack of reporting requirement makes cryptocurrencies
appealing for individuals engaging in illicit financial activities or
tax avoidance.
Question. The Internal Revenue Service has a longstanding
commitment to racial and ethnic diversity in its staffing,
substantially outpacing the diversity of the national civilian
workforce (see IRS Databook 2019, 72).
According to the IRS Internal Revenue Manual, IRS's Research,
Applied Analytics and Statistics Division (RAAS) group ``combines
advanced analytics, dynamic testing, reporting, and prototyping with
appropriate scientific rigor and deep IRS domain expertise to deliver
valid and actionable insights using diverse sources of data,'' and
contains eight data labs, including a data exploration lab and a policy
and program impact lab.\7\
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\7\ IRS Internal Revenue Manual Sec. 1.1.18.1, https://www.irs.gov/
irm/part1/irm_01-001-018.
Given the public reporting of the race and ethnicity of IRS
personnel, would you agree that racial equity issues in other areas of
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IRS policies and practices merit data gathering and analysis?
Are any of RAAS data labs studying the disparate racial impacts of
IRS procedures using matching and imputation techniques? If not, why
not?
Answer. Tax returns do not ask taxpayers to report information on
race and/or ethnicity; therefore, these factors are never considered in
any aspect of our tax administration activities. There is a concern
that the public may not be comfortable with the IRS having information
on individual taxpayers' race and ethnicity, and that discomfort could
erode the current voluntary compliance rate.
______
Questions Submitted by Hon. Sheldon Whitehouse
Question. Politically active groups often report different amounts
of political spending to the IRS than they do to campaign finance
regulators like the FEC. In some cases, they tell the IRS they will not
engage in any political activity but then go on to report election
spending to the FEC. However, the Department of Justice will not
investigate absent an IRS referral.
Of the more than 200 total criminal referrals the IRS made to the
DOJ involving 501(c) organizations during FY 2015 through May 2021,
have any involved false statements made by such nonprofits about their
political activity? If so, how many of those referred cases were
authorized by the DOJ tax division for prosecution?
Answer. From FY 2015 to the present, the IRS Exempt Organization
function referred 5 cases to IRS-CI, which in turn would determine
whether to pursue the cases with the Department of Justice (DOJ). None
of these cases relate to a failure to properly disclose political
election campaign activity.
None of the criminal referrals involving 501(c) organizations that
IRS-CI made to DOJ involved false statements about the organizations'
political activity. The investigations that were referred involved
evasion of income, using the organization to shelter income, or
diverting money for personal benefit. Numerous investigations involved
embezzlement from 501(c) organizations, using the organizations to
launder proceeds from drug activities or fraud, and using the
organizations to perpetrate scams.
Question. It has now been over a decade since Congress passed the
Foreign Account Tax Compliance Act (FATCA) to allow the IRS to lift the
veil on secret offshore accounts. While the IRS has done much to
implement that law, the Treasury Inspector General for Tax
Administration noted in testimony before the Senate Finance Taxation
and IRS Oversight Subcommittee that ``the IRS has taken virtually no
compliance actions to meaningfully enforce'' FATCA.
In the President's FY22 budget request, how much is allocated for
the enforcement and implementation of FATCA? Is this amount sufficient
to implement and enforce the law?
Answer. Since the 2018 TIGTA report (2018-30-040), we have
continued and initiated new FATCA compliance activities. For example,
we have developed campaigns that use automated risk assessment
processes to identify potential tax noncompliance related to taxpayers'
failures to report the proper income and tax and/or failure to properly
submit required information returns associated with these offshore
accounts. The automated risk assessment processes also identify
potential tax noncompliance related to foreign financial institutions'
(FFIs') failures to appropriately report taxpayer accounts by comparing
information reported on Form 8966, FATCA Report, with what is reported
on Form 8938, Statement of Specified Foreign Financial Assets. FATCA
data is also associated with individual exam cases involving offshore
related issues; utilized to ensure proper FFI certifications and remove
FFIs from the registered list, as appropriate; and reconciled in other
compliance activities on an ad hoc basis. Our business operating
divisions address noncompliance and errors through a variety of
treatment streams, such as soft letters, examinations, and termination
of an entity's FATCA status. While we have significantly increased our
compliance efforts in recent years, compliance efforts continue to be
limited by technological and human resource limitations in light of
budgetary constraints.
______
Questions Submitted by Hon. Todd Young
Question. First, I would like to take the opportunity to thank you
for our conversation during the hearing regarding the IRS's processing
of my constituents' tax returns. I appreciate your offer to work with
me and my staff on the ongoing issues faced by my constituents,
particularly related to the processing of 2019 Federal tax returns. I
commend your staff for their prompt attentiveness to this issue
following the hearing and look forward to continuing our collaboration
on behalf of Hoosier taxpayers.
Like many of my colleagues, I am concerned about the tax gap and
want to ensure we close the gap in a targeted, effective manner. I hope
that we can work toward bipartisan solutions to achieve improved tax
compliance.
In order to identify the best policy solutions for the tax gap, it
is important for us to understand the nature and source of that gap,
the ways in which our complex tax code contributes to that gap, and the
reforms needed within the IRS to improve efficiency and restore public
confidence. A prominent topic of conversation during the hearing was
your characterization of and thoughts on addressing the tax gap. During
the hearing titled, ``The 2021 Filing Season and 21st Century IRS,''
before the Senate Finance Committee on April 13, 2021, you estimated
the tax gap could approach $1 trillion per year. This greatly exceeded
prior IRS and third party estimates of the tax gap.
Can you please explain in detail how you calculated this estimate?
Answer. The tax gap represents, in dollar terms, the annual amount
of tax noncompliance with our tax laws. It does not distinguish between
intentional and unintentional noncompliance with tax laws. Further, it
does not report obligations, domestic or foreign, legal or illegal
source income, etc. In addition, because our published estimates are
based on available information, there are acknowledged gaps that
prevent it from serving as an all-inclusive measure of global tax non-
compliance by U.S. taxpayers.
The 2011-2013 estimates apply to returns filed for tax years 2011-
2013 and subsequently audited. They therefore cannot fully represent
the compliance landscape in 2021. The 2021 digital world economy is
significantly different from the world economy of 2011-2013 and
therefore it would be incorrect to think that these estimates fully
capture the current scope of the tax gap. At the May 11, 2021 hearing
on the tax gap before the Senate Finance Committee, Subcommittee on
Taxation and IRS Oversight, Barry Johnson, Acting Chief of RAAS,
testified that simply using asset and price growth information to
adjust the 2011-2013 gross tax gap estimates would yield an initial
estimated adjusted gross tax gap for Tax Year 2019 of approximately
$600 billion.
Further, an IRS research team working with others used operational
audit data to review sophisticated tax evasion by certain taxpayers
though the use of offshore bank accounts and/or complex pass-through
business structures. This information is not fully captured by our
legacy tax gap estimation methodology. IRS researchers estimated
evasion limited to the use of offshore bank accounts and/or complex
pass-through business structures contributed an additional $33 billion
to the 2011-2013 tax gap. Adjusting this estimate would increase the
Tax Year 2019 tax gap by an additional $46 billion. With this increase,
Mr. Johnson estimated the overall gross tax gap for Tax Year 2019 is
approximately $646 billion.
This estimate does not account for factors including the rise of
cryptocurrency, additional undetected income offshore or concealed in
pass-through entities not identified in the referenced research,
additional areas of noncompliance including conservation easements, or
illegal source income (which is not included in the tax gap estimate).
Cryptocurrency alone has grown to a world-wide market of $2 trillion.
Reporting compliance falls far short of what would be expected given
the number of users, transactions, and value that virtual currency
exchanges publicize on an annual basis. Recognizing compliance
challenges, the IRS has focused significant enforcement resources over
the past 2 years in the virtual currency environment.
In addition to most taxable virtual currency transactions, the Tax
Gap estimate for tax years 2011-2013 also doesn't fully reflect
noncompliance related to various undetected international or foreign-
based taxable transactions and activities, illegal source income (which
is taxable and is pursued by the IRS often in coordination with other
Federal and State agencies), and other types of undetected, concealed
taxable income. Previous Tax Gap estimates only generally measured
international activities by domestic tax return filers but not from
taxpayers with addresses abroad, foreign businesses and others. The IRS
is generally aware of significant noncompliance associated with the
foregoing but does not currently have an estimate of how much it would
impact the tax gap; however, we are committed to conducting the
research necessary to produce estimates in the future.
Finally, Mr. Johnson noted that it has been well publicized that
IRS audits have significantly declined. RAAS research consistently
finds that audits have a deterrent effect and noted that the recent
decline in audits is likely to have the opposite effect, leading to an
increase in the tax gap.
In consideration of the foregoing points, it would not be
unreasonable to believe that the actual tax gap could approach and
possibly exceed $1 trillion per year.
To address some of the above challenges, Mr. Johnson confirmed that
for at least the past 18 months, RAAS has been working on updating and
enhancing the underlying tax gap methodology, the goal of improving the
currency of the estimates by considering how to identify and
incorporate additional information and emerging compliance issues.
Question. You had indicated in the April 13th hearing that
increased enforcement could recapture at most 20 percent of the gap,
but we know that relying on audits to chase down complex tax evasion is
costly and unreliable. More promisingly, you had referenced the
potential of a modernized IRS to collect taxes due more efficiently.
What structural reforms are necessary for the IRS to more
effectively fulfill its mission?
Answer. To provide America's taxpayers top-quality service and
enable them to voluntarily meet their tax responsibilities while
enforcing the law with integrity and fairness to all, we are
modernizing our organizational structure to better align operations
with our mission, increase agency-wide collaboration, and remove
operational silos. An important first step was the appointment of our
first Taxpayer Experience Officer earlier this year and the
establishment of the Taxpayer Experience Office. We are in the process
of evaluating the steps needed to establish more integrated service
operations under our Relationships and Services Division and
consolidated enforcement operations under our Compliance Division.
Question. What, if any, barriers currently exist that are
preventing the IRS from implementing these structural reforms?
Answer. The IRS Restructuring and Reform Act of 1998 (RRA 1998)
directed us to restructure the IRS by eliminating or substantially
modifying the three-tier geographic structure (national, regional, and
district) that was in place at that time and replacing it with an
organizational structure featuring operating units to serve particular
groups of taxpayers with similar needs. Recognizing this barrier, the
writers of the Taxpayer First Act had the foresight to include the
following language:
Beginning 1 year after the date on which a comprehensive plan
to modify the organization of the IRS is submitted to Congress,
the provision removes the RRA98 requirement of an
organizational structure that features operating units serving
particular groups of taxpayers with similar needs.
Therefore, this legislative barrier to moving forward with our
restructuring efforts will expire in January 2022.
Question. Do you believe that steps to reduce complexity would
incentivize more voluntary compliance from taxpayers without throwing
billions more of taxpayer dollars at this issue with limited results?
Answer. Tax law complexity contributes to taxpayer errors when
filing their tax returns and increases the taxpayer compliance burden.
The complexity also requires IRS resources to deliver quality
assistance to taxpayers, to correspond with taxpayers on errors on
their returns and, in some situations, to take enforcement actions.
Question. How strong are current whistleblower protections for
those who seek to report noncompliance?
Answer. Protections for whistleblowers who seek to report
noncompliance are found in section 7623(d) of the Code. Subsection (1)
of section 7623(d) states:
No employer, or any officer, employee, contractor,
subcontractor, or agent of such employer, may discharge,
demote, suspend, threaten, harass, or . . . discriminate
against an employee in terms and conditions of employment . . .
in reprisal for any lawful act done by the employee--
(a) to provide information, cause information to be provided,
or otherwise assist in an investigation regarding underpayment
of tax or any conduct which the employee reasonably believes
constitutes a violation of the internal revenue laws . . . , or
(b) to testify, participate in, or otherwise assist in any
administrative or judicial action taken by the Internal Revenue
Service relating to an alleged underpayment of tax or any
violation of the internal revenue laws. . . .
A person alleging discharge or reprisal under the anti-retaliation
provisions must file a complaint within 180 days after the date on
which the violation occurs. Enforcement actions under section 7623(d)
are handled by the Department of Labor. If not resolved within 180
days, whistleblowers can bring an action at law or equity in the
appropriate district court of the United States. Compensatory damages
include reinstatement, 200 percent of back pay and 100 percent of lost
benefits and compensation for any special damages sustained.
Question. In your opinion, would enhanced protections help
encourage individuals to come forward?
Answer. Historically, most whistleblowers that file Form 211
whistleblower claims with the IRS have severed relationships with their
employers and have no desire for reinstatement. However, the Department
of Labor enforces section 7623(d) and may have views on whether
enhanced protections in 7623(d) might encourage whistleblowers to come
forward.
Question. President Biden's recently released Fiscal Year 2022
budget included an increase of over $13 billion in funding for the IRS.
Do you believe that efforts to expand the size and scope of the IRS
should be predicated on ensuring that taxpayer protections are
respected?
Answer. The IRS has strong protections in place to safeguard
taxpayer information. TIGTA regularly audits employee access to
taxpayer information. The IRS provides an annual report to the Joint
Committee on Taxation that describes all disclosures of taxpayer
information during the year and the statutory authorization for each
disclosure. The Government Accountability Office also provides
oversight on the protection of taxpayer information.
Question. I am interested in the Treasury Inspector General for Tax
Administration's 2020 audit of the IRS. Included in the report is a
description that the IRS--at the height of the pandemic and facing
record backlogs--was unable to function properly due to printer issues
that persisted for months. Unbelievably, the primary reason given by
the IRS is that many of these devices were simply out of ink or the
waste cartridge was full.
Of course, the pandemic was a challenge to operations everywhere,
but this seems like a problem that should not occur. In Indiana, many
of my constituents are still waiting on the IRS's processing of their
2019 tax returns, and the possibility that these delays are in part due
to printers being out of ink is troublesome.
On the heels of the Inspector General's report, I am very concerned
about discussions of expanding the IRS's scope or funding without
addressing the agency's underlying issues.
Do you believe that expanding the power and scope of the IRS
without increased oversight and taxpayer protections could lead to
further abuses, putting at risk not only taxpayers' dollars but also
their privacy?
Answer. The IRS has strong protections in place to safeguard
taxpayer information. TIGTA regularly audits employee access to
taxpayer information. The IRS provides an annual report to the Joint
Committee on Taxation that describes all disclosures of taxpayer
information during the year and the statutory authorization for each
disclosure. The Government Accountability Office also provides
oversight on the protection of taxpayer information. We welcome
oversight by the Congress.
Question. On the topic of taxpayer privacy, I believe that it is of
utmost importance that the IRS safeguard confidential taxpayer
information against unauthorized disclosures. Taxpayers must have faith
that their sensitive financial information will be protected by the IRS
and not exploited for political or other gain. To that end, I recently
joined my Senate Finance Committee Republican colleagues in sending a
letter to the Inspector General for Tax Administration regarding the
June 8, 2021, ProPublica article titled, ``The Secret IRS Files: Trove
of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income
Tax.''\8\ That article strongly suggests that the taxpayer information
described therein originated from within the IRS, which, if true,
constitutes a serious breach of privacy and is a criminal violation of
our tax laws. My Senate colleagues and I requested that Inspector
General George immediately investigate this apparent leak.
---------------------------------------------------------------------------
\8\ https://www.propublica.org/article/the-secret-irs-files-trove-
of-never-before-seen-records-reveal-how-the-wealthiest-avoid-income-
tax.
Do you believe that maintaining confidentiality of taxpayer
information is paramount to ensuring taxpayers fully and completely
---------------------------------------------------------------------------
report their income and earnings to the IRS?
Answer. Yes; taxpayers have a right to privacy and confidentiality.
The expectations for confidentiality are outlined in section 6103 of
the code, and the penalties for failing to meet these requirements are
severe. The IRS fosters a culture of privacy and confidentiality that
ensures personnel limit information collected to what is relevant and
necessary to administer the tax laws, and to share it only with those
who have both a need to know and the ability to receive the information
as allowed by the individual or law.
Question. If taxpayers do not trust the IRS to safeguard their
financial information, do you anticipate this would only exacerbate the
tax gap as taxpayers may be more reluctant to fully report their income
and activities?
Answer. While we anticipate most taxpayers will continue to meet
their tax obligations, some could use lack of trust as a reason to not
fully report their income.
Question. What taxpayer protections have you implemented during
your tenure at the IRS, and, particularly in light of the ProPublica
data release, what do you think still needs to be done?
Answer. Protecting taxpayer information has been and will continue
to be on the forefront of all that we do at the IRS. During my tenure
at the IRS, we have leveraged congressionally provided funds to
implement a multi-layered defense strategy. We continuously identify
and implement the most current cybersecurity protections available.
With regard to the ProPublica data release, we do not yet know the
source of the information and, therefore, we cannot make any
recommendations at this time.
Question. Do you commit to ensuring the IRS cooperates fully and
promptly with any investigation into the ProPublica data release,
including but not limited to investigations by the U.S. Department of
Justice and the Inspector General for Tax Administration, and do you
commit to taking immediate action to remedy any shortcomings identified
by any such investigation?
Answer. Yes, the IRS will fully cooperate with each and every
congressional and Federal investigation into the ProPublica article.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
Colleagues, I'll have prepared remarks in a moment. First, a brief
comment on the breaking news. This morning there is what appears to be
a massive, unauthorized disclosure of taxpayer records. The source of
this information is unclear. Given the IRS's responsibility to protect
taxpayer data, it has a responsibility to investigate the source of
this disclosure.
In the meantime, as reported by ProPublica, what this data reveals
is that the country's wealthiest--who profited immensely during the
pandemic--have not been paying their fair share. I'll have a proposal
to change that.
Moving to the subject of today's hearing, the Finance Committee
welcomes Commissioner Rettig this morning to discuss the President's
2022 budget request for the IRS. Commissioner Rettig knows well this
committee's interest in closing the tax gap, improving enforcement, and
fighting the unfairness in our tax laws. That starts, in my view, by
going after cheating by the big guys at the top.
A few key examples, starting with wealthy taxpayers who skip filing
tax returns altogether. According to a 2020 report from the Inspector
General for Tax Administration, nearly a million wealthy taxpayers
failed to file returns between 2014 and 2016, dodging a total of $46
billion in taxes. Tax season came and went, and they disappeared from
the radar.
Senator Whitehouse and I wanted some explanation. Two weeks ago, he
and I got a letter from the IRS that said that the agency sought
charges against only 200 taxpayers for failing to file a return over a
period of 6 years.
Something here is totally out of whack. On the one hand, you've got
a fortune going unpaid by wealthy individuals blowing off the
responsibility they share with every other American taxpayer. On the
other hand, only a couple hundred non-filers are facing charges. You
would think the IRS would be aggressively following up those affluent
non-filers, but the evidence shows that doesn't seem to be the case.
Here's a second example of high-earners escaping real scrutiny.
More than 2 out of every 3 dollars earned by partnerships in this
country go to the top 1 percent of earners. These are sophisticated
entities that bring in big revenue. However, the most recent data shows
that out of millions of partnership returns filed in 2018, only 140
were audited.
If you're a wealthy tax cheat in a partnership, your odds of
getting audited are slightly higher than your odds of getting hit by a
meteorite. It's an audit rate of 0.00004 percent. On the other hand,
taxpayers who claim the EITC are much, much likelier to get audited.
Again, something is out of whack when it comes to enforcement.
For the sake of fairness--and for the sake of the budget--it makes
a lot more sense to go after cheating by the big guys than focus on
working people. The President's budget proposal has a lot to say on
these issues. With funding increases for enforcement personnel and IT,
it would help to build up the IRS's ability to handle the most
important cases: tax evasion by the wealthy.
At the same time, it's important to recognize that the IRS has a
history of going after the little guy too often. The budget proposes
expanding the information that major financial institutions must report
about some client accounts. It's absolutely critical that the focus of
that reporting be on the wealthy tax evaders.
The budget also includes a proposal that's been a big priority for
this committee for a long time, the authority to regulate paid tax
preparers. Too many Americans who need help filing their taxes are
falling victim to fraudsters and incompetent individuals. Taking a
smart approach to creating rules in this area will help a lot of people
avoid a tax refund nightmare, particularly people of modest incomes who
depend on their refund every spring to make ends meet.
There's a lot more for the committee to discuss today. I want to
thank Commissioner Rettig for joining us, and I look forward to the
discussion.
______
Communication
----------
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael Bindner
Chairman Wyden and Ranking Member Crapo, thank you for the opportunity
to address this issue. These comments echo our submission on the 2021
filing season. We will discuss funding post-pandemic, distributing the
child tax credit, tax reform and tax administration after reform.
As the pandemic recedes (there are only so many possible vectors for
the virus remaining), the IRS can begin to bring people back to work.
Contractors, including former revenue agents, can be helpful in
clearing the backlog. Such relationships should continue so that the
portion of the tax gap due to non-compliance can be closed. As more
well off individuals face enforcement, others will do a better job of
paying what they owe under the law.
IRS funding is not adequate at present to meet the immediate challenge.
The recent change in government should bring about more of a
willingness to spend the necessary funds. We welcome the President's
proposals in this area, at least for now, although our proposed Asset
Value-Added Tax will end the need to increase audit resources. As with
clearing the backlog, hiring back or contracting with former revenue
agents will provide a quick bang for the buck in doing auditing, and it
decreases the pool of former agents who help their clients avoid
taxation.
The second issue is distributing the increased child tax credit to
eligible families. For middle-income taxpayers whose increased credits
are less than their annual tax obligation, a simple change in
withholding tables is adequate. Procedures are already in place to
deliver refundable credits to larger families. For the coming year,
they merely need to be expanded to all families with children. This
fact was likely already included in Mr. Rettig's testimony. If not, I
am sure he can easily confirm that this is the case.
Employers can work with their bankers to increase funds for payroll
throughout the year while requiring less money for their quarterly tax
payments (or estimated taxes) to the IRS. The main issue is working out
those situations where employers owe less than they payout. This is
especially true for labor intensive industries and even more so for low
wage employers. A higher minimum wage would make negative quarterly tax
bills less likely. Indeed, no one should have to subsist mainly on
their child tax payments.
A further challenge is fraud. I am not speaking of fictional
dependents, but of hiring more employees than workload demands in order
to reduce tax payments. Once the American Relief Act expires, any
permanent increase to and refundability of the child tax credit (and
ideally an even more generous credit) will require permanent tax
reform. At that point, the issue of possible fraud must be addressed.
Even without comprehensive reform, corrective legislative language will
be necessary.
Senior committee members and staff are likely familiar with the
Center's proposals for tax reform which, as usual, are included as an
attachment. A summary of individual policy changes has been added. As
the reader has likely surmised, tax reform is the third issue.
Allow me to highlight six points.
First, the difference between changing quarterly withholding and
enacting a subtraction VAT is six of one and a half dozen of the other.
The reason for this is that the proposed subtraction VAT is based on
the notion that employers would be responsible for paying and
reconciling the taxes now filed by employees. This would add little
additional burden to employers (especially the self-employed) but end
the burden of filing for all but the highest salaried employees.
The second is that this debate has gone on so long that the numbers
have changed. What used to be proposed at $75,000 per year should now
be delivered at $85,000. Proposals should always be indexed.
Third, for the sake of parity, the minimum wage should be set to $10
per hour immediately, with a phase in to $12 per hour to restore wages
to the level of productivity found in 1965. $15 should be treated as
either a bargaining chip or as the inflationary position to reach the
same buying power $12 wage would provide now.
Fourth, enacting an asset VAT allows for higher tiered subtraction VAT
(as proposed by Lawrence B. Lindsey) to replace some or all taxation of
higher incomes at progressive, rather than proportional rates. The only
advantages of keeping filing in place for high income individuals
(rather than households) are that keeping the highest salary rate and
the Asset VAT rate the same will reduce the incentive to game income
streams to avoid taxes and to allow higher income individuals to
purchase tax prepayment bonds, thus reducing the national debt sooner
than later.
Fifth, the biggest untold subsidy in the tax code is the exception
mutual funds enjoy from pay capital gains and dividend taxes. This
needs to end. Shifting from personal income tax collection of capital
gains and revenues (and payouts from mutual funds), ends the logic for
this exception. It is time to tax transactions, not people!
Sixth is that in reality, explicit and implicit value-added taxes are
already in force.
Individuals and firms that collect retail sales taxes receive a rebate
for taxes paid in their federal income taxes.
Tax withheld by employers for the income and payroll taxes of their
labor force is an implicit VAT. A goods and services tax simply makes
these taxes visible.
Should the tax reform proposed here pass, there is no need for an IRS
to exist, save to do data matching integrity. States and the Customs
Service would collect credit invoice taxes, states would collect
subtraction VAT, the SEC would collect the asset VAT and the Bureau of
the Public Debt would collect income taxes or sell tax prepayment
bonds. See the second attachment for details on this.
Thank you, again, for the opportunity to add our comments to the
debate. Please contact us if we can be of any assistance or contribute
direct testimony.
Attachment--Tax Reform, Center for Fiscal Equity, March 5, 2021
Individual payroll taxes. These are optional taxes for Old-Age and
Survivors Insurance after age 60 for widows or 62 for retirees. We say
optional because the collection of these taxes occurs if an income
sensitive retirement income is deemed necessary for program acceptance.
Higher incomes for most seniors would result if an employer
contribution funded by the Subtraction VAT described below were
credited on an equal dollar basis to all workers. If employee taxes are
retained, the ceiling should be lowered to $85,000 to reduce benefits
paid to wealthier individuals and a $16,000 floor should be established
so that Earned Income Tax Credits are no longer needed. Subsidies for
single workers should be abandoned in favor of radically higher minimum
wages.
Wage Surtaxes. Individual income taxes on salaries, which exclude
business taxes, above an individual standard deduction of $85,000 per
year, will range from 6.5% to 26%. This tax will fund net interest on
the debt (which will no longer be rolled over into new borrowing),
redemption of the Social Security Trust Fund, strategic, sea and non-
continental U.S. military deployments, veterans' health benefits as the
result of battlefield injuries, including mental health and addiction
and eventual debt reduction. Transferring OASDI employer funding from
existing payroll taxes would increase the rate but would allow it to
decline over time. So would peace.
Asset Value-Added Tax (A-VAT). A replacement for capital gains taxes,
dividend taxes, and the estate tax. It will apply to asset sales,
dividend distributions, exercised options, rental income, inherited and
gifted assets and the profits from short sales. Tax payments for option
exercises and inherited assets will be reset, with prior tax payments
for that asset eliminated so that the seller gets no benefit from them.
In this perspective, it is the owner's increase in value that is taxed.
As with any sale of liquid or real assets, sales to a qualified broad-
based Employee Stock Ownership Plan will be tax free. These taxes will
fund the same spending items as income or S-VAT surtaxes.
This tax will end Tax Gap issues owed by high income individuals. A 26%
rate is between the GOP 24% rate (including ACA-SM and Pease surtaxes)
and the Democratic 28% rate. It's time to quit playing football with
tax rates to attract side bets. A single rate also stops gaming forms
of ownership. Lower rates are not as regressive as they seem. Only the
wealthy have capital gains in any significant amount. The de facto rate
for everyone else is zero.
The mutual fund exemption will be repealed. It is the biggest tax
shelter is the use of money market funds to accumulate capital gains
and income without taxation. This practice must end if salary surtaxes
no longer include non-salaried income. 75% of such funds are held by
the top 10% of households as measured by the 2019 Survey of Consumer
Finance by the Federal Reserve. I suspect the other 20% are held by
high income retirees. The working class will not be harmed. Applying
the Pareto Rule to higher income households leaves the top 1450
households with 30% of wealth. The proof of this proposition is the
shareholders list of Berkshire Hathaway.
Subtraction Value-Added Tax (S-VAT). These are employer paid Net
Business Receipts Taxes. S-VAT is a vehicle for tax benefits, including
Health insurance or direct care, including veterans' health care
for non-
battlefield injuries and long term care.
Employer paid educational costs in lieu of taxes are provided as
either employee-directed contributions to the public or private
unionized school of their choice or direct tuition payments for
employee children or for workers (including ESL and remedial skills).
Wages will be paid to students to meet opportunity costs.
Most importantly, a refundable child tax credit at median income
levels (with inflation adjustments) distributed with pay.
Subsistence level benefits force the poor into servile labor. Wages and
benefits must be high enough to provide justice and human dignity. This
allows the ending of state administered subsidy programs and
discourages abortions, and as such enactment must be scored as a must
pass in voting rankings by pro-life organizations (and feminist
organizations as well). To assure child subsidies are distributed, S-
VAT will not be border adjustable.
The S-VAT is also used for personal accounts in Social Security,
provided that these accounts are insured through an insurance fund for
all such accounts, that accounts go toward employee-ownership rather
than for a subsidy for the investment industry. Both employers and
employees must consent to a shift to these accounts, which will occur
if corporate democracy in existing ESOPs is given a thorough test. So
far it has not. S-VAT funded retirement accounts will be equal-dollar
credited for every worker. They also have the advantage of drawing on
both payroll and profit, making it less regressive.
A multi-tier S-VAT could replace income surtaxes in the same range.
Some will use corporations to avoid these taxes, but that corporation
would then pay all invoice and subtraction VAT payments (which would
distribute tax benefits). Distributions from such corporations will be
considered salary, not dividends.
Invoice Value-Added Tax (I-VAT). Border adjustable taxes will appear on
purchase invoices. The rate varies according to what is being financed.
If Medicare for All does not contain offsets for employers who fund
their own medical personnel or for personal retirement accounts, both
of which would otherwise be funded by an S-VAT, then they would be
funded by the I-VAT to take advantage of border adjustability. I-VAT
also forces everyone, from the working poor to the beneficiaries of
inherited wealth, to pay taxes and share in the cost of government.
Enactment of both the A-VAT and I-VAT ends the need for capital gains
and inheritance taxes (apart from any initial payout). This tax would
take care of the low-income Tax Gap.
I-VAT will fund domestic discretionary spending, equal dollar employer
OASI contributions, and non-nuclear, non-deployed military spending,
possibly on a regional basis. Regional I-VAT would both require a
constitutional amendment to change the requirement that all excises be
national and to discourage unnecessary spending, especially when
allocated for electoral reasons rather than program needs. The latter
could also be funded by the asset VAT (decreasing the rate by from
19.5% to 13%).
As part of enactment, gross wages will be reduced to take into account
the shift to S-VAT and I-VAT, however net income will be increased by
the same percentage as the I-VAT. Adoption of S-VAT and I-VAT will
replace pass-through and proprietary business and corporate income
taxes.
Carbon Value-Added Tax (C-VAT). A Carbon tax with receipt visibility,
which allows comparison shopping based on carbon content, even if it
means a more expensive item with lower carbon is purchased. C-VAT would
also replace fuel taxes. It will fund transportation costs, including
mass transit, and research into alternative fuels (including fusion).
This tax would not be border adjustable.
Summary
This plan can be summarized as a list of specific actions:
1. Increase the standard deduction to workers making salaried income
of $425,001 and over, shifting business filing to a separate tax on
employers and eliminating all credits and deductions--starting at 6.5%,
going up to 26%, in $85,000 brackets.
2. Shift special rate taxes on capital income and gains from the
income tax to an asset VAT. Expand the exclusion for sales to an ESOP
to cooperatives and include sales of common and preferred stock. Mark
option exercise and the first sale after inheritance, gift or donation
to market.
3. End personal filing for incomes under $425,000.
4. Employers distribute the child tax credit with wages as an offset
to their quarterly tax filing (ending annual filings).
5. Employers collect and pay lower tier income taxes, starting at
$85,000 at 6.5%, with an increase to 13% for all salary payments over
$170,000 going up 6.5% for every $85,000 up to $340,000.
6. Shift payment of HI, DI, SM (ACA) payroll taxes employee taxes to
employers, remove caps on employer payroll taxes and credit them to
workers on an equal dollar basis.
7. Employer paid taxes could as easily be called a subtraction VAT,
abolishing corporate income taxes. These should not be zero rated at
the border.
8. Expand current state/federal intergovernmental subtraction VAT to a
full GST with limited exclusions (food would be taxed) and add a
federal portion, which would also be collected by the states. Make
these taxes zero rated at the border. Rate should be 19.5% and replace
employer OASI contributions. Credit workers on an equal dollar basis.
9. Change employee OASI of 6.5% from $18,000 to $85,000 income.
Attachment--Tax Administration, Treasury Budget, February 12, 2020
Shifting to a single system for all business taxation, particularly
enacting invoice value-added taxes to collect revenue and employer-
based subtraction value-added taxes to distribute benefits to workers
will end the need for filing for most, if not all, households. Any
remaining high salary surtax would be free of any deductions and
credits and could as easily be collected by enacting higher tiers to a
subtraction VAT.
Subtraction VAT collection will closely duplicate the collection of
payroll and income taxes--as well as employment taxes--but without
households having to file an annual reconciliation except to verify the
number of dependents receiving benefits.
Tax reform will simplify tax administration on all levels. Firms will
submit electronic receipts for I-VAT and C-VAT credit, leaving a
compliance trail. S-VAT payments to providers, wages and child credits
to verify that what is paid and what is claimed match and that children
are not double credited from separate employers.
A-VAT transactions are recorded by brokers, employers for option
exercise and closing agents for real property. With ADP, reporting
burdens are equal to those in any VAT system for I-VAT and A-VAT and
current payroll and income tax reporting by employers.
Employees with children will annually verify information provided by
employers and IRS, responding by a postcard if reports do not match,
triggering collection actions. The cliche will thus be made real.
High salary employees who use corporations to reduce salary surtax and
pay I-VAT and S-VAT for personal staff. Distributions from such
corporations to owners are considered salary, not dividends.
Transaction based A-VAT payments end the complexity and tax avoidance
experienced with income tax collection. Tax units with income under
$84,000 or only one employer need not file high salary surtax returns.
Separate gift and inheritance tax returns will no longer be required.
State governments will collect federal and state I-VAT, C-VAT, S-VAT
payments, audit collection systems, real property A-VAT and conduct
enforcement actions. IRS collects individual payroll and salary surtax
payments, performs electronic data matching and receive payments and
ADP data from states. SEC collects A-VAT receipts.
I-VAT gives all citizens the responsibility to fund the government. C-
VAT invoices encourage lower carbon consumption, mass transit, research
and infrastructure development. A-VAT taxation will slow market
volatility and encourage employee ownership, while preserving family
businesses and farms. Very little IRS Administration will be required
once reform is fully implemented. All IRS employees could fit in a
bathtub with room for Grover Norquist.
[all]