[Senate Hearing 117-204]
[From the U.S. Government Publishing Office]
S. Hrg. 117-204
THE IRS, THE PRESIDENT'S FISCAL YEAR 2023 BUDGET, AND THE 2022 FILING
SEASON
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HEARING
BEFORE THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
ONE HUNDRED SEVENTEENTH CONGRESS
SECOND SESSION
__________
APRIL 7, 2022
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Printed for the use of the Committee on Finance
__________
U.S. GOVERNMENT PUBLISHING OFFICE
55-204--PDF WASHINGTON : 2024
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...................... 3
ADMINISTRATION WITNESS
Rettig, Hon. Charles P., Commissioner, Internal Revenue Service,
Washington, DC................................................. 5
ALPHABETICAL LISTING AND APPENDIX MATERIAL
Crapo, Hon. Mike:
Opening statement............................................ 3
Prepared statement........................................... 43
Rettig, Hon. Charles P.:
Testimony.................................................... 5
Prepared statement........................................... 44
Responses to questions from committee members................ 60
Wyden, Hon. Ron:
Opening statement............................................ 1
Prepared statement........................................... 122
``Information Technology: Cost and Schedule Performance of
Selected IRS Investments,'' Government Accountability
Office, October 2021....................................... 124
Communications
American Citizens Abroad......................................... 153
Balcerak, Amy.................................................... 155
Callaway, Reginald............................................... 157
Center for Fiscal Equity......................................... 160
Coates, James Webster............................................ 164
Connor, Geoffrey................................................. 167
Democrats Abroad................................................. 170
Foster, Brent.................................................... 173
Gerretsen, Robert M.............................................. 176
Goldberg, Melvyn and Judith...................................... 179
Hemdal, Paula, Ph.D.............................................. 182
Holmes, John..................................................... 186
Levenson, Lynn Frances........................................... 189
Matthew, Stephen................................................. 192
McCarthy, C. Chase............................................... 195
National Taxpayers Union......................................... 198
Professional Managers Association................................ 202
Pulin, Keiko I................................................... 204
Purcell, Amy..................................................... 207
Ruh, Elizabeth, EA et al......................................... 208
Scurr, Linda..................................................... 209
Stop Extraterritorial American Taxation (SEAT).............. 212, 215
Seeds, Steven Clark............................................. 217
Walther, Ronald.................................................. 220
Wundheiler, Edward Francis....................................... 223
(III)
THE IRS, THE PRESIDENT'S FISCAL YEAR 2023 BUDGET, AND THE 2022 FILING
SEASON
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THURSDAY, APRIL 7, 2022
U.S. Senate,
Committee on Finance,
Washington, DC.
The hearing was convened, pursuant to notice, at 10:15
a.m., via Webex, in Room SD-215, Dirksen Senate Office
Building, Hon. Ron Wyden (chairman of the committee),
presiding.
Present: Senators Menendez, Carper, Cardin, Brown, Casey,
Warner, Whitehouse, Cortez Masto, Crapo, Thune, Portman,
Toomey, Lankford, and Daines.
Also present: Democratic staff: Eric LoPresti, Detailee;
Joshua Sheinkman, Staff Director; and Tiffany Smith, Chief Tax
Counsel. Republican staff: Michael Quickel, Policy Director;
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. Around the country are millions and millions
of families who are feeling the pressure of rising prices. This
year in particular, people are counting on getting their tax
refunds to help cover the bills.
I'll cut right to the heart of the matter for those
families whose refunds might be delayed due to IRS backlogs. If
you are frustrated by poor customer service from the IRS, you
can blame years and years of Republican cuts that have
contributed mightily to the ability of the agency to meet your
expectations.
And from all the talk about running government more like a
business, an awful lot of Republicans want to turn the
government into the kind of dysfunctional business that never
gets repeat customers. The fact is, Republicans had an
opportunity when they passed their big tax law in 2017 to fix
the Internal Revenue Service comprehensively, and they could
have included efforts to reduce backlogs and improve service.
That just was not done. In fact, more complexity was added
to the tax code, and it made the tax system more difficult to
manage. This came after a long period of Republicans squeezing
the IRS budget. It was clear at the time that Republicans were
steering into a train wreck, and you are seeing the effects
today.
The number of revenue agents at the IRS--and these are the
people who audit tax returns--is currently a third of what it
was a decade ago. The officers who collect unpaid taxes are
down by nearly a half. The agency has the same number of
employees it did in 1970 when the country's population and the
economy were a fraction of the size they are today.
As of late March, the IRS was facing a backlog of 12
million tax returns. Service agents struggle to keep up with
the phone calls. So far this year, they have been able to
answer only 11 percent of them. The IRS has recently been on a
hiring mission, and that is thanks to funding and hiring
authority passed by Democrats.
The agency is making progress on the backlog and targeting
resources to customer service and phone lines. But in the
meantime, law-abiding taxpayers dealing with the after-effects
of the Republican cuts are left with the impression that the
government cannot manage a two-car parade.
With that said, not everybody is pained by what is
happening at the IRS. Customer service has fallen off, but tax
enforcement is in even worse shape, which means that these are
high and good times for wealthy tax cheats. The IRS is just
totally outmanned against the tax cheats who use these
complexity-driven loopholes to cheat their way out of paying
their fair share. There are fewer revenue agents today than at
any point since World War II, and the challenge they are up
against is much bigger.
One of the murkiest, most loop-hole-ridden parts of
America's totally busted tax code is partnership income. It is
a thicket of super-complicated rules that are supposed to apply
to a third of all business income in America. It is a big and
growing percentage.
In Fiscal Year 2020, the IRS managed to audit a little more
than one-tenth of 1 percent of partnership tax returns, the
tiniest sliver. Meanwhile, new research from UC Berkeley found
that the working poor are 12 times more likely to face an
audit.
So, look at the big picture. As a result of years of
Republican budget cuts, IRS customer service is struggling,
while wealthy tax cheats get away with breaking the law, and
the burden of tax enforcement gets shifted onto working people
who spend every day walking a tightrope.
Now Democrats have begun to reinvest in taxpayer service
and enforcement to crack down on the cheats. It made tax filing
season less of a headache for everybody else. Part of that
ongoing process, in my view, ought to be making it easier for
Americans to file their tax returns directly online for free.
Give them that option. Taxpayers are paying huge sums to file
their taxes through private companies, and some of those
companies, in deeply deceptive practices, steer them away from
free options that they have a legal right to use.
I have been a long-time supporter of the right to file
directly with the Internal Revenue Service online. Again, it
would be your right, your option, and you would use a simple
return in which the forms are completed and all you've got to
do is check the numbers. It is past time for Congress to tell
these prep companies they no longer have a free pass to turn
rip-offs and deception into profit.
Wrapping up, Commissioner, I want to thank you and your
front-line staff, specifically this morning. They have been
putting in some long, long hours this filing season to
particularly get these refunds out in a timely way. The people
are not thinking about politics. They are thinking about
helping people. And the people need those refunds, particularly
right now when we are dealing with this inflation challenge. My
view is, the job for those front-line folks has been made a lot
harder than it had to be. It could have been easier with
additional resources and additional assistance. We are going to
be pursuing that, as you know, in the days ahead. We look
forward to your views.
[The prepared statement of Chairman Wyden appears in the
appendix.]
The Chairman. And let me recognize my friend, Senator
Crapo. And as we said, we are going to be running back and
forth, and we are used to it, but most other people will think
it is a little bit odd to have everybody running a shuttle
program, but we have to go to handle this vote.
Senator Crapo?
OPENING STATEMENT OF HON. MIKE CRAPO,
A U.S. SENATOR FROM IDAHO
Senator Crapo. Well, thank you, Senator Wyden. And I agree
with your observations. We will make this work. And,
Commissioner Rettig, we appreciate having you with us. And I
know you can cover it, so I appreciate that.
Thank you, Commissioner, for being here to testify today,
and thank you for your service. I appreciate your efforts to
make the IRS a more customer-focused place and understand that
it is hard to change the course of an institution like this in
just the few years that most of us have to work at it when we
get the opportunity. And you have done a good job.
There is a need to change course, but I do not believe the
administration's outsized partisan approach is the solution.
For the third filing season in a row, taxpayers find vexing
customer service challenges as they attempt to fulfill their
tax filing obligations. With tens of millions of 2021 tax
returns still to be filed, the most recent data we have on this
year's tax season is concerning, highlighting longstanding
issues that the IRS has not yet adequately addressed.
For example, more than 60 percent of the millions of items
of taxpayer correspondence and amended returns have sat in
storage for more than 3 months, an increase of nearly 30
percent over the last year. Average hold times for the lucky
few taxpayers who reach the IRS by phone are 28 minutes, an
increase of nearly 50 percent over the last year. And scores of
taxpayers have seen refunds delayed while their return is
suspended for various reasons. Millions of prior-year tax
returns await processing. The IRS's management of paper-filed
returns is a persistent problem that the National Taxpayer
Advocate recently noted goes back decades. By tax day this
year, millions of paper-filed 2020 tax returns will not have
been processed, while millions of current-year tax returns will
likewise gather dust.
Steps to prevent or minimize this disruption were not taken
by the IRS, and in some cases still have not been taken. For
example, many people may not be aware that in order for the IRS
to process a paper-filed return, each entry on the return is
manually inputted by an IRS employee. These taxpayer-funded
employees would be better able to serve taxpayers by answering
phones or responding to correspondence.
This is not simply a problem of taxpayers choosing to
deluge the IRS with paper-filed returns. In many cases, IRS
forms and schedules simply cannot be electronically filed,
including where a taxpayer could e-file and attempts to do so
but is rejected by the IRS's confusing digital signature
process.
This is not a funding issue. Solutions to these challenges
have existed for years, but to date have not been implemented.
The IRS can further transition away from mandating any return
or form to be paper filed. With respect to rejected e-filings,
which I understand to be often caused by taxpayers being unable
to locate or recall one of two possible e-filing PINs, the IRS
could implement additional means to e-sign a return. And I am
aware that the IRS, under your leadership, Commissioner, is
working on this.
The so-called 2D bar codes, much like the supermarket bar
codes that have been used for decades, could eliminate the
IRS's need to transcribe paper returns at all. Solutions like
these have been held up for years with no clear reason why,
leading to results that the current National Taxpayer Advocate,
Erin Collins, called ``crazy.'' And I agree.
Now to the question that has been raised by a number of my
colleagues on the other side, trying to blame Republicans and
the budget of the IRS for this. Some say that the IRS budgets
are to blame for all that ails the IRS. But this misdirection
distracts from real issues at the IRS. It also cherry-picks
data to paint a misleading portrait. Many begin their analysis
of the IRS budgets beginning only with Fiscal Year 2010, which
was a 30-plus-year high-water mark for the IRS's budget, and an
outlier. Viewed in the longer run, the IRS's average inflation-
adjusted budget is much lower, and it is in line with recent
years that meet this average. The efforts to try to claim that
Republicans have slashed the IRS budget are simply not
accurate.
Budget arguments are also often invoked in attempts to
justify massive IRS funding for things that do not address the
customer experience problems plaguing the IRS. For example,
some advocate for increased IRS funding to generate revenue
through heavy-
handed enforcement. This year's presidential budget request
seeks a large enforcement funding boost, and its reserve fund
placeholder for the reckless Build Back Better legislation
would provide a truly massive $80-billion infusion of mandatory
funding, primarily focused on enforcement. The reserve fund
could also accommodate the administration's chilling proposal
to monitor Americans' bank account flows of as little as $600.
I strongly oppose forcing community banks and credit unions to
report sensitive and private customer data of law-abiding
taxpayers to the IRS in order to raise more money by snooping
through customers' accounts, and I will continue to
aggressively push back on any attempts to add this reporting
scheme to the legislation.
I remain concerned about huge funding boosts that would
increase audits on small businesses and middle-class Americans,
rather than prioritizing taxpayer services. Our hearing in
February had a positive dialogue spotlighting IRS customer
service challenges and solutions, and I have a number of
questions about ways to address the longstanding IRS problems
that I think we can agree on, such as outdated IT and ways to
ensure the next filing season will be much better than the last
several.
Given your stated commitment to making these improvements,
Commissioner, which I not only appreciate but accept, I look
forward to continuing to work with you on this.
Thank you, Mr. Chairman.
[The prepared statement of Senator Crapo appears in the
appendix.]
The Chairman. I thank my colleague. And he and I often,
after we hear each other's statements, go back and forth a
little bit, and I am only going to say one very quick thing. I
think Senator Crapo has a very good point with respect to the
bar codes and ideas like that. But I also feel that the agency
is being asked to do more with less. And at some point, when
you try to do more with less, you simply get less with less.
And I think that is what all these people waiting for refunds
and the like are dealing with.
So, we will have this back and forth for decades. You can
tell both of us feel strongly about these issues.
Our witness today is Charles P. Rettig. He is the 49th
Commissioner for the IRS. He previously was a highly respected
law partner for 35 years, representing thousands of taxpayers
before the IRS at the Department of Justice Tax Division,
Federal and State courts, and State taxing officials. He served
as past chair and member of the IRS Advisory Council. He also
served as chair of the Taxation Section of the State Bar of
California, and has served on the Advisory Board of both the
Franchise Tax Board and the Board of Equalization in his home
State of California.
Please go ahead, Commissioner.
STATEMENT OF HON. CHARLES P. RETTIG, COMMISSIONER, INTERNAL
REVENUE SERVICE, WASHINGTON, DC
Commissioner Rettig. Thank you very much, Chairman Wyden,
Ranking Member Crapo, and members of the committee. Thank you
for the opportunity to discuss the President's Fiscal Year 2023
IRS budget, as well as the current status of the 2022 filing
season.
As you know, for Fiscal Year 2021, gross receipts to the
Internal Revenue Service were approximately $4.1 trillion,
representing approximately 96 percent of the gross receipts in
the United States of America. A successful, fully functioning
IRS is important to the continued success of our country. We
have been at the forefront of successfully providing rapid
economic relief to taxpayers, issuing more than $1.5 trillion
in combined economic relief and individual refunds during the
pandemic.
The President's Fiscal 2023 budget is a proposal for $14.1
billion, representing an increase of $2.2 billion. The budget
would allow the agency to take important steps forward in
improving taxpayer service, modernizing our systems, and
ensuring fairness in the imposition and enforcement of tax law.
The President's budget proposal also supports oversight of
high-wealth individuals, that we stay current with our paper
inventories, and that we accelerate the development of digital
tools, which would obviously reduce the paper inventories and
the processing that you have described.
The President's legislative proposals also provide for
oversight of paid tax return preparers. This has been an issue
since about 2013. Personally, I would say it is critical for us
to receive some form of oversight with respect to return
preparers. There are other legislative proposals in there that
are important that we can certainly discuss at another point.
With the signing of the recent omnibus legislation on March
15th providing the IRS with a Fiscal 2022 budget of $12.6
billion, we are adjusting our spending plan, which we
previously delivered to members of the committee on February
12th, and we will adjust with respect to the funds that we
have, the movement of those funds, implementation projects that
were referenced in the plan that we provided, and we will be
moving other funds to cover other remaining short- and long-
term shortfalls.
As of April 5th, we have obligated $911 million of these 3-
year funds to maximize taxpayer service, and it has been
eventful. Taxpayer service remains the most significant IRS
priority, and funds provided by Congress, including ARP, have
allowed us to implement many new innovative strategies to
reduce our unprecedented current and projected inventories, and
to get healthy, which is our commitment by the end of Calendar
Year 2022, and before the beginning of filing season 2023.
With respect to our current 2022 filing season, we are off
to a healthy start in terms of tax processing and the operation
of our IT systems. Through April 1st, we have processed more
than 89 million returns, issued more than 63 million refunds,
totaling more than $204 billion. However, there are essentially
two distinct filing seasons. Taxpayers who choose to
electronically file who request a direct deposit are receiving
their refunds within approximately 21 days. Many individuals
have received those refunds within 3 or 4 days of the
submission of their electronic filing.
With respect to taxpayers who submit paper returns, our
processing is first in, first out. We are processing
approximately 2.7 million returns still that were received in
Calendar Year 2021. And so taxpayers who, during this filing
season, choose to file a paper return end up at the end of that
particular stack. And I am sure we will be discussing that.
I want everyone to know that the employees of the IRS,
including myself, but specifically our employees, are doing the
best we can. We may not always have gotten it right, but we
have tried our best. We have put taxpayers first as the number
one priority, and I believe that following my term, the agency
will continue to head in that direction.
Our mitigation efforts as to our inventories are working.
They are making a difference. We are trending in a very good
direction that will allow us, and allow me, to commit that we
will be healthy by the end of Calendar Year 2022. We are
working to make sure that these inventories are addressed as
quickly as possible, and have implemented many new innovative
strategies never before used within the Internal Revenue
Service.
I believe that almost every Commissioner over the past
decades has stated that inconsistent funding is among the most
frustrating experiences for the Federal agency that touches and
serves more Americans than any other government or private-
sector organization. Modernized technology would significantly
improve our ability to respond to a crisis, pandemic-related or
otherwise. It is simply unacceptable for us to remain largely a
paper-based organization operating in a digital world
environment.
Chairman Wyden, Ranking Member Crapo, and members of the
committee, this concludes my statement. I am happy to take
questions.
[The prepared statement of Commissioner Rettig appears in
the appendix.]
The Chairman. Thank you very much.
Commissioner, last year I asked you about the current tax
gap. And I was concerned, and still am, that it is higher than
the official estimate, which always seems to be outdated. When
I asked about it last year, you said the tax gap could be a
trillion dollars a year. Nobody needs to go over that again.
So the Congress needs updated information about the size of
the tax gap. Who is cheating? What is the agency doing about
the problem? So, my first question to you picks up on last
year's question. Is the IRS going to start producing more up-
to-date tax gap estimates to give us more information about who
is cheating?
Commissioner Rettig. Yes, sir. When I got on board in 2018,
we released the tax gap estimates for 2011 to 2013, which was
more of a paper world. Virtual currencies did not exist. And
so, we then began implementing the ability to be more current,
and to actually be more engaging with respect to emerging
issues.
This summer we will issue tax gap data for 2014 to 2016,
which I would submit is also somewhat dated in 2022, but we
will also be submitting----
The Chairman. It is certainly dated, Commissioner. Please
go ahead and tell us what else you are doing.
Commissioner Rettig. We will also be submitting projections
for 2019. Know that the tax gap estimates that we submit for
2014 to 2016 and the projections will again not include
information with respect to virtual currencies and certain
foreign-source income. We are working to get that information.
We are not where we need to be.
The Chairman. Is there anything that we can do, working
with you, that can get us more updated projections? Because I
think that is essential for a lot of the debates that we are
having here: wealthy tax cheats, a variety of others.
What else could we do, this committee, in a bipartisan kind
of way, to get better data through these updates?
Commissioner Rettig. In working with the Department of
Justice on John Doe summons activity with respect to a variety
of different exchanges, we are aware of a significant
noncompliance from the reporting perspective in the virtual
currency world. Information reporting in the virtual currency
world is improving. It is definitely not where it needs to be.
And there is a huge question as to what the aspect of it is.
There were $14 trillion in transactions last year in that
space, and the U.S. represents somewhere between 30 and 40
percent of that, if you compare our GDP to the world.
The Chairman. So you want additional resources to go after
scams and rip-offs and the like, because I had made the point
when we had the debate about cryptocurrency last year. I am all
in in the fight against wealthy cheats and people who are
money-
laundering. I just do not want to go after the innovators, the
coders, and the like.
So we can talk offline about this, but I just want to make
sure that we get better and more current updates, because that
is what this committee needs to deal with major policy
questions.
The timeline to eliminate backlogs--we talked a bit about
this, and I think I would really like to get your sense here.
In your view, what is a reasonable level of phone service? And
when will the agency reach that level?
Commissioner Rettig. The President's budget proposal for
Fiscal 2023 requests $389 million, with a target level of
service of 85 percent--so, answering 8\1/2\ out of 10 calls.
Every IRS employee would like to answer 10 out of 10 calls. And
the surge in the incoming volume of phone calls has obviously
had a huge impact. And I think you all are aware that at one
point we were seeing phone calls at the rate of 1,500 per
second. One thousand five hundred calls per second. And that
builds up such an inventory and a backlog, and we have never
recovered from that.
The Chairman. So what is a reasonable expectation for
Americans on phone service?
Commissioner Rettig. We need to crush our inventories, our
paper inventories. We need to crush our return backlogs,
because the folks who answer the phones also process paper. So,
when we can get through the paper, we can get all those folks
full-time back onto the phones to handle it. And we are
committed to getting into that position by the end of Calendar
Year 2022.
The Chairman. Thank you.
One other one that you and I have talked about: technology
policy. And this has been a focus of my work. I showed up in a
Senate where basically nobody was using a computer. And I
understand the backlog is due, to a great extent, to the fact
that the IRS employees have to transcribe paper returns
manually.
So when, in your view, can we expect the IRS to start using
scanning technology to transcribe individual tax returns? And
how does the President's budget affect that?
Commissioner Rettig. The President's budget supports our
ability to scan and electronically convert paper into something
that we can have actually machine-readable and hopefully
process automatically. I should say, with respect to the 2D bar
code, the congressional budget justification for each year
between 2013 and 2017 requested funding for 2D bar codes, and
that funding was never provided. And the agency then pivoted
into focusing on electronic filing. And we are currently
running around 96 percent of e-filed income tax returns in our
current filing season.
The Chairman. Thank you very much, Commissioner.
Let's go to Senator Grassley next.
Senator Grassley. You know that all over the country
taxpayers are at their wit's end this time of the year. I think
there have been some improvements, from the cases that my staff
in Iowa forward to the IRS, because in 2021, it took 570 days
to get an answer, on average, and it is down now to 245 days.
But this brings up the question about IRS employees working
remotely.
We have had the National Taxpayer Advocate say something
along the lines that it is time for IRS to require all hands on
deck. And I appreciate that the IRS recently unveiled a return-
to-work policy, but you know, for Iowans who have been back to
work for a long time, probably for a year and a half, why
have--the IRS will not be fully back until the end of June.
Could you explain why that cannot be right now?
Commissioner Rettig. I certainly can. That is not accurate.
Ninety-nine percent of our employees have been working since
June of 2020----
Senator Grassley. At their office?
Commissioner Rettig. Sir, before the pandemic, a
significant percent of IRS employees were teleworking, and we
have a union contract with NTEU, and we negotiate that contract
every 6 years. And we follow the terms of that contract. And it
requires telework-eligible positions to be teleworking.
Senator Grassley. You may be right in regard to the 99
percent, but your plan says that it is not going to be fully
deployed until the end of June.
Commissioner Rettig. Can I address that?
Senator Grassley. What?
Commissioner Rettig. Can I address that?
Senator Grassley. Yes, go ahead.
Commissioner Rettig. So, 53 percent of the employees are in
a full-time telework capacity. The rest of the employees either
have a blended capacity or they are on-site. Every employee who
has interaction with respect to what are the major issues--the
inventories, submission processing, and accounts management--
they came back in June 2020 in a socially distanced
environment, and on principal campuses in Ogden, Kansas City,
and Austin, TX.
There were occasions where, because of COVID spikes and
following the CDC, we needed to shut down briefly. But our
front-line processing employees have been on-site in place
since June of 2020.
Senator Grassley. Okay.
The IRS has spent $5.4 billion on IT modernization since
1999, yet we are still using systems that go back to the 1960s.
In 1999, the IRS started working on what they called a CADE
system, which was intended to replace one such system, the
Individual Master File, IMF. However, after spending $400
million, IRS abandoned this project in 2009. In its place, IRS
began CADE 2 with plans to replace the legacy IMF system by
2014. According to GAO, after spending $1.5 billion, CADE 2 is
now expected to replace core functions of the IMF only and not
get that completed until 2013.
So given this history, how can Congress have any confidence
that additional funds will result in the IRS successfully
replacing its 1960-era systems?
Commissioner Rettig. As you know, I came onboard in 2018.
In 2019 we launched our Business Modernization Plan, actually
April 16th of 2019. That was a 6-year plan--$2.3 to $2.7
million--at the same time that major financial institutions
were spending $10 to $14 billion per year to modernize their
systems.
As of today, we have only received 57 percent of the
funding of that plan. And that plan was actually reviewed by
outside consultants McKinsey. Our initial plan was revised and
adjusted in accordance with the comments from McKinsey, and
they continue to be involved. And we have, and we welcome
oversight. I have always welcomed oversight and interactions
with every member on the Hill during my term, and I am
convinced whoever would follow me as Commissioner later this
year would do the same. As to how people can have confidence in
the Internal Revenue Service, we were the agency called upon to
issue the three rounds of the Economic Impact Payments and at
least six payments on the Advance Child Tax Credit.
We issued $1.5 trillion during the pandemic, more than $200
million in Advance Child Tax Credit payments, and I think if
you look at what we were able to do--and we were able to
process electronically filed returns during this same period of
time--I think people should have confidence in us. We were the
agency that stood up for this country and supported Americans
who for the first time were either unemployed, had health
issues, and the rest. And our employees are very proud, and we
were privileged to have that opportunity, as am I to be on
board with our employees. But if you look at what we have done
recently, I think that people would be impressed.
I am not saying that IRS should be funded and then Congress
goes away. I am saying that IRS should be funded as and where
Congress approves, and bring us oversight.
The Chairman. The time of the gentleman has expired.
Senator Grassley. I will submit questions for the record.
[The questions appear in the appendix.]
The Chairman. Then I am going to submit something as well,
because this point that my colleague from Iowa has offered up--
that the agency cannot be trusted with an increase because, in
his view, they have wasted billions of dollars of IT funding--
is not in line with what the Government Accountability Office
has said. The Government Accountability Office has said that
between 2019 and 2020, a lack of funding delayed IT upgrades
five times. This is not by people in politics and all the rest.
This is according to the Government Accountability Office. And
I am going to put that document into the record at this point.
[The document appears in the appendix on p. 124.]
The Chairman. All right.
Next will be Senator Carper, who I believe is online.
Senator Carper. I am right here. Can you hear me, Mr.
Chairman?
The Chairman. Yes. And after Senator Carper, we will go to,
in order of appearance, Senator Menendez.
Senator Carper?
Senator Carper. Mr. Chairman, I could not agree more on
what you just said about GAO. We ought to listen to GAO on this
front. They got it right, and we should take their advice and
counsel.
I have a couple of questions. Commissioner Rettig, welcome.
We are delighted you are here before us. And our thanks to you
and your team for all that you do for our country.
My first question deals with multiyear funding for the IRS.
A decade ago, I sounded the alarm on the need for greater
investments for the IRS. Today, you rely on a depleted
workforce and generations-old technology, causing frustration
and confusion for taxpayers. These challenges are a direct
result of Congress neglecting our duty to fund you to do
collections. The result is a growing tax gap that allows
wealthy individuals and corporations to, in many cases, avoid
paying the taxes that they legally owe.
I believe that the Fiscal Year 2023 budget request will
help ensure that the IRS can keep its head above water. What
the agency really needs is the certainty of multiyear funding
to address some of the significant challenges.
My question, Commissioner Rettig, is how would long-term
funding for the IRS help address the agency's systemic
workforce and occupational challenges, and how would this
funding improve taxpayer services and efficient tax collection?
Commissioner Rettig. The agency, like every other Federal
agency, has been in more than 100 continuing resolutions since
Calendar Year 2001. We received our funding a year ago with ARP
on March 11th. We received funding this year on March 15th. It
is impossible to build a robust, meaningful technology
infrastructure for any agency, or any private-sector
organization, when we do not have consistent, timely multiyear
funding. It is simply not the way to do that. The start and
stop that this agency receives from a funding perspective--and
I am focused on the technology side of the house--means we
continually have to push projects off based on limitations and
figure out how we can do something in--like I said, for this
year and for last year, we got our omnibus funding with 6
months left in the year, and it is really impossible to do
anything.
Senator Carper. I agree. I agree.
Workforce challenges and direct hiring authority is my
second question. In recent years, the IRS has faced tremendous
difficulty--as you know, Mr. Commissioner--in attracting and
retaining a robust workforce. Fortunately, the recent omnibus
appropriations bill provides direct hiring authority for the
IRS to expedite the hiring process for qualified applicants,
especially those needed to address the backlogged tax returns.
The question: how will the IRS implement this new
authority? What impact will this have on the long-term
recruitment challenges facing the IRS?
Commissioner Rettig. Congress rescued the Internal Revenue
Service by including direct hiring authority in that omnibus
budget for us. And that passed on, I think it was March 11th,
March 15th. The next day we started holding job fairs in our
three key processing centers--Kansas City, Ogden, and Austin,
TX. A lot of press, individuals showing up to these job fairs
with resumes. Over 90 percent received job offers on the spot
from us.
Senator Carper. That is great.
Commissioner Rettig. And we can bring them onboard between
30 and 45 days. And we are doing so. We have over--I think the
current count as of this week is over 2,200 people through
these job fairs, which is a direct result of getting direct
hire authority. Over 2,200 people with offers, and we are
continuing to hold these job fairs. We also hold job fairs
virtually, and those require a little more follow-up, but we
anticipate a similarly high rate of offers. And this is
critical to help us with our surge teams, our contractors, and
everything else we are doing to get onto the inventories.
Senator Carper. Thank you.
My third and last question, Mr. Commissioner, deals with
Economic Impact Payments. My casework team back in Delaware
continues to hear from constituents who have not received their
full Economic Impact Payments. And while the Recovery Rebate
Credit is intended, as you know, to solve this issue, many of
my constituents, and I would guess constituents of my
colleagues across the country, do not know this credit exists,
or if they do, how to claim it.
It is especially challenging for our elderly or vulnerable
taxpayers who have difficulty accessing, in many cases, online
resources and information related to the question. What steps
has the IRS taken or does it plan to take to provide critical
information about the Recovery Rebate Credit to vulnerable
taxpayers as part of the current filing season?
Commissioner Rettig. We provide that information in
multiple languages, and importantly this Saturday, April 9th,
and on the second Saturday in May, we will have open houses at
our Taxpayer Assistance Centers for people to walk in, no
appointment needed, walk in on any issue. And anybody who has
these issues should certainly come in to one of our Taxpayer
Assistance Centers, and we should be able to resolve it.
In many cases, when people did not get it, or they got a
reduced amount, there were offsets, or it went to another
location. But I will say that TIGTA, the Treasury Inspector
General, issued a report about 2 weeks ago saying that, I think
on the EIP3, we got it 99-percent accurate. And in May of 2020,
they issued a report that we were 98-percent accurate. And I
think that speaks to the quality of the people.
Senator Carper. That is great. Commissioner Rettig, thank
you very much to you and your team.
The Chairman. I thank my colleague.
Senator Menendez?
Senator Menendez. Thank you, Mr. Chairman. Let me follow up
by thanking the employees of the IRS who have been working
around the clock to assist taxpayers, during exceptionally
challenging times over the last 2 years. And, Commissioner
Rettig, thank you for responding to my and my colleagues',
including Senator Cassidy's, bicameral, bipartisan calls to
suspend notices, allow employees to join surge teams, and
implement mandatory overtime at the IRS in order to work down
the backlog.
Right now, as I understand it, the IRS has two main issues
when it comes to working down the backlog. And until we address
these issues, we are going to have more of the same next year.
The first issue is staffing--some of that has been talked about
here--and that we need more IRS employees. The second is that
the IRS still relies on paper. And this paper needs to be
opened, sorted, and also manually entered into the IRS systems.
It seems to me, Commissioner, one of the ways to decrease
the backlog is to hire more customer service representatives,
or CSRs, at the IRS, especially the submissions processors.
Both the National Taxpayer Advocate and the National Treasury
Employees Union have identified that these employees are making
less than $37,000 a year, and that, quote, ``this is competing
with the fast-food industry with high stress and unreasonable
expectations,'' and this is why applicants, quote, ``are not
beating a path to the IRS's doors.''
How many submissions processing CSRs is the IRS seeking to
hire this year? And how many have you hired?
Commissioner Rettig. Between this year and next year, we
expect to onboard 10,000. And we have more--before that hiring,
we have more CSRs onboard than we have ever had in history. And
normally a lot of them come onboard as seasonal. And a year
ago, we extended them to permanent. And we brought on an
additional 1,000 about----
Senator Menendez. So you are looking to hire 10,000?
Commissioner Rettig. Ten thousand.
Senator Menendez. And at this point, what do you have
onboard?
Commissioner Rettig. All total? There are different
categories for them.
Senator Menendez. Of this 10,000 that you are seeking to
hire, is that still ``to be filled''?
Commissioner Rettig. No. It is two 5,000 traunches. And I
talked about--I think you were here when I talked about the
hiring events we are having around the country, and we have
made offers for 2,000 of that 5,000. We expect to fill that
5,000 shortly. We are having quite a bit of success at out job
fairs.
Senator Menendez. I will look forward to hearing about
that.
Let me talk about the second issue, which is paper. The IRS
is stuck in the 1960s, before the information age. Last year,
IRS employees were expected to open the envelopes of over 21
million paper returns that were filed. They were expected to
manually process the returns, like this one [holding up a paper
return]--this one may be a simpler one--but meaning that they
had to enter in all of the numbers that a taxpayer writes on
this form.
This all takes time. It is the reason why the IRS is a year
behind on working down the backlog. Just how do we fix this?
Last week, the National Taxpayer Advocate issued a directive
that asked the IRS to work with the tax software industry to
implement bar coding and scanning technology for next year's
tax season. This would speed up processing of returns, reduce
errors, and allow the IRS to reassign employees where they are
needed the most, such as answering the phone.
Commissioner, does the current budget request include
funding to accommodate implementing bar codes and scanning
technology for next year's filing season?
Commissioner Rettig. First, I would ask you to look at--we
will issue our response to that directive, and I would ask you
to look at that. And we will be available to discuss it with
you in person.
Second, I would say with respect to 2D bar coding, in our
congressional budget justification for each year, 2013 to 2017,
we specifically requested but did not receive funding for 2D
bar coding.
And then the third answer is, yes, the President's budget
does provide for this. We absolutely need to do better. Absent
a pandemic, we would have been in a lot better place with the
paper. But we have to balance--the same individuals answer
phones and do the paper. And the phones--as you know, we
received over 400 percent more calls than ever before.
Senator Menendez. So the bottom line----
Commissioner Rettig. But we are headed--and we have had
pilots, and have run pilots, and you will see this in our
response in this space. There are some technological problems
associated with us using the 2D bar code, but we need to get
there.
Senator Menendez. Okay.
And then lastly, on February 15th, Senators Booker, Cortez
Masto, Padilla, and myself sent you a letter expressing
concerns about how the IRS implemented facial recognition
technology. In this letter, we expressed concerns about whether
taxpayers--especially last-minute filers, like the millions of
Americans who will be filing their taxes this week and next--
would have a meaningful choice whether they wanted to use
facial recognition or how their biometric data would be
protected.
Despite requesting a response to the letter by February
25th, we received a response from the IRS yesterday in time for
this hearing. And even though the IRS has allowed taxpayers to
opt out of the video selfie and to instead conduct a live chat
with an ID.me agent, I am still concerned that taxpayers do not
have a meaningful choice here, as many have waited long times
in trying to reach an agent. I am also extremely concerned
about the amount of information ID.me collects and stores for
every taxpayer who uses this website. As a matter of fact, as
ID.me tells me, according to this California disclosure in its
notice for residents, it includes things like age, gender,
military veteran status, taxpayer's location, and maybe their
citizenship status, and where they access the ID.me website.
Even though tax returns and tax identity information
including a taxpayer's name, address, and taxpayer ID number
are protected from disclosure, or potential disclosure, by the
Internal Revenue Code, the information disclosed in ID.me is
not protected.
So the congressional intent, it seems to me, was to prevent
the erosion of trust in our tax system and encourage taxpayer
compliance. So I look forward to working with colleagues on
both sides of the aisle to update this outdated provision of
the tax code.
The Chairman. And, Senator Menendez, those of us who
consider ourselves privacy hawks pretty much agree with you. So
I look forward to working with you and with the committee.
Senator Menendez. You are the ultimate privacy hawk, Mr.
Chairman, so I look forward to working with you.
The Chairman. Okay.
Senator Whitehouse, we are dealing with a little bit of the
logistics of the Senate. I would just ask my colleague, did you
have a chance to vote on the second measure?
Senator Whitehouse. Yes.
The Chairman. Great. We do not have anyone online. Why
don't you go ahead with your questions for the Commissioner? I
am going to get over there as fast as I can. I think Senator
Crapo may have to stay a few more minutes. I am going to
return, and I think I can get here by the end of your 5
minutes.
Senator Whitehouse. Great. Thank you very much. If
necessary, I will filibuster.
The Chairman. Wonderful. Thank you.
Senator Whitehouse. Thanks, Commissioner. Thank you for
being here. My questions all relate to solving the bad problems
of secrecy, which are particularly germane right now as we see
international oligarchs stashing their loot in secrecy-
providing jurisdictions.
One of the ways we have cleaned this up, in terms of the
United States being one of the worst jurisdictions for that
kind of evil, was with the passage of the beneficial ownership
law which Ranking Member Crapo had such an important role in,
along with Senator Graham, Senator Grassley, and others.
Are you comfortable with the input that you have been able
to have into the Treasury regulation process? And do you feel
that you will be able to use it effectively to find tax cheats
and people who are hiding, against the law?
Commissioner Rettig. It is critical that we receive
information for what are often referred to as bad actors, both
in a civil and a criminal context. The beneficial ownership
rules and regulations are really a Treasury primary issue,
supported by FinCEN, which is another bureau of Treasury, as
IRS is. And we are hugely supportive, and we have been engaged.
Senator Whitehouse. Good. And you are comfortable with the
way Treasury is going about it? You are getting your needs met?
Commissioner Rettig. They are my boss. Yes. [Laughter.]
Senator Whitehouse. That is different than getting your
needs met.
Commissioner Rettig. I am not shy, and you know that.
Senator Whitehouse. Good.
Second, with respect to the reciprocal FATCA bill, setting
aside the staffing concerns that it creates for you with the
additional workload, do you support the passage of reciprocal
FATCA, and why?
Commissioner Rettig. Absolutely. And when FATCA was passed,
we committed to our partners, exchange partners around the
world, that we would pass a similar provision with respect to
reciprocal FATCA. And it has not occurred yet, and so we are
receiving information from them, but U.S. institutions are not
providing that information.
And so--you know, I am a believer in transparency, where
transparency is appropriate, and in the FATCA arena, I think it
has proved that.
Senator Whitehouse. Great. And then with respect to
501(c)s, I have three questions. First, where 501(c)
organizations are allowed to obscure the donors behind
political influence efforts, what prevents Putin's influence
effort from deploying itself through that vector into our
politics?
Commissioner Rettig. I honestly cannot speak as to any
specific individual country or otherwise----
Senator Whitehouse. Putin, generically. Foreign influence
efforts from penetrating our political space using that device.
Commissioner Rettig. Yes. The IRS needs transparency in
this arena. This is an issue that predated me coming onboard,
as many of you are aware and control votes in this room. So you
know, we are supportive for getting the information we can, and
processing that information----
Senator Whitehouse. Is the answer a simple one, that if
there is secrecy behind political spending, then foreign actors
can take advantage of that secrecy just as readily as domestic
actors?
Commissioner Rettig. That is what I was going to say.
Domestic people could do the same.
Senator Whitehouse. Yes, but foreign actors can as well,
correct?
Commissioner Rettig. Correct.
Senator Whitehouse. Okay.
Second, the IRS has a so-called 50-percent rule about how
much a 501(c) organization can spend in politics. I want to
hypothesize a not-very-remote hypothetical, which is that you
have four affiliated entities, just picking that number. They
share the same office. They share the same staff. They share
the same board. And one of them gets a check, let's call it,
for round numbers, a million bucks. It can spend 50 percent of
that on politics, correct?
Commissioner Rettig. That is the principal, primary rule as
far as the funding. Correct.
Senator Whitehouse. And then the other 50 percent, let's
say it gives it to the second affiliate in the same office with
the same staff. And it can spend 50 percent of that on
politics, correct?
Commissioner Rettig. There is a point in time where I would
believe that the agency's tax-exempt governmental entities
agents would consolidate, if it is really a money circle.
Senator Whitehouse. Could you tell me----
Commissioner Rettig. We would have to be able to identify
that there is a relationship----
Senator Whitehouse. Could you tell me if that has ever
happened? That is a question for the record. Because what I
think is that they are organizing so that you get 50 percent in
the first bite, 25 percent in the second bite, 12.5 percent in
the third bite, 6-point-whatever it is, in the fourth bite. And
when you add it all up, 90 percent of the money has gone into
politics in plain violation of the spirit of the rule, and the
IRS, I don't think, looks at that.
So please look at that.
Commissioner Rettig. I could not tell you where it happens.
I will certainly make those inquiries and make sure that it
does not happen.
Senator Whitehouse. Because if it never happens, then I
would like to know that.
Commissioner Rettig. In the income tax context, it is the
step transaction rule as it goes through a whole bunch of
steps. Those steps are not independent----
Senator Whitehouse. And the last piece is that it appears
that, when there is an evidently false statement in a filing
made under the 501(c) rules, i.e., a plain discrepancy between
a filing under oath at the Federal Election Commission and a
filing under oath at the IRS, that the IRS has never referred
that question to the DOJ to inquire into whether a false
statement has been made. And DOJ in return has always insisted
on there being a referral. So that is 100 balls dropped between
the second baseman and the shortstop here, and everybody is
just pointing at each other. Could you address that, please?
Commissioner Rettig. Yes. We talked about this yesterday,
and I would have to be able to confirm ``never.'' My belief
would be never, but I could not for the record say never,
sitting here. But it is a difficult arena to get those cases--
--
Senator Whitehouse. It is really easy, actually. You just
make the referral to DOJ. They put the two statements next to
each other. They send it into a grand jury. People ask
questions. And if there is a case, they proceed.
Commissioner Rettig. DOJ--we interact with DOJ Tax. They
are more resource-constrained than we are. And they are very
selective on what we do refer----
Senator Whitehouse. False statement cases are easy. We have
heard that from DOJ themselves. It is bread and butter stuff.
Commissioner Rettig. Bring them in, and let's have a
hearing together.
Senator Whitehouse. Great. Let's do that. Because it is
preposterous the way this is working right now.
Commissioner Rettig. I am with you. I agree with you.
Senator Whitehouse. Thank you. I am hearing you agreeing.
Commissioner Rettig. To earn the trust and respect of
everybody, we need to be present in all of these issues.
Senator Whitehouse. And if it is obvious that the two
numbers do not add up, and they are both under oath, the
obvious predication of somebody lying is right in front of
everybody's face in public filings. And I think it demeans
government when government does not act on public information
like that, that is presumptively false.
Senator Crapo [presiding]. Thank you. And, Commissioner, I
am back, and Senator Wyden is now over voting.
Senator Whitehouse. I took the liberty while you were away,
our ranking member, acting chairman, to appreciate the work
that you did on beneficial ownership. That was our first topic.
So, I just wanted to mention that, that the Commissioner was
very appreciative of what we had done and how that will help
him in his work.
Senator Crapo. Well, thank you. And I appreciate your
referencing that. It shows there is bipartisan work that goes
on around here, notwithstanding what may appear to the public.
One of the other issues that is a bipartisan effort is one
that I just voted on, and Senator Wyden is voting on--actually
two of them; the first vote has already occurred. It was a vote
on denying Russia permanent normal trade relations. We passed
that with a vote of 100 to 0. And so now, at least the Senate
has gone on record, and we expect the House to pick this bill
up, even today possibly, putting Russia in the same pariah
trade status as Iran and North Korea. So at least some other
bipartisan good things are happening as well.
The bill that we are voting on now--which, when Senator
Wyden gets back, I will leave again to go do--is one to put
into statute the ban on U.S. purchases of Russian oil until
Russia ceases its aggression.
So anyway, let's get back to the IRS. As you know,
Commissioner Rettig, I am interested in examining updates
necessary to bring the IRS's outdated technology into the 21st
century so taxpayers can get some better service. In April of
2019, the IRS issued its most recent 6-year IT modernization
plan, which had a top-line estimate of $2.3 to $2.7 billion. As
background, from Fiscal Year 1996 through Fiscal Year 2021,
actual IRS budgets have included nearly $5.6 billion in IT
modernization spending. Just a couple of questions I have about
this.
Is the IRS certain that its 2019 6-year IT modernization
plan, if implemented, would bring the IRS IT up to date without
the need for further funding?
Commissioner Rettig. That plan in 2019, as I may have
indicated earlier, was reviewed by McKinsey--outside
consultants. We were asked to do so. We did so. We actually
modified the plan. What was released was the modified plan.
Know that the 2.3 to 2.7 at that point, two of the largest
financial institutions in the United States had announced that
they were putting in between $12 and $14 billion per year to
modernize their systems, and they interact with fewer people,
obviously, than we do.
It was a current plan at the time. As of today, we have
only received 57 percent of the funding requested in the plan.
We have taken resources from elsewhere for the priorities.
Senator Crapo. Right.
Commissioner Rettig. I would be remiss if I said that it
will get us where you want us to be, where we want to be, and
where every American deserves. It will not. We need more.
Senator Crapo. You may have already covered this, and I
apologize for that, but if you could give us an updated plan
for what you expect we need today, given what you have already
seen develop, that would be very helpful.
Commissioner Rettig. And technology advances faster than
maybe any other lane that is out there.
Senator Crapo. Yes.
Commissioner Rettig. And so, the idea of this 6 years--you
know, at the time I made comments, I believe here, that by year
3 we should be looking at something different in year 6. By
year 6, we should be----
Senator Crapo. Build that into your analysis. But I would
love--and I understand that. I can totally accept what you are
saying there. But I would like to just see a plan so that we
here can understand what it is we need to fight for in order to
get that.
Commissioner Rettig. And we would invite everybody. I have
made some tours in certain areas asking people to help us--not
necessarily just Congress, but public statements to help us
help others. Help us. Let us know what the technology is. And
we use a lot of contractors, and obviously we have about 7,000
internal IT folks, and about 6,000 outside contractors.
So the hope is that we are cutting-edge for our layers. But
you know, undoubtedly people come in with ideas every day.
Senator Crapo. All right. Good. I appreciate your attention
to this. And I just have time for maybe one more question. And
it is sort of on data as well as on biometric data.
As you and I have talked about, I am focused on the IRS's
announcement of migration of all existing IRS accounts to
requiring further authentication, including with biometric
data. And I have two questions.
I have received mixed messages about the IRS's plan for the
migration of existing account holders that have been verified
using the enhanced authentication. For the record, at what
point will an existing IRS account holder be required to move
to a newly authenticated account in order to retain access?
Commissioner Rettig. We have no plan at present to require
anybody to move to the current version. And importantly, as I
think we discussed yesterday, we have two options available on
ID.me. We are looking at other options on a go-forward basis,
including login.gov, which right now cannot handle our
capacity.
And so, if we--and we are working with login.gov. We need
about 1,500 transactions per second. They can handle less than
30. So, if we can get them up, and we can get their
authentication levels up--it is critical that we are at
authentication level 2 so that we can actually start to open up
and provide meaningful online services, self-service, for
people. Otherwise, if we cannot get to that authentication
level, we are forced to provide fewer services, because
security is our number one priority in that space.
Senator Crapo. I just have one quick follow-up on that. I
am already over time, and I would just alert Senator Portman,
if you are online, to be ready. You are next. And Senator
Toomey, I understand, is the next in line after that.
My quick follow-up on that is, you referenced that you were
looking at possibly login.gov. And as I understand it,
login.gov is powered by LexisNexis, which is a foreign data
broker and requires the use of personally identifiable
information.
What is the IRS doing in that context to ensure that any
new options will not themselves raise privacy and security
issues?
Commissioner Rettig. I couldn't address that today because
we are with ID.me, not with login.gov. We cannot even get to
our enhanced capacity, let alone the rest of the issues.
Senator Crapo. Understood. I just alert you to the kind of
issues that I am going to have.
Commissioner Rettig. Our options in the space are pretty
limited. The desire is strong to be able to have self-service
portals so those who want to use them can use them for a lot of
different transactions.
Senator Crapo. I agree with that, by the way. I think you
should expand the number of transactions that people can do
with you in that way.
Senator Portman, are you there?
Senator Portman. Yes, I am. Thank you. And congratulations
to you, Ranking Member Crapo, for the great vote we just had on
making sure that Russia does not have access to our market. It
is a privilege, not a right, the lower tariffs that they can
get under PNTR. It was a 100-to-nothing vote, and it was a vote
in favor of the people of Ukraine, and to crank up the
sanctions on Russia. And I know, although it looks easy, in the
end it was not. So, congratulations.
Senator Crapo. Thank you for that.
Senator Portman. Commissioner, thank you for being with us
today. You and I had a good conversation prior to this hearing
about one of my major concerns, which is the fact that we have
so many unprocessed returns out there. I think we have gone
from 76.5 million returns that have not been processed, to a
backlog of about 11 million returns--11.5 million as of March
25th. That is progress since our last meeting, but obviously we
have a huge backlog. And as you know, you and I have talked
about it, and I know others have raised it as well.
We have small businesses in Ohio, as an example, that are
still waiting for their refunds from a year and a half ago. And
we have people, individuals telling me, ``I can't get a loan
because I have to be able to show I have a processed tax return
in order to get a loan.''
So this is having a real-world impact out there. And
obviously, we all have deep concerns about this backlog. As you
know, Senator Cardin and I have worked with you and your
predecessors on IRS reform, actually for the last decade and a
half, or almost 2 decades. And our latest one is the Protecting
Taxpayers Act, which is included in the text of the first act.
We have another bill we are now looking at to provide
additional funding for customer service from the IRS that I
think American taxpayers deserve, as well as an overhaul of the
Individual Master File and to begin revamping the Business
Master File as well.
We would require 2D scanning of paper returns to help
prevent future backlogs. It is basically just putting a bar
code on the returns so you can process them much more quickly.
Increase the amount of funding for these Low-Income Taxpayer
Clinics that are over-utilized now. Provide direct hiring
authority to help get employees onboard more efficiently, which
I know you value.
We also, as you know, have revamped the Oversight Board,
which was in our first legislation on IRS oversight, and we
require regular reporting to Congress and to the Inspector
General--and a recommendation for IT audit trails on IRS
applications to increase the protection of taxpayer data.
Anyway, talk to us about what that would mean. Do you think
this would help in terms of addressing the backlog and
preventing future ones? And a specific question for you: does
the current budget proposal include funding to completely
update the Individual Master File?
Commissioner Rettig. The current budget proposal does not
include sufficient funding to update the Master File entirely,
and it has been, as all of you are aware, a long-term project
for the agency. We want to and need to get there.
We are, myself included--every employee in the Internal
Revenue Service, and I think every American, is supportive of
funding and bringing oversight over IRS in the technology space
to be able to provide the services that every American
deserves. I think the vote you all had today shows that we are
the greatest country in the world. We should provide that level
of service to our people. And a blend between employees--who I
think in the IRS are spectacular, and I cannot say enough about
the quality of the people and the desire--but we need to
provide them the right tools and training and technology. The
technology will change the skill sets, so the direct hiring
authority, what we use it for, will change as we bring on
technology.
We are going to ask, in the direct hiring authority arena,
for direct hiring authority beyond what we just received, which
is in some of our specialist-type positions--more sophisticated
examiners. We have a very difficult time bringing those people
onboard when they are told it is going to take 6 to 9 months,
or something, to get them onboard. So one of the comments,
Senator, that you made about direct hiring authority in this
space--and as we discussed prior to today, it will get you what
we believe would be critical to be able to do what we need to
do.
Senator Portman. Yes, as we talked about, we need the
specific positions that you need direct hiring for, what your
priorities are. And I guess if you could, just answer my
initial question also, Commissioner: do these various reforms I
talked about--including the customer service funding increases,
but also the scanning of paper returns and overhauling the
Individual Master File--will this help in terms of the
backlogs?
Commissioner Rettig. They will absolutely help in terms of
the backlog, and numerous other functions within the Service.
It is critical that we receive them.
Senator Portman. Well, thank you for that. And thank you
for giving us the additional information on the specific
positions for which you need direct hires that are so
important. We want to help you. And as you said, it is all
about the taxpayer.
My time has expired. I am going to give you a question for
the record on foreign tax credits. I know you just released
your final regulations on that. I have some concerns about it,
and I will be following up with you on that. Thank you,
Commissioner. I appreciate it. Good luck with the filings.
Commissioner Rettig. Thank you.
[The question appears in the appendix.]
Senator Crapo. Thank you, Senator Portman.
Next is Senator Toomey, and he will be followed by Senator
Cardin.
Senator Toomey?
Senator Toomey. Thank you, Senator Crapo. And I would also
like to congratulate you on the work that you did to get us to
this vote this morning. So, well done on that.
Commissioner Rettig, I appreciate the conversation we had,
I guess it was earlier this week. I do want to follow up on the
issue that Senator Portman raised, which is the backlog,
because as you know, this is a really big problem. And I am
concerned about whether it is going to be solved, and how long
it is going to take. I am concerned about how well-defined a
plan is to get this wrapped up, to catch up, to get back to a
normal steady state. And I have to tell you, one of the real
frustrating problems for so many of my constituents is the
combination of the backlog, the fact that their return has not
been processed, and they cannot get through on the phone to any
human being. That is a very, very frustrating situation.
My understanding is that for 2021, only 11 percent of the
calls that were made by taxpayers to the IRS actually were
completed. That is obviously just a huge problem. And I have
all kinds of letters from constituents complaining about not
getting their tax refund for 2020, even after filing in 2021.
I have a letter here from a constituent who said--and this
is January 24th of this year: ``I received a letter from the
IRS claiming they did not receive my 2020 tax return, but I
mailed my return, a voucher, and my check, all in one envelope,
and they cashed the check on April 27, 2021. Now they claim
they do not have the return that was with the check.'' So,
okay, I understand mistakes will happen, but you can imagine
how frustrating it is when this person then tries to call and
has like a 1-in-10 chance of getting through to any human being
they can talk to.
So I know you are very aware of this problem, but I would
like to just have a little discussion with you about what is in
the works. What is going to change? How quickly are we going to
be able to catch up both on the backlog, but also on the
ability to actually have a human being pick up the phone when a
taxpayer calls?
Commissioner Rettig. Let me give you some current numbers.
Senator Toomey. Okay.
Commissioner Rettig. As of March 31st, individual returns
that were received in calendar year 2021, we have 2.7 million;
individual returns received in calendar year 2022, we have 2.3
million. So in total, we have just about 5 million individual
returns waiting to be processed.
When returns fall out, and they fall out for a variety of
reasons--failure to reconcile Economic Impact Payment, Advance
Child Tax Credit payment, mismatches, and whatnot--they move
over to our error resolution cases. Last year at this point, we
had 7.7 million returns in error resolution. As of March 31st,
we have 741,000 returns in error resolution, less than 10
percent. Our efforts are working. We are trending in the right
direction.
We will--you know, during the summer, you will start seeing
the impact of this. And many people, beyond a telephone call
with a live IRS employee--and I keep trying to make the point
that the same employee in other times is processing paper
returns, inventories, things that we get in that context----
Senator Toomey. So, can I just follow up on that, because I
am trying to understand? What you just said there invokes, in
my mind, the image of a person who is processing tax returns in
some form. And then a phone rings, and they have to drop what
they are doing to pick up the phone? I assume it does not
happen that way, right?
Commissioner Rettig. Not at all. They are taken off the
phones and moved to the paper.
Senator Toomey. And so that would obviously suggest that we
do not have enough people on the phones. How much does that
relate----
Commissioner Rettig. These are the areas where we are
hiring: 5,000 this year, and 5,000 next year, and 2,500
contractors. We have automated the processing in error
resolution. We automated the processing with the ARP money, and
we have cleared 7.1 million return recovery credits----
Senator Toomey. That sounds like a tremendous amount, and I
fully acknowledge--I realize that legislation that was passed
made the work much more difficult and complex and added to the
backlog.
What do you think the goals should be regarding the ability
of people to speak on the phone? And when do you anticipate a
really significant improvement in the ability of constituents
to get through?
Commissioner Rettig. I am old-school, so I am more of an
in-
person rather than an online person, and the President's budget
proposal provides funding to have the telephone level of
service be at 85 percent, and we would answer 8\1/2\ out of 10
calls. I think that is a respectable figure. We would like to
be at 100 percent. Every 10 percent in a normal year, non-
pandemic, every 10 percent is another $100 million. It is an
appropriated item. We get X dollars for Y amount of people on
the phone. So there is a direct relationship.
Senator Toomey. So, my time has expired. If I could just,
with one final question--and I appreciate your answers,
Commissioner. If you got the full budget request appropriated
in this next cycle, how long would it be before you are able to
answer the 85 percent of the calls that, as I understand it,
your request conforms with?
Commissioner Rettig. That budget request is for Fiscal
2023. I expect us to get to answering a meaningful percentage
of the calls--which I have to hedge because, if we go into
another spike in the pandemic, it changes our situation. But I
expect us to be at normal, which we refer to as healthy, which
is viewed through the eyes of the taxpayer, and the taxpayer's
experience, during Calendar Year 2022. We cannot carry this
into Calendar Year 2023.
Senator Toomey. Will that be above 50 percent in Calendar
2022 in terms of phone calls going through?
Commissioner Rettig. Historically, and as you are aware,
IRS comes up with a budget. It goes to Treasury. It goes to
OMB. And so, what comes out of the building and what Congress
passes does not necessarily always look the same. Sometimes we
are told what numbers to put in there. But I think
historically, the target has been right around 70 percent, and
so that would be the mark that we would try to get up to.
Where I would caution is--we operate on a fiscal year--not
to use our annual level of service, but as you see our trends
improving, look to what we will have on a monthly or a weekly
basis. Because the denominator here is so big that we will
never get off the mark. And we are currently running around 19
to 20 percent level of service.
Senator Toomey. Okay. Thank you very much.
Thanks, Mr. Chairman.
The Chairman. Thank you, Senator Toomey.
Next will be Senator Cardin, and then Senator Cassidy.
Senator Cardin. Thank you, Mr. Chairman.
Commissioner Rettig, let me start by just saying ``thank
you'' to you for your willingness to stay with this challenge.
We have put so many additional responsibilities on your plate.
We can talk about the 2017 tax bill. We can talk about the
American Rescue Plan. We are asking you to do more and more. At
the same time, your budgets have not at all kept up with
inflation, let alone modernization, which is critically
important for a longer period of time than just 2017.
So I want to first acknowledge that. In addition, Congress,
when it does not pass a full-year appropriation, you go into a
continuing resolution, how can you possibly make the type of
investments and planning that you need to in order to deal with
the types of questions that we are asking you? So my first
point is to say ``thank you.'' And I have been with the
workforce at IRS. They are dedicated professionals, and I thank
them for what they do every day in public service on the front
line. And we appreciate that.
Which leads me to the legislation that you already talked
about with Senator Portman. I just want to concur in his
comments. The legislation that we have introduced would provide
enhancement of IRS resources, because you need resources. A
multiyear operational plan, because we need to have longer-term
planning on reaching the level that we want to in the modern
tax collecting agency. IT upgrades and increased customer
service, that is something that has grown and grown and grown
as far as the consumer expectations; you have to have the IT
that can meet that. Oversight is critically important so that
the taxpayer gets the right return from the investments they
make in regards to the IRS. Strategic Transformation Office, so
that we can understand what the strategic strategies are moving
forward. Hiring flexibility, which is something we have given
you some help with. We need to give you more. Low-Income
Taxpayer Clinics--they are critically important. And then the
last thing: reinstating the authority to regulate paid tax
return preparers.
All we have to do is listen to the ads we hear every day
where people are being told they can get something that is too
good to believe, and many of them have bought into that. And
your authority to regulate paid providers was compromised in
2014, and to this day, we still have not responded. I know the
chairman has been working on that, and I hope we can get our
legislation moving forward, along with the paid preparer
provisions.
I am going to ask a question, though, about concerns--I
know it is on your radar screen, but I want to do it in this
forum. I also am the chair of the Small Business Committee, and
we have provisions in the tax code to help small businesses.
Very frankly, I think we need to examine the tax code as to its
impact on small companies that generally use the individual tax
rates rather than the corporate returns in order to carry out
their business transactions.
I do not think the individual tax return has been updated
to deal with the realities of smaller business entities. And I
think that is something we need to deal with. But in the
meantime, we have the Employee Retention Credits, and we have
heard from a large number of our small companies that have told
us they just have not been able to get this credit in a timely
manner.
I would just ask, among the other priorities you have, to
recognize that small businesses are at a crisis level as a
result of COVID-19, and these Employee Retention Credits are
critically important to their survival. If you could make that
a priority, I would certainly appreciate it.
Commissioner Rettig. Let me first address your opening
comment and express my personal appreciation to you and every
member of the committee for the appreciation that you have
expressed for the IRS employees. This has been a very difficult
few years, and it has been my privilege to be here with them
during this period of time.
The second part--what was going through my mind as you were
making the appreciation to me personally is, not only do our
employees watch these hearings, but my wife is watching this
hearing. So I will have fewer critiques when I get home
tonight, because I can say, ``Well, you know, the Senator said
we are doing okay,'' right? So I appreciate you helping me out
on the home front there. But she is on this journey with me and
a significant part of my world, my life. My experiences are not
only mine, but also hers.
Small business--as you know, I come from a small business
environment. My dad had a truck, and as we used to say, two big
boys had to get in the truck when it was dark, and we got home
when it was dark. And our reward was we got to eat dinner, as
my mom explained to us, and that kind of thing. So small
businesses, I believe, are the backbone of this country. They
provide valuable services to real people in real situations, in
real communities and local communities, that are just not
otherwise available.
So, the 941s and amended 941s, we have actually about 1.9
million in inventory of 941s. We have 324,000 of 941-Xs, and
those are current figures. We are working those on a priority
basis. And you are right: we have a number of priorities. So
within the priorities, obviously we have to make decisions. And
they are at the top of the list, with a couple of others. But
they are at the top of the list. And we need to earn that trust
and respect of everyone, including the small businesses. We are
aware of that.
Senator Cardin. Thank you.
Thank you, Mr. Chairman.
The Chairman. Thank you, Senator Cardin. And before you go,
I just want to make it clear, I so appreciate what you are
talking about with respect to small businesses. Oregon is just
overwhelmingly a small business State. You can almost count our
larger businesses on both hands. We only have a small number of
larger businesses, and so many smaller businesses. In the last
few days, I have been struck by how many people are just coming
up to me and saying they really want to see this Employee
Retention Credit, because they like the fact that this is a
kind of win/win arrangement that creates an incentive for
people to pitch in and work together at a very challenging
time.
So I want you to know I am all in with you. We have talked
about this often, and your leadership is much appreciated.
Okay, let's see. Senator Cassidy, and then, because we are
going back and forth, I think after Senator Cassidy will be
Senator Casey, who is online. We are just going to do our best
to keep this going.
Senator Cassidy?
Senator Cassidy. Yes, sir. Thank you for being here.
Last week the IRS and Treasury announced a proposal to fix
the so-called ``family glitch'' in Obamacare. Now the IRS had
looked at this in the past, and in fact finalized a rule in
2013 that determined that whether an employer's offer of
coverage is, quote, ``affordable'' is determined based only on
the employee-only rather than family coverage.
Now the law has not changed, but why is the IRS suddenly
interpreting the law differently? Frankly, it seems more like
this is what we wish the law to read, as opposed to this is
what the law was interpreted as being in 2013. So, thoughts on
that?
Commissioner Rettig. Yes. I cannot speak to that. My guess
is that came from Treasury more so than IRS. Treasury does
policy. IRS does administration. But if you will submit a
question for the record, I will get back to you on that. I do
not have that information.
Senator Cassidy. So let me ask. I find that almost kind of,
whoa! Because there is an article in Health Affairs which goes
through all the considerations that IRS gave in 2013. This was
clearly an IRS decision. So what I think I am hearing from you
is that Treasury has gone this way without consulting IRS?
Commissioner Rettig. I cannot confirm that Treasury--I do
not have the personal knowledge. I will confirm what the
thinking was and who did the thinking, whether it was IRS or
Treasury. But know that Treasury is usually significantly
involved, and they are the jurisdiction, if you will, for tax
policy issues. So, if there has been a shift in policy,
Treasury would have been involved. I will have to get back to
you. I just do not have the personal knowledge.
Senator Cassidy. I am just a little dumbfounded. I would
have thought that this would have risen to your level, since
this is such a significant reversal of previous IRS decisions.
Okay. Let me ask about something which is near and dear,
unfortunately, to my heart: disaster retirement legislation
with
penalty-free withdrawals. My State has been disproportionately
affected by natural disasters. I could give you a list, but I
think you are probably very familiar with them. Now one thing
Congress has done in the past to help disaster victims is to
allow penalty-free withdrawals from qualifying retirement
plans. And so, since many Americans' big chunk of savings is in
these plans, we can help them with penalty-free withdrawls. Now
we typically enact this relief along with enhanced casualty
loss deductions and other measures.
But, despite recent disasters in Louisiana, New Jersey, New
York, Pennsylvania, and other States, to date Americans have
not received tax relief for disasters in 2021, which I do not
think is a policy concern but a timing issue.
Now, Commissioner, we have a bill, 2583, with Senator
Menendez and Representatives Thompson and Kelly, that would
make penalty-free withdrawals from retirement accounts
automatic after the President issues a disaster declaration. I
am hoping to get this included in retirement legislation that
may move through this committee. As a Commissioner, giving you
the certainty as to the implementation of this policy, and as
regards timing, do you think that would be a good way to go?
Commissioner Rettig. Absolutely.
Senator Cassidy. Sounds great. And just to echo that, the
Taxpayer Advocate Erin Collins talked on February 17th about
how these last-minute tax law changes present challenges for
IRS and for tax software companies.
So again, in your last statement, I think you would agree
with this, but is permanent legislation generally preferable
from a tax administration standpoint?
Commissioner Rettig. We are currently programming for
filing season 2023. We are in 2022, so we begin preparation
that far out. We got caught here with respect to the March
legislation on unemployment compensation and a variety of other
provisions that we did not have the ability to automate in our
systems. And as a result, it led to more than 20 million
returns being pushed into a manual processing.
Senator Cassidy. You've got 20 million returns in manual
processing?
Commissioner Rettig. Correct. And then that led to
inventories that led to delays in refunds, and the rest. There
is a connection between all of this. And I am not saying it
started there--that was one of the issues--but we had more than
20 million. We had 11.2 million return Recovery Rebate
reconciliations, Earned Income Tax Credits, ability to use 2019
instead of 2020. We could not automate that. And the
unemployment compensation we could not automate.
Senator Cassidy. So many of the questions here, or many of
the comments thank the IRS employees for their hard work, and
thank you, and express concern about staffing, and express
concern about backlogs.
What I just heard from you is that if we made permanent
this legislation that almost always passes when there is a
disaster, we do something positive for the employees, positive
for productivity, and positive for backlogs?
Commissioner Rettig. And we would implement it
automatically. There are other provisions that key off of
national emergency declarations. We do not need to consult
anybody. We implement immediately. Like delaying in filing a
tax return, for example.
Senator Cassidy. Sounds great.
So, Mr. Chairman, just for the record, I think we have a
solution that Congress always passes, but if we made permanent
would help the IRS tremendously, and in turn help other
taxpayers as regards any backlogs that may occur. So, knowing
that all States--and this is a Menendez-Cassidy bill. So just
to put that in your kind of front of brain as maybe something
we could include in future legislation.
The Chairman. We will have the staff follow up with you on
that, Senator Cassidy. And I noted that you and Senator
Menendez had teamed up in that kind of bipartisanship.
Senator Cassidy. Thank you.
The Chairman. Okay, Commissioner, I have to go be part of
an effort to make some wonderful history and vote for Judge
Jackson. So, we now have the good fortune of having our
colleague from Nevada, who is willing to chair. And then we
have a number of Senators, a colleague I think already on the
phone. I think Senator Casey may be next. But we will work
closely with you.
And finally, Commissioner, because I am not sure I am going
to be able to make it back, I want to thank you particularly
for your candor, for your willingness to work with us, and to
do it in a hands-on kind of way. That is really the litmus test
here: whether people are really going to be hands-on, talk
about where we ought to go, follow through, and you have
clearly met that test. And I really look forward to talking
with you in the days ahead.
Commissioner Rettig. Thank you. I very much appreciate
that.
The Chairman. Thank you.
Senator Cortez Masto, to run the hearing.
Senator Cortez Masto [presiding]. Thank you. I believe,
Commissioner--excuse me, is Senator Casey online?
Senator Casey. Yes.
Senator Cortez Masto. All right; Senator Casey?
Senator Casey. Thanks very much.
Commissioner, thanks for your time today and for your
public service. I am glad we had a chance to chat yesterday. I
really only have one question, in the interest of time, so I
should take less than my 5 minutes. But it is true what you and
I have talked about, and our teams have worked together on, is
letting people know that in the next couple of days, if they
have not already filed their taxes, there are a lot of families
that can take advantage of a greatly enhanced Child and
Dependent Care Credit. That is the long version of the name,
but most people know it as the Child Care Credit--to be
distinguished from the Child Tax Credit--a separate, individual
tax credit just for child care and related expenses.
So as you know, that is available to families now because
of the American Rescue Plan. So, in the next couple of days, I
hope that we keep promoting and talking about it, and that
families will take advantage of it.
By some estimates, families can have a tax credit that will
be seven times more generous than the tax credit under the
current version of the credit. And at a time when families are
paying so much for the price of food, or gasoline, or so much
else, this tax credit can be enormously helpful. Because one of
those big costs, as you know, is the cost of child care that
has exploded over the last 10 to 15 years.
So here is my question. It is just one that you and I have
talked about, but one of the frustrations we had was that we
thought the IRS, as well as the administration more broadly,
was not doing enough to promote this credit. And you and your
team responded to that, and we appreciate that.
I wrote a letter, with 13 Democratic Senators, to Vice
President Harris and Secretary Yellen, urging them as well to
be more aggressive on the outreach so that people know about
this as a one-time-only opportunity on this particular tax
credit before it goes back to the original version of it.
So can you tell me what steps the IRS has taken already to
make sure that families know about the credit and can claim the
credit as they deserve on this year's tax forms?
Commissioner Rettig. Certainly. And I appreciate the
opportunity, and we are very supportive of the credit, and we
are doing our best. I would agree that we are later than we
should have been in getting the word out in as many channels as
we have, but we issued an information release on March 8th that
covered a lot of issues. We have frequently asked questions.
But importantly, we have been very aggressive with social
media, YouTube, both in English and in Spanish. And we have
Taxpayer Assistance Centers open on Saturdays, this coming
Saturday, and the second Saturday in May.
We have relationships with community organizations, over
18,000 community organizations around the country. When we were
going into the pandemic, we only had relationships with about
3,000. We are now at 18,000. We have relationships with 13,000
public school districts in the country. Obviously that
translates into millions of individual children that it can be
impactful for. And we use all of the channels that we have. And
we did not have those public school relationships either,
before the pandemic. But I think it is a tribute to the IRS
employees getting out there and figuring out how to get in the
communities, get the word out, and we are using all the
channels that are available on this, as well as the other ones.
Senator Casey. Well, Commissioner, thanks. We look forward
to continuing to work with you in the days ahead--literally
now, we are down to days.
And the last thing--I will just make a statement, because I
know you and I have already talked about it. I look forward to
working with you and the chairman to pass the President's
budget request so that Pennsylvanians can get the level of
service that they expect and deserve from the IRS. And I know
that there are concerns about falling levels of service, and I
know you are trying to work on that, but you need a budget to
do it. So, thank you for your work.
And, Madam Chair, I will turn it back over to you. Thank
you very much.
Commissioner Rettig. Thank you, sir.
Senator Cortez Masto. Thank you.
Senator Lankford?
Senator Lankford. Thank you very much. It is good to see
you again. Thanks for coming in. And let me give you one piece
of positive news on this, because we are asking you all kinds
of questions on the issues. I typically file my taxes, like
millions of other Americans. I have already done that for my
Federal return. Typically when I e-file, I will wait hours or a
couple of days to be able to get the confirmation back that it
has all been received. That took seconds this year. So the
change in your system was pretty dramatic from what we have
seen in the past. Literally after I e-filed, it came back
within seconds, said ``confirmation done'' and that everything
went through. So that part of it is working faster. I know we
still have a lot of issues in the call center and being able to
answer calls.
I want to ask about the personnel issues and to zero in on
this. You were given direct hiring authority. This has been an
issue I have talked about in my other committees and in this
committee as well. You have been given access for 10,000 of
those, but I do not know yet what positions you are using those
for.
So, I do not need the exact type of position you are
looking for in that direct hiring authority, but how are you
using it?
Commissioner Rettig. We are going to come back and ask for
an expansion of that, so I always believe in transparency----
Senator Lankford. That's good. That's fair.
Commissioner Rettig. The first level is where we have our
inventories, which is submission processing and accounts
management. And the legislation limits direct hiring authority
to essentially the clerks in those positions. They are lower-
graded individuals, if you will, on a pay grade. And that is
what we have authority for. We have authority for 10,000, which
is 5,000 this year and 5,000 next year. We have been holding
job fairs around the country. We have been very successful in
those job fairs. We fully expect to bring onboard the 5,000,
which will make a difference. We also have other avenues.
Senator Lankford. Do you have individuals who are in the
processing center or answering phones? Is that in your direct
hire authority, or are those not in your direct hiring
authority?
Commissioner Rettig. It is. Where we are hiring is Kansas
City, Austin, and Ogden. And that is where our three big
processing centers are. And we have direct hiring authority--
Congress rescued us; there is no question about it. We were
able to onboard folks in those facilities within 30 to 45 days.
We needed them in December, but without direct hiring
authority, we are competing with Walmart. We are competing with
Target, which is onboarding at $20 an hour. Our folks are at
$15. And we are competing with Amazon. And then, without direct
hiring authority, we have to tell these individuals it may be 6
to 8 months before we can bring you onboard.
For these folks, they need that job now. There was a news
release recently, a press release out of Ogden. A lady got laid
off on Friday and came to our Saturday hiring event and got
hired. We were able to move that fast.
Senator Lankford. Yes, that makes a big difference. So the
onboarding process itself, once you have actually made the
hire--before they can actually get engaged to actually doing
the task, how long is that onboarding process?
Commissioner Rettig. Thirty to 45 days. Individuals are
showing up in person at these job fairs with resumes. We are
also doing virtual job fairs, and it takes a little more
follow-up to get some of their information. We do the
background checks within that 30 to 45 days, but we can do
everything else we need in person at the site. And it has been
really superb.
Senator Lankford. Terrific. You and I have talked before
about the attrition rate in certain areas of the IRS, and then
also the number of retirees that are out there. So, two
questions on this. You have seen the high attrition rate in the
processing centers before. How is that going? And the other
side of it is, there are a lot of folks at IRS who are eligible
to retire this year. Have you seen a lot of retirements this
year?
Commissioner Rettig. So, attrition--you know, we had a
hiring freeze from 2011 to 2018, so we have a more experienced
workforce on average than probably most other agencies.
Attrition is holding true. I will say that the majority of our
folks stayed during this period of time. We are seeing
basically a 5- to 7-percent attrition rate on about 80,000
employees. And some of our avenues are a little higher, 10 or
11 percent, and we are addressing that. Although I will also
say that I had been contacted by a number of folks before I
came onboard at the IRS who were career IRS employees who
retired, who have come back as retired annuitants.
And so we are getting a sense of, if you will, the IRS
community understands that they need to pitch in and help us
out, and they have been doing that. So we are not where we need
to be, not where you want us to be, but we are getting in a
better position every day. And, you know----
Senator Lankford. Do you have data at this point for
individuals who chose not to get the COVID vaccine who retired
early, or who left the IRS, what that number is, or a
percentage of the workforce?
Commissioner Rettig. We have that. I believe that we were
among the leaders in Federal service in terms of the percentage
of employees who were fully vaccinated. And I could not tell
you whether that is or is not for folks who are leaving now. We
do not have that requirement.
Senator Lankford. Right. So there is no way to be able to
know how many folks did leave before, based on that?
Commissioner Rettig. We did not--to my knowledge, we did
not see a noticeable spike in leaving, although it was in the
hallways.
Senator Lankford. We had lots of phone calls that came into
our office saying, ``Hey, I already had COVID. Why am I doing
this?'' We are grateful the pause is there at this point. We
would love long-term clarification from OPM on what direction
they are planning to go on that, because that is still hanging
over some folks' heads who have had COVID three times since
then.
Commissioner Rettig. That is all beyond my pay grade.
Senator Lankford. I get it. I get it. I just did not know
if you all were tracking that number. Thank you very much.
Commissioner Rettig. Thank you.
Senator Cortez Masto. I believe Senator Warner is available
virtually. Senator, are you there?
Senator Warner. Yes, Senator Cortez Masto. Thank you so
much. And Commissioner Rettig, it is good to see you again, at
least remotely. And let me start, like so many of my other
colleagues did, by thanking you and all of the IRS employees
for their really diligent hard work during COVID. And it has to
have been, I know, just brutal, and like Senator Lankford was
talking about, what it has done to some of the workforce.
Let me also move, as many of my other colleagues have, from
the thanks to the enormous burden that so many Virginians are
feeling by not getting their 2020 taxes processed. And that has
obviously hurt in terms of child tax payments getting out, to
getting their returns on a timely basis. And we are really
going to need to put as much attention and focus there as
possible.
I want, in my first question, at least to start on
something that I do not think has been raised yet, and that is
the EIDL loan process. EIDL, as I am sure you know,
Commissioner, is an SBA program that was utilized a great deal
during the pandemic in conjunction with programs like PPP and
others. Part of the EIDL process is a company that is going for
an EIDL loan from the SBA has to, in effect, give permission to
the IRS for the IRS to release their tax returns to the SBA so
the SBA can process the application.
And unfortunately, the SBA has been receiving either no
returns, or in many cases partial returns. Our office has
contacted the IRS. Our office has contacted the Taxpayer
Advocate. And the Taxpayer Advocate has said, oftentimes, the
applicant's tax returns cannot even be found in the IRS system.
If this is the case, we have businesses that are in all
likelihood eligible for these critical EIDL SBA loans that are
not getting them because of this snag at the IRS.
Are you aware of this problem? Is there anything that can
be done? And can we have some kind of flagging system within
the IRS process to make sure that there is at least some review
done, or if a partial transcript is sent over to the SBA, that
there is some ability to kind of work that out?
Commissioner Rettig. If you have current situations on
this, we should talk offline, because we created a work-around
for this with the SBA, and with taxpayers, where they verify a
current filing. And then we verify with the SBA. So if you have
people who are hung up in that, we----
Senator Warner. We have a number of people, and we have
been in regular touch with the IRS. We have been, obviously, in
regular touch with the Taxpayer Advocate. But I will definitely
take you up on that. There are an awful lot of Virginia
companies that are kind of lost in the ether at this point. And
if there is a work-around that is actually working, I would
love to engage with you on that. So, I appreciate that,
Commissioner.
In the last couple of minutes, I want to raise the issue of
cyber-attacks. I know you indicated, I think at your Ways and
Means hearing, that IRS is the victim of at least over a
billion and a half cyber-attacks a year. And obviously many of
those--most of those do not get through. So I commend you on
that.
But as chair of the Intel Committee, I can tell you, with
the war in Ukraine, my expectation is quite high that we will
see increased numbers of cyber-attacks. And I still do not
believe we have seen Russia's full-on A game. And clearly, in
addition to sectors like energy and financial, causing more
disruption in a governmental entity like the IRS would be high
on the Russians' hit list.
I know the President's budget increased a bit here, but how
do you feel you are doing in terms of cyber-protections, and
even beyond the President's budget, what else should we be
doing to give you the assistance you need?
Commissioner Rettig. I am proud of our employees, and we
receive about 2.5 million sophisticated cyber-attacks, which
generally speaking are nation-states, a day--2.5 million a day.
And we receive about 1.6 to 1.8 billion per year.
We are ever-mindful of events that occur not only inside
the United States, but certainly outside of the United States.
Cyber, I think every Commissioner would say, is the primary
thing that keeps them awake at night. It is not only protecting
the data, which is obviously hugely significant, but I think
that if we got hit in that space, it would be an emotional
constraint on the country and the people of the country. They
trust us, and we need to be there.
I am hugely proud of our cyber folks and our IT folks, and
I think you may know that, actually this week, there was a
takedown of a very large dark-money site announced by the
Department of Justice. That was an IRS co-led case. We
identified it and led it and worked with the German Government
for the seizure.
And we have been doing those, been announcing those, about
every 6 months or so when they become public. That is our cyber
people. But like every agency--and I am speaking on behalf of
IRS and Treasury at this point, to the extent I can speak on
behalf of Treasury as a bureau head: we need resources in the
cyber space.
There are more than 470,000 cyber positions available in
the United States of America, with a zero-percent unemployment
rate. And we need not only to keep the people we have, but we
need to continue getting new people. So, it is a high alert for
us, as I think it is for every American.
Senator Warner. As we go offline--I know my time is up--on
the EIDL program, I want to visit with you more on this. I
would point out, as you know--this is not your area, but the
kind of psychic and emotional hit when OPM was hit a number of
years ago by the Chinese--and we have not seen their full
utilization of that, but it was really important. And then
also, because of all the members in the Senate, we did pass
finally cybersecurity reporting legislation. It is the law of
the land now. So at least CISA will have that information.
But thank you, Commissioner, and thank you, Senator.
Senator Cortez Masto. Senator Daines?
Senator Daines. Madam Chair, thank you.
I want to, first of all, start off by thanking the
hardworking men and women at the Internal Revenue Service for
their tireless efforts. This has been one of the most
challenging times, I think, in the agency's history. Your work
is incredibly important and is very appreciated. With that
said, Montana taxpayers remain frustrated with unanswered
calls, delayed refunds, and inadequate customer service.
Commissioner Rettig, as you know, Montana is a very rural
State, with Internet service and cell coverage sparse in many
parts of the State. Montanans rely on in-person Taxpayer
Assistance Centers to get help with their tax issues.
Currently, half of Montana's Taxpayer Assistance Centers remain
closed, and I hope that does change in the near future.
Moving to some questions. Commissioner Rettig, there are
several States that have been successfully implementing IT
modernization plans, including partnering with industry to
adopt modern practices, state-of-the-art methods. For example,
partnering with private industry in the State of Rhode Island,
they were able to, over a period of years, nearly fully
integrate their tax systems on time and on budget.
The question is, after billions of dollars being spent by
the IRS to modernize the system, why have we not achieved the
equivalent results or something close to it? Presumably the
States are under the same pressures of budget and hiring the
IRS operates under, even if on a smaller scale.
The IRS has yet to close dozens of outstanding and unfilled
recommendations from GAO and TIGTA. So, what are your thoughts
around how we can get modernized here?
Commissioner Rettig. First, many of the recommendations
from GAO are historic, and they are ones that the IRS
completely disagrees with. So, there is a disagreement whether
we should go into that space. They are not being ignored, but
they are ones that we have looked at.
Second, we have been in, like every Federal agency, over a
hundred continuing resolutions since 2001. It is virtually
impossible--last year we got our budget March 11th. This year
we got it March 15th. It is virtually impossible to build out a
viable, realistic technology space when right now we have 6
months to do it. So it is start and stop. And you know, if you
were to see our IT priority list, it is like 2-point font, 60
pages, and we are trying in that space.
So that is our continued ask: for consistent multiyear
funding. Give us a target so we can build out the target. We
will come up and show you what we want to do. But we cannot do
it in 6 months. The start-stop just really is not the way it
should be for us, or anyone else.
Senator Daines. I completely agree with your frustrations.
This is the most broken--and it should be the most fundamental
process in building a budget prior to the start of the fiscal
year.
Commissioner Rettig. We spend billions a year just on
operations maintenance. We have got to get there to not be
spending that much.
Senator Daines. I want to talk about conservation
easements, Commissioner. You and I have had many conversations
about the abusive easement syndications. You know how I feel,
because I entered legislation with Senator Stabenow to outlaw
the most egregious transactions.
As you are aware, criminal indictments were recently handed
down related to some of these syndicated conservation deals,
and the IRS is auditing hundreds of other syndicated
transactions.
Mr. Commissioner, just help my understanding of the state
of play here. When looking at syndicated easements, either
those referenced in indictments or those you continue to review
through the audit process, are there structural differences in
the way a syndicated easement is designed, or are they similar?
Commissioner Rettig. We are--the IRS is very supportive of
the purpose of the legislation with respect to issues in
conservation easements. And what has happened is, the abuse of
syndicated easements has taken those and essentially created a
situation where you can pay X dollars to avoid multiple X of
tax.
Senator Daines. So, to get back to that, what are some of
the characteristics of those transactions? Can you name two or
three of them?
Commissioner Rettig. Enter and leave the transaction in
less than 3 years. So I buy in, and often within a single
year--and they are targeted toward, if I need to save this
amount of tax I buy in, I buy this percentage, and I can save
this amount of tax.
Senator Grassley and Senator Wyden held a hearing on
conservation easements, and I think if you see some of the
information that came out associated with that hearing, public
information, you would share our concerns as to why we need to
devote significant resources to that space. It is not something
that will generate trust and reliance of the people on the
streets that other people can basically go buy a tax deduction.
We are supportive of conservation easements. It is the
abusive syndicated easements that I think Congress needs to
consider legislation for.
Senator Daines. So, with those comments in mind--and
Chairman Wyden, I know, had to go vote--but I want to wrap up
by looking back and applauding the investigative report that
came out on this issue with Senator Grassley that Senator Wyden
did. It really exposed the egregious nature of many of these
transactions. And that was part of the indictments as well that
came out. And these are indictments--and I encourage members of
the committee to go look at these indictments on the fraud and
abuse that are going on in some of these easements.
Your report identifies some very troubling issues that DOJ
is now highlighting as well. I think enough has happened on
this issue that perhaps the Finance Committee should schedule a
hearing to dig deeper into your reports and figure out, as a
committee, what is going on here, and how we can stop it.
And again, as you just articulated, and I want to
reinforce, there are so many very legitimate conservation
easements--Montana is one of the leaders in that regard, doing
it the right way--but there are others, based on the
indictments here, that are fraudulent. And we will let the
courts decide what is going to happen there.
I know the chairman has stepped out, but I guess I want to
thank Senator Wyden for his support here, and I hope we can get
a hearing on this issue.
Commissioner Rettig. And you know the hearing would be,
obviously, the prerogative of the chair and ranking member, but
we would support that. And not only would I encourage you to
look at the information that is in the investigative report,
but also in the indictments. You know, we are in litigation
with many transactions, and we have taken to amending our
pleadings to assert civil fraud penalties in certain of these
transactions. That should telegraph where the IRS believes many
of these transactions are. The abuse in the syndicated
transactions needs to stop. And our efforts have not been
impactful, from what we have seen.
Senator Daines. As you and I have talked about, it seems
like, even though the indictments are coming out with that
warning, and there was clear guidance given out here----
Senator Cortez Masto. Thank you, Senator Daines. We need to
wrap it up. Thank you.
Senator Thune?
Senator Thune. Thank you, Madam Chair. Commissioner, nice
to have you here. Welcome.
Since last year's IRS data breach, or leak of private
taxpayer information in which the left-leaning ProPublica
publicized confidential taxpayer details, there has been no
meaningful follow-up from the administration. In your March 8th
response letter to Finance Republicans, you pointed to
Secretary Yellen's testimony that said the Department of
Treasury, the Office of the Inspector General, the FBI, and the
Department of Justice are conducting independent investigations
into this matter.
This apparent leak or hack of private taxpayer information
is a serious breach of trust between taxpayers and their
government. And it is simply inexcusable that the
administration hasn't provided any accountability.
So my question, Commissioner, because I think it is a
fundamental one, is, when taxpayers' private information is
stolen from the IRS and then shared by a partisan media outlet,
how do you think that impacts trust in the agency?
Commissioner Rettig. I do not believe it has been indicated
that it was actually stolen from the IRS. I do not think there
has been anything on that. I think the Treasury Inspector
General for Tax Administration is the authority at the IRS that
has the jurisdiction. So the investigation--and they announced
that there has been an investigation, so they would be the
people to talk to.
Hypothetically, any data breach, I think, causes
significant reputational risk, at a minimum, for the U.S.
Government, and specifically the Internal Revenue Service, on a
go-forward basis.
We need to protect. We need to confirm to people that the
information that they give us is safe, and information that
they are required to give us is safe, and the security of
taxpayer information is among the highest priorities, not only
of myself, but I think any Commissioner who has been here, and
any Commissioner who will follow me.
Senator Thune. I am glad to hear you say that. And so, as a
follow-up, when do you expect, based on what you just said, the
administration to provide accountability regarding the
unauthorized disclosure of taxpayer information?
Commissioner Rettig. I can speak generally that, as most
people, I get frustrated when investigations go on without
public acknowledgment of what is there. You know, the timing is
not helpful for maybe an agency to say what did or did not
happen, and to rebuild the trust. But we do not control the
timeline of the Treasury Inspector General.
Senator Thune. I would hope that you would urge them to
complete it in as quick a way as possible--as thorough a way as
possible, but obviously so there is some accountability.
I hear from a lot of South Dakotans who are frustrated with
the IRS. Many are reaching out to my offices. Their returns are
over 6 months behind. Not only are they frustrated with the
delay, but with the lack of assistance, as it feels impossible
sometimes to reach an IRS representative.
When can taxpayers who are still waiting on their 2020 and
2021 tax returns expect to receive a completed return?
Commissioner Rettig. We have 2.7 million paper returns that
were filed in Calendar Year 2021 in inventory. We have 2.3
million paper returns filed in 2022 that are in inventory.
Those are not necessarily dated, because that is our current
system. The outdated are clearly the ones we received in 2021,
and there are paper returns that are being processed.
The over 95-98 percent of electronically filed returns are
being processed quickly, timely, within 21 days. People who are
entitled to refunds get the refunds. The ones that fall out--
the statistics I gave earlier--they fall out for a variety of
reasons. Typically it is a non-matching of two Economic Impact
Payments that do not add up, or something like that--a math
error.
They fall into our error resolution service. Last year at
this time, we had 7.7 million returns in error resolution
service. Today we have 741,000. So that has been less than 10
percent there.
A lot of the statistics that I could go through--and I will
not necessarily belabor the point--but a lot of the statistics
confirm that our decisions that we have been making in the last
6 to 8 months are correct and accurate, and that we are
trending in the right direction.
I will also say we have tried innovative, creative things
that were never tried by this agency before. We are a very
risk-averse agency. We did not assume risk to get here. But we
took really educated moves to put us there, and I will be the
first to say that every suggestion--I will put it on myself--of
how we can get through this did not work as intended. So we had
to come back.
But I will say that to the extent that that occurred, it
was with the intent to get this right, and to get it right
quickly. And so the effort and desire really was there. We get
the importance, and appreciate the importance, of getting
refunds out to individuals as quickly and as accurately as
possible.
Senator Thune. Well, I appreciate your attention on
clearing the backlog, and I urge you to prioritize improving
customer service. As you know, the timely, as you mentioned,
processing of returns and the ability to talk with an IRS
representative are cornerstones to good tax administration. And
many taxpayers are trying to comply with the tax laws, and they
deserve a responsive IRS.
So, keep pressing in that area, because I think it is
critical, as we talked about earlier, along with the other
issue of the leaks of information, to establish that trust with
the American people. And having a responsive tax collection
service is key to that.
So my time has expired. Thank you.
Senator Cortez Masto. Senator Hassan?
Senator Hassan. Thank you. I want to thank the chair and
ranking member for this hearing. And, Commissioner, thank you
for being here.
I want to follow up on an issue that Senator Cardin talked
about. I am hearing from small business owners, including an
owner of many Dunkin' locations in New Hampshire, who are still
waiting for their Employee Retention Tax Credit payment.
Small businesses need this relief. And now, with the tax
filing deadline approaching, many employers are facing higher
taxes due to the delay in payments of these tax credits. What
is the IRS doing to provide relief from higher taxes for small
businesses still waiting for their Employee Retention Tax
Credit?
Commissioner Rettig. We have prioritized the processing of
the related forms for that, which are the 941s, and in some
cases 940-Xes. We have, in our inventory currently, 1.9 million
941s and 324,000 940-Xes. We are moving through those quickly,
and we have put a lot of employees there. We have mandatory
overtime. We have authorized overtime. We just expanded
mandatory overtime to another group to be able to move through
that.
Also, a logical question is, ``Well, okay, you gave me the
numbers, but what is the date? When can I tell people that they
are going to get this?''
I do not have that for you yet, because we have some
uncertainties that we are facing. We are bringing people
onboard. We are training people. We are getting them in those
lanes as quickly as possible. And I always hedge, if we get
another COVID, or this or that. So we are careful----
Senator Hassan. Right. So I understand that----
Commissioner Rettig. Another comment, if I could actually
interject--this is not IRS-Commissioner-speak--but some folks
might want to put their individual return on extension until
October 15th. We should be able to get this done before then,
and then they could match it at that point.
Senator Hassan. But the other possibility is that the IRS,
of course, has the authority to waive penalties in certain
circumstances so that you could provide that relief, because
even with an extension, people have to pay their taxes, right?
So that is the question: whether they will be penalized.
Commissioner Rettig. After 36 years on the outside, I
thought IRS was extremely easy to work with from a penalty
perspective, pre-pandemic. I never really had--if I thought I
had a case----
Senator Hassan. Right. But look--I want to move on to other
questions, but here's the thing. I think it would be very
helpful for small businesses that have navigated through so
much during the pandemic, to actually know ahead of time, not
to have to negotiate on an individual basis about penalties.
But if they have not gotten their Employee Retention Tax Credit
yet, they should be able to know that their penalties would be
waived if they did the calculation as if they got the tax
credit that they are owed. So that is just a suggestion, and I
look forward----
Commissioner Rettig. We have a number of penalty
provisions----
Senator Hassan. Thank you.
Last week--I am going to come around to an issue that
Senator Daines was talking about too, about legacy IT. But last
week, the Homeland Security and Governmental Affairs Committee
passed my bipartisan Legacy IT Reduction Act, which requires
agencies to identify their outdated and obsolete technology and
publish robust modernization plans to dispose of, or update
those systems--systems such as the 62-year-old processing
system at IRS and its paper-based filing systems. Modernizing
these systems could help reduce improper refund payments and
address the current backlog of unprocessed tax returns, which
has been significantly worsened by the IRS's outdated IT
systems.
How would IRS use the $310 million that it requested in the
President's Fiscal Year 2023 budget to modernize this legacy
tax processing system to reduce improper payments, while also
working to get taxpayers their refunds more quickly?
Commissioner Rettig. Currently, only about 16 percent of
our systems are outdated. And going back to the 1960s--we do
not use systems from the 1960s, but we do use COBOL language,
which, you know, people say there are three people on the
planet who understand it. I have not met the other two; one
works for us.
That is not an official IRS response. [Laughter.]
Senator Hassan. We understand that: the challenge and
frustration. That is what I was trying to get at. So how would
you use----
Commissioner Rettig. And let me just answer your question,
which is what we will do, which is obviously increase our
online presence, mostly focused on taxpayer service and
taxpayer interactions, the portals. We will update our IMF
systems so that they are actually workable among ourselves, as
well as for taxpayers to come in. And it would be a noticeable
improvement, and it is needed.
Senator Hassan. Right. Thank you so much. I am running out
of time as well. I have some additional questions, including
about the backlog that people talked to you about on the
amended returns. But I will submit those for the record.
[The questions appear in the appendix.]
Senator Hassan. Thank you so much.
Thank you, Madam Chair.
Senator Cortez Masto. Senator Warren?
Senator Warren. Thank you, Madam Chair.
Right now, millions of hardworking Americans are getting
ready to file their taxes, but thanks to loopholes in our tax
code for billionaires, paying taxes can be optional. This has
to stop.
Now last week, President Biden proposed a new minimum tax
to ensure that the very, very rich pay at least 20 percent in
taxes every year on their income. I have long called for a tax
on wealth, not just income, of ultra-millionaires and
billionaires. The President's proposal is different, but it is
a giant step forward.
Now, critics claim that the IRS just is not up to the task
of administering a tax like this because it requires assessing
the value of complicated assets and doing this calculation for
many taxpayers. This is a question about your agency's
competence, so I want to ask you about it, Commissioner.
In fact, the IRS already has a lot of experience examining
the assets of the ultra-wealthy. For more than 100 years, the
IRS has valued the property of multimillionaires in order to
apply the estate tax. So, Commissioner Rettig, about how many
estate tax returns have been filed with the IRS in the last 10
years?
Commissioner Rettig. Just under 300,000.
Senator Warren. Just under 300,000? All right. And do you
know anything about the combined worth of those, offhand?
Commissioner Rettig. I do not.
Senator Warren. Okay. I think the estimate will be well
over a trillion dollars. Does that make sense?
Commissioner Rettig. Not from my private practice
experience, but I'll go with it.
Senator Warren. Okay. All right.
For comparison, the President's billionaire's tax would
only apply to 20,000 taxpayers. Now, the estate tax has got to
be generally harder to administer because, by definition, it
applies to new taxpayers every time it is paid, because it is
not triggered until someone dies and an asset is transferred to
an heir. By comparison, the President's billionaire's tax would
mostly apply to the same taxpayers year after year, making
valuation much simpler. Some of the valuations that the IRS
already does can be quite complex.
In 2020, the IRS completed 1,454 estate tax audits,
including 770 estates valued at over $10 million. So,
Commissioner Rettig, what kinds of assets do the IRS
investigators examine in these estate tax audits that they are
performing every year?
Commissioner Rettig. The examiners in that space are known
as estate tax attorneys. They are sophisticated examiners. They
are among our best. And the estate tax is based on a valuation
at a point of time--date of death, or either 6 months after the
date of death. And the examiners look to see if the values were
appropriate, if the deductions were appropriate, et cetera, et
cetera.
In appropriate cases, they may bring in engineers, which
are really economists and valuation specialists.
Senator Warren. What about the kind of property that they
look at and value?
Commissioner Rettig. The valuation of the assets and
discounts people claim for the assets would be most of the
issues.
Senator Warren. So mansions, ownership of businesses----
Commissioner Rettig. Cars, virtual currency----
Senator Warren. There you go. There you go. So the IRS has
lots of experience valuing assets like mansions, expensive art,
and private companies--exactly the assets that would be subject
to the President's billionaire's tax. But to make anything
work, it is critical that we fund the IRS so that it has all
the tools it needs to ensure that the ultra-wealthy pay the
taxes that they owe.
And that is why President Biden and congressional Democrats
have proposed $80 billion in funding for the IRS. Commissioner
Rettig, how would additional funding turbo-charge the IRS's
ability to take on wealthy tax cheats, or to administer a new
tax on billionaires like the kind that the President has
proposed?
Commissioner Rettig. We have the most sophisticated
financial examiners on the planet, and they are also the most
dedicated folks on the planet in this particular space. We need
to support them by providing them meaningful tools, resources,
and training. At some point in time, when I started in practice
in 1981, the IRS was a place that people wanted to go and earn
their stripes, if you will. And maybe some left for private
practice; some certainly stayed.
We need to get back to that. And the funding would
certainly help get to that level.
Senator Warren. Well, thank you. Thank you for your
leadership on this, Commissioner Rettig. We need to fund the
IRS to make sure that wealthy tax cheats pay what they owe. But
we also need to fix our broken tax rules.
Billionaires who pay a lower tax rate than public school
teachers are freeloading, and we need to make it stop. The
President's proposal for a minimum income tax on billionaires
is about exactly that. And I am with him on this. The American
people are with him on this. Let's get it done.
Thank you, Madam Chair.
Senator Cortez Masto. Commissioner, Nevadans are facing
higher costs at the pump as the global supply chain recovers
from the COVID-19 pandemic and other global factors, as we
know. I have fought for a comprehensive approach and pushed for
critical legislation to alleviate supply chain bottlenecks, led
the charge for investments in clean energy, and called for the
Biden administration to develop a long-term government-wide
strategy to lower gas prices.
Senator Bennet and I sent a letter to you requesting that
the IRS increase the standard mileage rate to better reflect
the recent shock in gas prices, and what businesses and some
individuals are paying out of pocket every day. The letter was
dated March 25th. And the reason being--and I know you are very
aware of this--is that an increase in the per-mile
reimbursement rate will offer some relief to Americans who use
a personal vehicle for everyday needs like work travel or
medical transport, by enabling independent contractors and
businesses to adjust for increasing expenses. It will also
offer relief to families in need, particularly in rural areas,
as well as help small businesses struggling with higher costs
for transporting goods.
My question to you is, have you received the letter? And
then, as requested in the letter, will the IRS take action in
raising the standard mileage rate to better reflect the actual
costs that businesses and consumers are currently paying at the
pump?
Commissioner Rettig. We did receive the letter. My first
question was going to be if we responded, but when you said
March 25th, I am confident we have not responded.
Senator Cortez Masto. Okay.
Commissioner Rettig. We have inventory in that as well, and
so I apologize for that. Let me take a look at that and get
back to you with the timing on that and see if we cannot also
accelerate the letter.
Senator Cortez Masto. If you would. Obviously, the sooner
you act, the better for so many who are struggling right now
and need the help because of the high prices that we are
seeing.
So let me jump to another request that I have for you, and
it is another letter, but this letter was sent to you on March
2nd by Senator Rosen and I. We, both of us, have really worked
to provide relief for our hospitality and restaurant industry
throughout the COVID pandemic and its recovery. And I was able
to ensure that our hotels and live entertainment businesses
were eligible for PPP loans, and I led on bipartisan
legislation which is called the Hospitality and Commerce Jobs
Recovery Act and a restaurants act to provide critical relief
to these businesses and workers that were hardest hit by the
pandemic.
We know, and I know the hospitality industry is really--and
the leisure and travel industry--the last to come out of this.
I want to acknowledge the IRS, the work that you did for
reducing the tip allocation rate during the COVID-19 pandemic.
You actually reduced it by an average of 60 percent to assist
our service-sector businesses and tipped wages like those in
the hospitality/travel/tourism industry, and in my home State
of Nevada.
Unfortunately, I just recently learned from some of our
workers at the Culinary Union, Local 226, that the IRS raised
the tip allocation rate at the beginning of 2022 during the
peak of the Omicron variant and while those in the food and
beverage industry continue to face double the national
unemployment rate, while this industry continues to safely
recover.
So my question to you is, what was your reasoning for
changing the tip allocation in January? And when you did so,
did you take into account that many of the hardest-hit
businesses and workers in the industry are still trying to
recover?
Commissioner Rettig. These agreements tend to be negotiated
with individual employers, so I cannot speak to any specific
individual employer. But I am sensitive to the fact that, if in
fact in certain industries and certain communities, if we
were--I find it hard to believe that our people on the ground
who negotiate these agreements would not be sensitive to that.
They do live in these communities.
Senator Cortez Masto. Well, here is my concern----
Commissioner Rettig. Well, let me--I need to personally
look into it and get back to you.
Senator Cortez Masto. Yes, please look at it, because here
is my concern. Traditionally in the past, you consulted, the
IRS consulted with employers, organized labor, and those
affected in this industry with the impact because of COVID. But
my understanding is, that was done in the past, but it was not
done this time. There was no consultation. And that is my
concern, that without the consultation, you do not realize that
this industry is still hard-hit.
So, if you would, please, take a look at this and work with
our offices, both mine and Senator Rosen's. I would really
appreciate it.
Commissioner Rettig. For sure.
Senator Cortez Masto. Thank you. And I want to say ``thank
you'' again. It has been a long morning for you. You are always
here. You respond whether it is on Zoom or in person,
Commissioner, so thank you so much for joining us today.
I believe that is it for the Senators appearing, so just
thank you again for joining the committee. Thank you for this
discussion.
I also want to remind my colleagues that questions for the
record are due by close of business next Thursday, April 14th.
And this committee hearing is adjourned.
Commissioner Rettig. Thank you very much.
[Whereupon, at 12:25 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 to Commissioner Rettig for
your willingness to testify today, and for your service. I appreciate
your efforts to make the IRS more customer-focused, and I understand
that it is hard to change course in large organizations like the IRS.
There is a need to change course, but I do not believe the
administration's outsized, partisan approach is the solution.
For the third filing season in a row, taxpayers confront vexing
customer service challenges as they attempt to fulfill their tax filing
obligations. With tens of millions of 2021 tax returns still to be
filed, the most recent data we have on this year's season is
concerning, highlighting longstanding issues the IRS has not adequately
addressed.
For example, more than 60 percent of the millions of items of
taxpayer correspondence and amended returns have sat in storage for
more than 3 months, an increase of nearly 30 percent over last year.
Average hold times for the lucky few taxpayers who reach the IRS by
phone are 28 minutes, an increase of nearly 50 percent over last year.
Scores of taxpayers have seen refunds delayed while their return is
suspended for various reasons. Millions of prior-year tax returns await
processing. The IRS's management of paper-filed returns is a persistent
problem that the National Taxpayer Advocate recently noted goes back
decades.
By tax day this year, millions of paper-filed 2020 tax returns will
not have been processed, while millions of current-year returns will
likewise gather dust. Steps to prevent or minimize this disruption were
not taken by the IRS, and in some cases have still not been taken.
For example, many may not be aware that in order for the IRS to
process a paper-filed return, each entry on the return is manually
inputted by an IRS employee. These taxpayer-funded employees would
better serve taxpayers by answering phones or responding to
correspondence.
This is not simply a problem of taxpayers choosing to deluge the
IRS with paper-filed returns. In many cases, IRS forms and schedules
simply cannot be electronically filed, including where a taxpayer could
e-file and attempts to do so but is rejected by the IRS's confusing
digital signature process.
This is not a funding issue. Solutions to these challenges have
existed for years, but to date have not been implemented. The IRS can
further transition away from mandating any return or form to be paper
filed.
With respect to rejected e-filings, which I understand to be often
caused by a taxpayer being unable to locate or recall one of two
possible e-filing PINs, the IRS could implement additional means to e-
sign a return. I am aware that the IRS, with your leadership,
Commissioner, is working on this. So-called ``2D bar codes'' much like
the supermarket bar codes that have been used for decades, could
eliminate the IRS's need to transcribe paper returns at all. Solutions
like these have been held up for years with no clear reason why,
leading to results the current National Taxpayer Advocate Erin Collins
calls ``crazy.'' I agree.
Some say that IRS budgets are to blame for all that ails the IRS,
but this misdirection distracts from real issues at the IRS. It also
cherry-picks data to paint a misleading portrait. Many begin their
analysis of IRS budgets beginning only with Fiscal Year 2010, which was
a 30-plus year high-water mark for the IRS's budget and an outlier.
Viewed in the longer-run, the IRS's average inflation-adjusted budget
is much lower, with recent years aligning with this average. The
efforts to try to claim that Republicans have slashed the IRS budget
are simply not accurate.
Budget arguments are also often invoked in attempts to justify
massive IRS funding for things that do not address the customer-
experience problems plaguing the IRS. For example, some advocate for
increased IRS funding to generate revenue through heavy-handed
enforcement.
This year's presidential budget request seeks a large enforcement
funding boost, and its ``reserve fund'' placeholder for the reckless
Build Back Better legislation would provide a truly massive $80-billion
infusion of mandatory funding primarily focused on enforcement. The
reserve fund could also accommodate the administration's chilling
proposal to monitor Americans' bank account flows of as little as $600.
I strongly oppose forcing community banks and credit unions to
report sensitive and private customer data of law-abiding taxpayers to
the IRS in order to raise more money by snooping through customer
accounts, and I will continue to aggressively push back on any attempts
to add this reporting scheme to legislation. I remain concerned about
huge funding boosts that would increase audits on small businesses and
middle-class Americans, rather than prioritize taxpayer services.
Our hearing in February had a positive dialogue spotlighting IRS
customer service challenges and solutions, and I have a number of
questions about ways to address the longstanding IRS problems we can
agree on, such as outdated IT, and ways to ensure the next filing
season will be much better than the last several.
Given your stated commitment to making these improvements,
Commissioner, I look forward to continuing to work with you on this.
______
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 filing season and the
President's Fiscal Year (FY) 2023 budget proposal for the IRS.
Taxpayer service remains the most significant IRS priority, and we
have implemented many new, innovative strategies in an effort to
improve our overall level of service and processing of our
unprecedented current and projected inventories. The pandemic presented
the IRS with a confluence of novel and critical demands at a time when
we lacked the stable, long-term funding needed to appropriately serve
the American people. Given these significant challenges, although we
may not have always gotten it right or supported the important
priorities of some, our employees have worked extremely hard to respond
as best we could to a never-ending string of compounding challenges.
I am pleased to report the 2022 filing season got off to a strong
start in terms of tax return processing and the operation of our
information technology (IT) systems. Through April 1st, the IRS
processed more than 89 million individual Federal tax returns and
issued more than 63 million refunds totaling more than $204 billion. We
worked diligently to open the filing season earlier this year than
last, on January 24, 2022, compared to February 12, 2021. A detailed
discussion of the filing season is provided later in this testimony.
While the current filing season has so far presented no major
disruptions or surprises, we know we have a great deal of work to do in
many other areas of the IRS. The IRS continues to focus on working to
reduce paper correspondence inventory and process paper tax returns
from 2021 as well as improve our response to an unprecedented level of
phone demand--situations that have been compounded by the pandemic and
related issues. For example, in FY 2021, we received more than 15
million individual paper returns. We also had a significantly higher
error rate on individual returns due in large part to challenges
associated with reconciling funds received through important stimulus
programs like Economic Impact Payments (EIPs). We received far more
than 10 million returns where the taxpayer did not properly reconcile
the two EIPs received in 2020 to the amount of the Recovery Rebate
Credit (RRC) stated on their return filed in 2021. Similarly, more than
10 million individuals reported unemployment compensation on their
return that was subject to the exclusion enacted during the 2021 filing
season. In addition, millions of taxpayers elected to use 2019 rather
than 2020 as the base year for determining their EITC (and the
legislative change for that was enacted after our IT development for
the 2021 filing season had been completed). Each of these returns
required a manual review and resolution by an IRS employee.
We will continue to do our best as we face new challenges. Our
workforce is strong and remains our most important resource, with
substantially all of our employees engaged on a full-time basis. We
have taken numerous steps to address these challenges, and we continue
to look for other ways so that we can improve these operations and get
healthy by the end of the year.
The IRS is serving more people and entities in a global environment
than ever before, while handling new and bigger responsibilities. This
was the case before the pandemic and has only increased since then. At
the same time, we have experienced delays in updating our IT systems,
which means the IRS and taxpayers must continue to use certain paper-
based processes. This use of paper processes can result in significant
delays, contributing to IRS inventories and limiting taxpayers' ability
to know the status of their cases.
We are in this position because we have not had the sustained
sufficient multiyear investment for IT modernization necessary to
improve our technology and operating systems. I am here to tell you
today that nothing is more important than having those resources in
place to make it possible for us to appropriately serve the American
people. Absent consistent, timely, multiyear funding, we have largely
been a paper-based organization operating in a digital world
environment. In 2022, IRS employees should not be transcribing paper
returns by hand. Taxpayers should not have to wait and wait on the
phone--often to no avail. I want to better serve the American people--
and so do the dedicated employees at the IRS. They will finally be able
to do so if you, and your colleagues, provide us the stable, multiyear
funding we need.
Like all Federal agencies, the IRS is best able to accomplish our
mission when we receive the resources necessary to do so. And that
mission is vital to the functioning of our government. The fact that
the IRS collects approximately $4.1 trillion in gross revenue per year,
representing about 96 percent of the gross revenue of the U.S., clearly
shows that the success of our Nation is closely tied to the success of
the IRS. The President's FY 2023 budget proposal, which provides $14.1
billion for the IRS, will allow the agency to take important steps
forward in improving taxpayer service, modernizing our systems and
ensuring fairness in the tax system. But for the IRS to truly be able
to deliver for the American people, it needs stable, multiyear funding
to be in place to allow the agency to rebuild.
Over the course of the last decade, the IRS's budget has decreased
by more than 15 percent in real terms. Because of this decrease, in FY
2021 we realized less than 79,000 full-time equivalents (FTEs), which
is close to 1974 levels. Since 2010, IRS Enforcement FTEs have
decreased by 30 percent, while the Nation's real Gross Domestic Product
has increased by 29 percent, and the filing population has increased by
14 percent. Over the next 6 years, we estimate we will need to hire
52,000 employees just to maintain our current levels. Every measure
that is important to effective tax administration has suffered
tremendously in recent years, with profound deficiencies resulting from
underinvestment in human capital and information technology.
Although the IRS appreciates the $675-million increase to our
budget in the FY 2022 Omnibus, sufficient funding remains a constraint
to addressing the current paper inventory and supporting our IT
operations adequately. For example, this year's funding left our
Operations Support account, the account that funds all of the hiring,
rent, laptops, and telecom for taxpayer services and enforcement
employees, $100 million short of our inflationary cost increases.
Without shifting the funds to the appropriate accounts, we are left
depleting resources from one less-visible program to pay for another
essential program, which causes us to slow or stop work on updates to
our systems that must be modernized to provide digital services that
citizens expect from us. Mandatory multiyear, consistent funding would
help us deliver meaningful services to taxpayers, conduct critical
enforcement initiatives and support long-term modernization efforts to
improve both service and compliance for the Nation.
When we are confronted with long-term Continuing Resolutions (CRs),
we typically freeze nearly all external hiring. We take this action to
ensure we have funds to pay all employees, including any applicable pay
raises. Last fall, we increased staffing despite the CR, hiring at risk
without the funding in place to support these positions, but assuming
future resources would be provided by the eventual enactment of the FY
2022 appropriation, to help address our inventory. The full Fiscal Year
2022 President's budget request would have allowed us to maintain
current staffing levels and fund 4,200 additional full-time equivalent
employees. The Omnibus increased our Taxpayer Services account by $193
million from FY 2021, which covered the inflationary increases in
Taxpayer Services (what we refer to as ``maintaining current levels''),
and about 42 percent of our requested program increases. We will now be
required to use other funding sources to cover our remaining needs,
including requesting an inter-appropriation transfer, redirecting user
fees, and realigning American Rescue Plan (ARP) funds. Although the
Omnibus reflects an important down payment on the necessary investments
in the IRS, it is far, far from what the dedicated IRS employees need
to serve the American people they way they deserve.
Even with appropriate funding, the IRS continues to experience
significant challenges recruiting talent to support the critical work
the agency does for taxpayers and our Nation, particularly in the
current labor market. With our limited funding, we have been hard at
work to do all we can to bring talent on board. For example, we have
major processing center operations in Austin, TX, Kansas City, MO, and
Ogden, UT, where we are working to attract eligible applicants for more
than 5,000 vacant positions. We have been holding both in-person and
virtual job fairs in Austin, TX, Kansas City, MO, and Ogden, UT where,
using recently received Direct Hiring Authority (DHA), we have been
able to make more than 2,500 conditional offers at the conclusion of
the interviews.
IRS employees want to do more to help taxpayers. We want to be able
to answer the phones and respond to questions. We want to be ready,
whenever crisis hits, to deliver economic relief quickly--as our
employees demonstrated repeatedly during the current pandemic, working
long hours to deliver crucial programs. During this challenging period,
the IRS has been operating in an ``all-hands-on deck'' approach,
leaving nothing off the table for consideration to improve overall
service.
Our employees continue to expend every effort to balance the
confluence of multiple, unprecedented demands--including successfully
starting the current filing season and working our inventory of
unprocessed tax returns, as well as looking for additional ways to
minimize burden for taxpayers, tax professionals and businesses. We
will continue to rapidly adapt to changing circumstances when
appropriate to do so. We remain committed to ensuring the tax system is
administered fairly and impartially and that every American receives
the nature and quality of services they deserve.
effects of the covid-19 pandemic and the irs response
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. The
IRS's response to COVID-19 includes issuing more than $1.5 trillion in
combined historic economic relief and individual refunds over the past
2 years. This effort shows the level of dedication of our workforce and
illustrates how important the IRS is to the functioning of our
government and the success of the Nation.
IRS employees have worked hard since March 2020 to implement major
provisions of the Coronavirus Aid, Relief, and Economic Security
(CARES) Act, ARP, and other COVID-related relief legislation. This work
included delivering more than $800 billion in EIPs to help Americans
cope with the financial effects of COVID-19--which involved creating
the internal processes to accomplish this effort. The Treasury
Inspector General for Tax Administration (TIGTA) noted in a report
released March 21, 2022, that the IRS computed the correct payment
amount for more than 99 percent of the 175 million payments issued for
the third round of EIPs. Our work also included delivering (and
creating the internal processes for) more than 200 million advance
payments of the Child Tax Credit totaling $93 billion that were made to
eligible families between July and December of last year.
Congress provided critical help to support our ability to implement
the third round of EIPs and the advance CTC payments by appropriating
$1.86 billion in supplemental funding for the agency under the ARP.
These funds represent important 3-year funding (expiring FY 2023) and
have provided, and will continue to provide, critical assistance in our
effort to better serve taxpayers. As of March 27, 2022, the IRS has
obligated $850 million of the total; we are continuing to use the funds
over the remaining 2 years of the expenditure window provided by
Congress in ways that are intended to maximize taxpayer service,
including responding to taxpayer questions about EIPs and advance CTC
payments. As identified in our ARP Spending Projections provided to
Congress in February 2022, these funds are allowing us to help
taxpayers efficiently obtain the payments they are rightfully due, with
additional front-line staffing, systems and technology improvements to
create safe and secure platforms, and with investments in long-term
modernization enhancements that will pave the way for long-needed
system improvements going forward.
For both the third round of EIPs and the advance CTC payments, the
IRS made an extensive effort to ensure we reached as many people as
possible who might be eligible for these benefits. We worked with
thousands of community groups, non-profits, associations, education
groups and anyone else with connections to people with children to
share critical information about EIPs, the CTC and other important
benefits. As noted above, we are continuing to work this filing season
to ensure that anyone eligible who did not receive an EIP understands
they can claim the RRC on their return, and we continue reminding
recipients of the advance CTC of the need to reconcile those amounts on
their returns.
Reducing Inventory of Paper Returns and Correspondence
The combination of the pandemic, new tax laws and numerous other
factors led to an unprecedented amount of unprocessed tax returns and
correspondence remaining in the IRS inventory during 2021.
The IRS pursued significant actions during the 2021 filing season
to address the return and correspondence inventory. But due to resource
issues and numerous unique factors tied to new legislation and the
pandemic, we have entered the 2022 filing season with a significant
inventory of unprocessed returns and correspondence and, to date, the
inability to meet our hiring goals. We must continue pursuing
innovative strategies to fulfill our commitment to return inventories
to a healthy level before entering the 2023 filing season.
To reduce the current and projected inventory, we are taking
aggressive actions that include:
Surge Teams. We presently have more Customer Service
Representatives (CSRs) onboard than ever before. We have retained
temporary CSRs on a permanent basis to concentrate on the inventories.
We took this risk in the context of an uncertain funding environment,
hoping the annual appropriation process would deliver funding; however,
this effort has not been sufficient to reduce the current and projected
inventories The IRS is deploying surge teams, which are groups of
employees across the agency organized to temporarily assist with urgent
issues. For example, we temporarily moved approximately 900 employees
with previous relevant experience back into key areas from other
organizations. In addition to this accounts management surge team,
which is now in place, we are working to assemble a similar surge team
for our submission processing area with 700 employees who will start on
this critical work this month.
Direct Hire Authority (DHA). Working with Treasury, the Office
of Personnel Management, and the National Treasury Employees Union, the
IRS recently secured direct hiring authority for a total of 10,000
positions--5,000 employees with the goal of onboarding them in the next
several months, as well as an additional 5,000 new hires to be made
over the course of the next year. Congress also helpfully provided
hiring flexibilities in this month's Omnibus to further expedite hiring
in critical positions. Due to the challenges of hiring during the
pandemic and competition from other employers for the same talent, this
environment is an exceptionally difficult one for hiring. DHA may
improve our ability to be competitive in cities where these employees
are most needed. We are extremely hopeful to satisfy our hiring goal
over the coming months. Also, for the first time, we have partnered
with the Military Spouse Employment Program and are engaging
contractors while aggressively pursuing our hiring goals. We are
grateful for the specific direct hiring authority language included in
the recent Omnibus (Consolidated Appropriations Act, FY 2022) that will
enable us to bring talent onboard more swiftly in needed locations.
Mandatory Overtime. We have implemented mandatory overtime and
are offering authorized overtime to certain employees to help with the
reduction in inventory, and we are doing so for the first time in
certain functions.
Increased access to online self-service tools. Over the last 6
months, more than 10 million individuals have created their individual
online account through IRS.gov. Reducing call volumes through increased
online service allows us to devote more resources to the inventories.
EIP/CTC letters. We sent more than 250 million letters to help
taxpayers match IRS records to prevent delays in processing. IRS Letter
6475, Your Third Economic Impact Payment, and IRS Letter 6419, 2021
Advance Child Tax Credit, set forth the amounts that individuals
received in 2021. Individuals can also verify these amounts by
accessing their individual online account through IRS.gov. Given that
more than 10 million returns failed to properly reconcile two EIP
payments received in 2020 on their returns filed during the 2021 filing
season, it is critical that individuals (and their preparers) verify
the possibly six to eight payments received in 2021 before submission
of a 2021 return this year.
Innovating to expedite case closures. We are employing new
tools to help IRS employees review and process tax returns that include
errors and manual reviews, a piece that is already helping taxpayers
receive refunds quicker in 2022. These efforts have already
demonstrated positive results.
Expanded Saturday openings of certain Taxpayer Assistance
Centers (TACs) to assist taxpayers this filing season in more than 90
cities \1\ around the country. TACs provide important front-line, in-
person taxpayer assistance. We maintain 358 TACs but, due to attrition
and resource limitations, 39 are presently not staffed on a full-time
basis (24 TACs presently provide a virtual service delivery alternative
to an in-person visit). All staffed TACs offer appointments as well as
the ability to walk in.
---------------------------------------------------------------------------
\1\ https://www.irs.gov/help/irs-face-to-face-saturday-help.
Enhanced the EITC Assistant tool on IRS.gov to make it more
user-
friendly for individuals to determine their potential eligibility
(intended to reduce resources being dedicated to erroneous EITC
claims). This important tool serves taxpayers and reduces erroneous
---------------------------------------------------------------------------
claims, freeing up resources to help process our inventories.
VITA/TCE. We are also continuing to notify taxpayers about
``Free Tax Return Preparation for Qualifying Taxpayers''\2\ by
encouraging use of the IRS's Volunteer Income Tax Assistance (VITA) and
Tax Counseling for the Elderly (TCE) programs, which offer free basic
tax return preparation to qualified individuals.
---------------------------------------------------------------------------
\2\ https://www.irs.gov/individuals/free-tax-return-preparation-
for-qualifying-taxpayers.
Created and expanded self-service portals for taxpayers to
implement an Online Payment Agreement, request payment transcripts,
request an Identity Protection Personal Identification Number (IP PIN),
update their personal information, etc. These efforts reduce call
---------------------------------------------------------------------------
volume, which releases resources to help process our inventories.
Expanded ``Customer Callback'' to approximately 70 percent of
our toll-free telephone demand. During FY 2022, we have offered this
option to more than 4 million taxpayers with an acceptance rate
exceeding 57 percent. We estimate this feature has saved taxpayers more
than 1.3 million hours.
Implemented Online Live Assistance, Voice Bots and Chat Bots
(in English and Spanish) to better enable taxpayers to interact with
IRS. Online Live Assistance leverages limited employee resources
allowing a single employee to respond to multiple taxpayers at a time.
Our Advance CTC Voice Bot launched February 18, 2022 (delivered 6-8
weeks ahead of schedule) and handles the top 27 Advance CTC topics
(English only at present, but the Spanish version is coming soon) to
assist callers who need help reconciling the credits on their 2021 tax
return. The IRS, in recent weeks, has deployed Voice and Chat Bots in
English and Spanish for phone lines that assist taxpayers with tax
payment issues or understanding an IRS notice they may have received.
In addition to the payment lines, Voice Bots help people calling the
EIP toll-free line, providing general procedural responses to the most
frequently asked questions. Voice Bots are software powered by
artificial intelligence (AI) that allow a caller to navigate an
interactive voice response (IVR) system with their voice, generally
using natural language. Chat Bots simulate human conversation through
web-based text interaction, also using AI-
powered software to respond to natural language prompts. Taxpayers who
request to speak with a CSR are placed in queue for English or Spanish
telephone assistance. These efforts reduce call volume, releasing
resources to help process our inventories.
Reduced the percentage of our outdated hardware from more than
60 percent a few years ago to approximately 10 percent at present.
Funding provided by Congress has allowed us to pursue these efforts,
reducing the risk associated with an interruption to our delivery of
meaningful services.
These steps are making a difference. Refunds for tax returns and
amended tax returns in the inventory continue to flow out to taxpayers.
We continue to consider and pursue additional relief measures while
balancing the many other demands for our time and limited resources.
We also instituted additional relief measures for taxpayers, such
as:
On January 27th, we announced the suspension of notices in
situations where we have credited taxpayers for payments but have no
record of the tax return being filed. Given that in some situations the
return is still waiting to be processed, suspending this notice will
help avoid confusion.
On February 9th, we announced the suspension of more than a
dozen additional notices, including automated collection notices
normally issued when a taxpayer owes additional tax or has no record of
filing a tax return. Note that many other IRS notices are statutorily
required to be issued within a certain time frame to be legally valid.
We are evaluating penalty relief options; however, we must also
determine if systemic programming changes or manual intervention are
required for the considered relief. Manual intervention would require
re-direction of resources from processing original returns and amended
tax returns, which complicates this area.
Other Taxpayer Assistance Offerings
Important Update Information Available at IRS.gov. The IRS
workforce is working hard to reduce current and projected inventories,
meet taxpayers' continuing needs and provide relief or assistance
whenever possible. We have issued various announcements available on
IRS.gov outlining important steps we're taking this filing season to
assist taxpayers with the aim of reducing current and projected future
inventories. On February 14th, we issued a news release titled, ``IRS
launches resource page on IRS.gov with latest details and information
for taxpayers during filing season,''\3\ (IR-2022-32, February 14,
2022) with a link to this important resource page (``Help for taxpayers
and tax professionals: Special filing season alerts'').\4\
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\3\ https://www.irs.gov/newsroom/irs-launches-resource-page-on-
irsgov-with-latest-details-and-information-for-taxpayers-during-filing-
season.
\4\ https://www.irs.gov/newsroom/help-for-taxpayers-and-tax-
professionals.
The IRS is continuing to assess other changes and system
modifications to assist taxpayers on an array of issues. We have
redeployed and reallocated resources throughout the IRS and have
implemented innovative strategies in an ongoing effort to provide a
meaningful reduction in our inventories. As we make additional
adjustments, we will continue to make information available to
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taxpayers throughout the filing season and beyond.
Important Steps for Current Filers to Get Their Refund as Quickly
as Possible. To prevent future inventory problems, the IRS has also
worked diligently to encourage people to take extra precautions this
year so they can get their refund quickly and avoid processing delays.
During this filing season, refunds on error-free electronically filed
returns continue to be processed within approximately 21 days.
Requesting direct deposit accelerates receipt of the refund by the
taxpayer. There are three important steps people can take to get their
refund as quickly as possible:
File electronically;
File an accurate return (verify amounts reflected as received
for the EIP and advance CTC payments); and
Request a direct deposit of their refund.
These steps are critical to accelerating delivery of the refunds
people deserve and the IRS employees want to get out as quickly as
possible. We have engaged in extensive outreach with community-based
and professional organizations to reduce the otherwise manual review of
returns that fail to reconcile these amounts. We're also encouraging
taxpayers with questions to turn first to online resources, since we
anticipate a continued high call volume again this year.
Responding to Unprecedented Demand for Phone Assistance
The IRS provides phone service to individuals, businesses, tax
professionals, and tax-exempt entities. We have specialty lines for the
hearing impaired, identity theft victims, the taxpayer protection
program, and for making appointments at our TACs. We also offer over-
the-phone translation services in 350 languages.
Taxpayer Service Remains Our Top Priority. The long-term erosion of
our budget has depleted every function of the IRS. Even though our Wage
and Investment division--which is where the current and projected
inventories exist--remains the most well-staffed function of the entire
IRS, it is well below the levels necessary to deliver the service we
aspire to achieve. We have implemented several approaches to reducing
current and projected inventories and reducing call volumes which
allows us to devote more resources to the inventories.
Our customer service representatives (CSRs) operate from 10 main
campus sites and 14 smaller satellite locations across all mainland
United States time zones, plus Puerto Rico. The CSRs work 7 a.m. to 7
p.m. shifts staggered nationally according to time zones. When we
temporarily closed most of our facilities in March 2020 to protect
employees from COVID-19, our IT operation worked rapidly--within
weeks--to provide our CSRs with laptops, related equipment and training
so they could work remotely in a virtual environment.
Against that backdrop, IRS phone operations have faced an unusually
challenging environment over the past year, with an unprecedented level
of phone assistance demand. In 2021, we answered 4 million more
taxpayer calls than the year before but had a lower level of service
than prior years because demand was so high. In the first half of 2021
alone, we received more than 199 million calls--about 400 percent more
calls than we get in an average year. For comparison, we received a
total of 42 million calls in all of 2018, 40 million calls in 2019, and
55 million calls in 2020. On March 15, 2021, we received 8.6 million
calls on just that one day, which is an average of about 1,500 calls
per second. The high call volume has significantly hampered our ability
to manage telephone demand.
At the same time, the average duration of each call has also
increased due to the complexity of COVID-related tax law changes and
because taxpayers have personally endured a great deal throughout the
pandemic. Our average time per call was 12 minutes for calendar year
2019. Thus far in 2022 (through February 26) the average time per call
is 16 minutes. Spending more time on each call to provide the needed
customer service limits the CSRs' ability to handle more calls during a
shift.
We attempted to ease these challenges by starting the CSR hiring
process for the 2021 filing season months earlier than normal. We
repeated this approach for the 2022 filing season. During the pandemic,
we transitioned into an entirely virtual recruiting and onboarding
process for new employees to speed up the process. While we were able
to hire an additional 3,800 CSRs, clerks and other support staff for
the 2021 filing season, it was short of our goal of 5,000. While we did
slightly better thus far in the 2022 filing season, we still have been
able to hire just 3,805 of our overall goal of 5,000. The pandemic
caused significant hiring challenges, including low applicant pools in
some locations, delays in fingerprinting due to closed facilities, and
delays in processing applicants virtually. And we routinely find
ourselves being able to offer candidates significantly less than what
the private sector can. We are trying innovative training approaches to
get new CSRs ready to work the phones in less than the usual 14-week
time frame. Working with NTEU, OPM, and congressional appropriators, we
are also thrilled to have secured direct hire authority, discussed
previously, which will allow us to be more successful in recruiting top
talent by increasing the speed with which new employees can be
onboarded.
update on the 2022 filing season
The IRS successfully opened the 2022 tax season on January 24th--2
weeks earlier than the year before--giving taxpayers more time to file
returns and delivering more than 1 million refunds in the first days of
processing. Getting underway in January has given taxpayers as much
time as possible to meet the Federal tax filing deadline, which this
year is April 18th for most taxpayers.
Due to many factors, the 2022 tax filing season is a complex and
challenging one for taxpayers, tax professionals, and for the IRS as
well. During this tax season, taxpayers face a number of issues
resulting from critical tax law changes that took place in 2021, as
well as ongoing challenges related to the pandemic. Our dedicated
workforce has done everything it can to prepare for the April 18th
deadline, and our immediate focus is simplifying the taxpayer filing
experience by streamlining the process, answering as many questions as
possible and reducing the inventories mentioned earlier in this
testimony.
Our system that allows electronic filing of returns, Modernized
eFile (MeF), took a major step forward this filing season. We made the
latest in a series of changes that over time have made MeF more
efficient, standardized and robust. This latest change expanded the
availability of MeF so that our external partners who transmit returns
electronically can access the system 24 hours a day, 7 days a week.
This upgrade is a win not only for the transmitters and ultimately
taxpayers, but also for the IRS, because it allows us to perform MeF
maintenance during the week, enabling more rapid deployment of critical
updates.
Providing Help to Navigate a Challenging Filing Season
We continue to believe the filing season will go the smoothest for
taxpayers who file electronically, file accurate tax returns and
request direct deposit of their refund. In fact, filing electronically
with direct deposit is more important than ever this year, given the
additional complexities on many returns, such as those who were
eligible for an EIP but did not receive it and are now claiming the
RRC, as well as those who need to reconcile advance CTC payments on
their return.
We also want families who added a dependent--such as a child, a
parent, a nephew or niece, or a grandchild--on their 2021 income tax
return who was not listed as a dependent on their 2020 income tax
return to know they may be eligible to receive a 2021 RRC of up to
$1,400 for this dependent. Additionally, all eligible taxpayers with
qualifying children born or welcomed through adoption or foster care in
2021 are encouraged to claim the CTC--worth up to $3,600 per child--on
their 2021 tax return.
Another important credit we've been highlighting is the Child and
Dependent Care Credit, which was expanded for 2021. This means that
more taxpayers will qualify this year than ever before, and the credit
will be worth more. We've been working to remind people who pay
expenses for the care of a qualifying person while working or looking
for work that they may qualify for this important tax credit. Depending
on their income, taxpayers can get a credit worth 50 percent of their
qualifying child-care expenses. For tax year 2021, the maximum eligible
expense for this credit is $8,000 for one qualifying person and $16,000
for two or more.
We realize that taxpayers who are still waiting for their 2020
return to be processed may be wondering whether they should wait to
file their 2021 return. Our message to these individuals is that they
can file their 2021 return when they are ready. If a taxpayer is
electronically filing their 2021 tax return and we have not yet
processed their 2020 tax return, they should validate their 2021
electronic tax return by entering $0 (zero dollars) as their prior year
adjusted gross income (AGI). If a taxpayer used the Non-filer Sign Up
tool in 2021 to register for advance CTC payments or an EIP, they will
instead enter $1 as their prior year AGI.
Given that incredibly high call volume is continuing again this tax
season, we understand the filing experience will be more difficult for
taxpayers who need to interact with us. But we continue to make
improvements and are confident this work will have us trending in the
right direction. We are also encouraging taxpayers with questions to
turn first to online resources. This area has been a huge focus for the
IRS, and critical tools are available that people may overlook. These
options range from the Where's My Refund? online tool to several other
automated tools now available through the Online Account on IRS.gov.
For many, there are ways to get help without calling.
Improving Service to Diverse Communities
Amid the challenges posed for the agency by the pandemic and new
tax law changes, the IRS has continued to focus on improving service to
diverse communities. An important way we serve these taxpayers is by
communicating with them in their most comfortable language. We are
committed to enhancing the experience of all taxpayers, including those
who have limited English proficiency. We know that these taxpayers
respond to our efforts--as just one example, there were nearly 90
million visits to non-English pages on IRS.gov last year. Already this
year, through March 23rd, there have been about 14.3 million visits to
non-English pages.
Since 2021, the IRS has taken important steps to further improve
the amount of service we offer in multiple languages:
Provided the Form 1040 in Spanish during the 2021 filing
season for the first time.
Gave taxpayers the opportunity to indicate on new Schedule LEP
(Limited English Proficiency) whether they want to be contacted by us
in a language other than English. This schedule, filed with the 1040,
allows taxpayers to select one of 20 languages in which to receive
communications from the IRS. During Calendar Year (CY) 2021, the IRS
received approximately 326,000 Schedule LEPs.
Made Publication 1, Your Rights as a Taxpayer, available in 20
languages.
Issued a new, streamlined version of Publication 17, Your
Federal Income Tax, that is available in seven languages.
These efforts continue this year. We've completed conversion of 34
Spanish notice inserts to Braille, text, audio, and large print as of
January. We also recently converted Form 1040 and its main schedules,
as well as Form 1040 NR, Form 1040 SR, Form W-4, and six publications,
into Spanish Braille, text, and large print. We continue working to
increase our communications and outreach materials--including
information shared on social media channels--into additional languages.
To ensure that taxpayers can easily provide their preferences in this
area, we also released new Form 9000, Alternative Media Preference,
this filing season. This form allows taxpayers to tell us they want to
receive notices in Braille, large print, audio, or text, and can be
filed alone or with the 1040.
While those steps are all important, the IRS is continuing to do
more to enhance the taxpayer experience for those who are more
comfortable using a language other than English. We are, for example:
Pursuing efforts to translate website applications for these
taxpayers. We have already identified 17 of the most frequently used
applications for translation into additional languages.
Exploring opportunities to employ machine translation to help
us add more multilingual content. This is a significant challenge,
given how complex many tax terms are. We will need to carefully
evaluate automated translation tools, so we anticipate this effort will
be ongoing for several years.
update on modernization efforts
One of my highest priorities as Commissioner is ensuring the
agency's IT infrastructure remains on a path toward modernization.
Modernization is vital to all our core functions: successfully
delivering the annual tax filing season, ensuring the health of the
Nation's tax system and supporting the Federal Government's financial
strength. Today, we do not have the steady, consistent multiyear
funding to support these efforts the way we need to in order to deliver
appropriately for the American people.
We have long sought levels of funding that would enable necessary
IT investments. As noted above, absent consistent, timely, multiyear
funding, we have largely been a paper-based organization operating in a
digital environment. It is difficult to modernize a significant IT
portfolio to improve processing and delivery of important taxpayer
services when constantly funded through a CR.
Until recently, we were operating under a CR for FY 2022. This
year's Omnibus (Pub. L. 117-103) represents the largest funding
increase for the agency in 2 decades. But the agency's needs are much
deeper. Unfortunately, because our budget has fallen so significantly
in real terms over the course of the last decade, we have lost
foundational staff at the agency and need to rebuild. From a
modernization perspective, many of our priorities, including upgrading
the Individual Master File, one of the oldest IT systems in the Federal
Government, are multiyear efforts. This situation means we have not
been able to invest in modernizing and integrating our technological
infrastructure, which processes the more than 160 million returns we
anticipate receiving during the current filing season. The situation
also affects other important interests of tax administration.
Modernized technology would significantly improve the ability of the
IRS to respond to a crisis, pandemic-related or otherwise.
Since the initial release of our Modernization Plan in 2019, our
operations and infrastructure have changed significantly. We have
received only limited funding for our efforts: from FY 2019 through FY
2021, we received only 57 percent of the planned Business Systems
Modernization funding. But within the funding received, we have
delivered critical technology improvements and at the same time
responded to unprecedented demand due to the pandemic. We accelerated
the development of our digital services. We expanded customer callback
availability on our toll-free telephone lines. We created new web
applications such as ``Get My Payment'' to track EIPs. We also created
the Child Tax Credit Update Portal to help people manage advance CTC
payments, a first-of-its-kind endeavor. And in another milestone, we
also achieved the long-time goal of making it possible for individuals
to e-file their amended tax return.
Another example of modernization at work involved creating a tool
last year to help eliminate several steps in the process an IRS
employee is required to do to reconcile RRC discrepancies between the
two EIPs that were made in 2020 and what the taxpayer reported on their
tax return. Prior to the automation, an employee could reconcile about
100 returns per day. Once we completed the modernization improvement,
the employee can now process 600 per day. Not only does this
improvement speed up the ability for the taxpayer to receive their
refund, but it also avoids adding further to the backlog of inventory.
We continue to investigate new ways of doing business to optimize
the important work of IRS employees and improve the taxpayer
experience; for example, we hope to be able to scan in a paper form and
file it electronically later this summer, which will help us identify
the potential for this approach to be used for other forms in the
future. We are also looking into our ability to leverage an approach
that we call Scanning-as-a-Service, where we may be able to
significantly increase the availability of digital images for IRS
employees to use to perform their work without owning and maintaining
expensive equipment or paying to store the paper records. Both efforts
seem straightforward on the surface, and although we are cautiously
optimistic of their progress to date, it is important to note that they
are not a sure thing, and a significant amount of work remains to
confirm the viability of these pilots, as well as their ability to
scale to other use cases.
In addition to the above, we continue taking steps to safeguard
taxpayer data while modernizing platforms to improve taxpayers'
experiences. Investments in cybersecurity are essential. In 2017, IRS
was experiencing just over 1 million cyber-
attacks per day. Today, we sustain more than 1.5 billion attacks each
year. While IRS network defenses mitigate threats and keep our core tax
processing systems secure, we must continue to advance our cyber
capabilities, so we stay one step ahead of the bad actors who are
attacking IRS systems.
IRS Online Account
An important focus of our efforts has been the development of IRS
Online Account, which allows taxpayers to interact with us online and
perform various types of transactions in a secure environment. For
example, they can view their payment history, make a payment online or
request previous years' tax information. Since the initial launch of
IRS Online Account in 2016, we helped taxpayers securely access the
information and services they need, with more than 23 million sessions
and 8.37 million new users in FY 2021. We are continually working to
expand the transactions taxpayers can conduct through the online
account.
In July of last year, we launched a new online feature that allows
individual taxpayers to authorize their tax practitioner to represent
them before the IRS with a Power of Attorney (POA), and to view their
tax accounts with a Tax Information Authorization (TIA). Tax
professionals can go to the Tax Pro Account on IRS.gov to digitally
initiate POAs and TIAs. Over time, we will continue building
functionality so that other transactions involving tax professionals
can be completed online in a secure digital environment.
As we expand our digital options, security is always an important
consideration. For that reason, in February we announced steps to
change the way taxpayers authenticate their identities when signing on
to their online accounts. Specifically, we began transitioning away
from using a third-party service for facial recognition. The IRS is
working closely with partners across government to roll out Login.Gov
as an authentication tool for us. The General Services Administration
is currently working with the IRS to achieve the security standards and
scale required of Login.Gov, with the goal of moving toward introducing
this option later this year.
efforts to improve tax compliance
The IRS remains committed to doing everything we can, with our
limited resources, to track down those who willfully refuse to fulfill
their tax obligations or who commit tax fraud. We want to maintain a
strong, visible, robust tax enforcement presence to appropriately
support taxpayers who comply voluntarily. When taxpayers file their
returns, they should feel confident others are doing the right thing
too.
Our efforts to ensure compliance with the tax laws cover a broad
range of groups--individuals, small businesses, tax-exempt
organizations and large entities. In our challenging resource
environment, large entities are of particular concern because this
group includes very sophisticated taxpayers--major U.S. corporations,
multinational companies and complex multitiered partnerships--all of
which require us to have highly trained, highly skilled enforcement
personnel with special accounting and tax law skills, who can
understand the issues raised by these returns, root out instances of
noncompliance and litigate issues where necessary.
We will continue emphasizing a number of special areas in our
enforcement activities. This strategy includes keeping a focus on high-
income taxpayers engaged in offshore noncompliance, failure to file,
unreported and improperly reported virtual currency transactions and
abusive tax shelters, such as syndicated conservation easements and
micro-captive insurance shelters, as well as monetized installment
sales and Malta pension abuses.
In this challenging environment, the IRS continues working to
improve coordination of enforcement activities across the agency. In
fact, the IRS's Office of Fraud Enforcement (OFE), which we created in
March 2020, is actively encouraging and ensuring this coordination
across the IRS, promoting compliance, strengthening the IRS's response
to fraud and working to mitigate emerging threats. The Office of
Promoter Investigations (OPI), created last year, is helping us better
identify issues that involve abusive tax shelters as well as
individuals promoting abusive tax transactions.
It is vital that we improve our ability to identify and deter
promoters, and that we do so more quickly--before they are able to
widely market their transactions, as we have seen with syndicated
conservation easements and micro-captive insurance. We are seeing many
aggressive transactions being promoted on social media and the
Internet, and we continually work to identify and evaluate potentially
abusive trends and transactions to determine whether they need further
enforcement actions. I have challenged OPI to lead our efforts against
not only those who promote abusive tax avoidance transactions we know
about, but to find the transactions that are being concocted today, and
to coordinate our efforts to stop those promoters quickly and
efficiently.
Recent Accomplishments
We have made progress in a number of enforcement areas. For
example, over the past 2 years, we have shifted significant examination
resources and technology to increase our focus on high-income and high-
wealth taxpayers. As a result, examination coverage of the taxpayers in
the highest income category (taxpayers with over $10 million of total
positive income) increased to over 8 percent coverage for Tax Year (TY)
2018, the most recent year for which complete statistics are available.
This level is the highest coverage rate of this growing population
since TY 2014, and we expect the TY 2019 numbers will show this level
of coverage continued.
Substantially all experienced examiners--those who are the most
highly trained with substantial accounting and tax law skills--are
almost entirely focused on tax returns that include complex issues,
such as high-income taxpayers, pass-through entities, multinational
taxpayers involving international tax issues, large pension plans,
private foundations and the most egregious situations. We also continue
to focus on employment tax cases where employers have failed to pay
over taxes withheld from employees or have failed to file their
employment tax returns.
An IRS initiative announced in 2020 involves improving tax
compliance by increasing visits to those generally with incomes above
$100,000 who failed to file tax returns. These Revenue Officer
Compliance Sweeps (ROCS) focus on the most egregious non-filers. A
partnership between our Field Collection operations, the OFE and our
Criminal Investigation (CI) division also worked to identify common
attributes of successful fraud referrals resulting in recommendations
for criminal investigation for non-filers.
Another example of our accomplishments involves the development of
a comprehensive, coordinated enforcement strategy to address abusive
syndicated conservation easement transactions, and we have worked
closely with the U.S. Department of Justice to shut down the promotion
of them. Subsequently, the U.S. Tax Court held in the government's
favor in a number of conservation easement cases, supporting the IRS's
position on the abusive nature of the underlying deductions in these
cases. While continuing to investigate these transactions, the IRS has
also made settlement offers to certain taxpayers with docketed cases at
the Tax Court involving this type of transaction.
Our efforts have also borne fruit in another important area--
employment tax fraud. Noncompliance in this area means employers cheat
the system and their employees without consequence. In so doing, they
gain an unfair advantage over their honest competitors. We continue to
work with the Justice Department's Tax Division to identify
opportunities to better address noncompliance. These opportunities
include using data analytics to identify egregious noncompliant
employers. To cite one instance, we used our Innovation Lab's Data
Analytics Program to identify thousands of taxpayers who reported wages
on their individual income tax returns where the employer who paid
those wages did not file their W-2 forms with the Social Security
Administration and neither filed employment tax returns nor remitted
taxes withheld from their employees. Seriously noncompliant employers
were further investigated by the IRS examination, collection and CI
organizations. This agency-wide commitment ensures consistent treatment
of taxpayers and fair application of the tax law.
The IRS's enforcement efforts have extended to preserving COVID-
related financial relief for those legitimately in need of financial
support during this crisis. For example, the IRS has been working
diligently to thwart scams related to COVID-19 by alerting taxpayers
and tax professionals to these scams--especially calls and email
phishing attempts tied to the EIPs. The IRS and our partners throughout
the country have been publicizing these scams. Another example involves
the OFE's efforts to prevent ineligible claimants from obtaining $1.2
billion in COVID-related employer credits. The credits were intended to
help employers retain employees who would otherwise be unable to work
during the pandemic, but bad actors saw an opportunity to exploit the
program for their own financial gain. Working collaboratively with
teams of seasoned enforcement employees who identified the questionable
claims, OFE investigated the suspect claims and either administratively
disallowed the claims and/or referred cases for further investigation.
In noting accomplishments on enforcement, I continue to be
extremely proud of the investigative work done by CI. To take just one
recent example, CI's Cyber Crimes Unit played a key role in the largest
cryptocurrency seizure ever recorded for the Federal Government, valued
at more than $3.6 billion. In February 2022, the Justice Department
announced the arrest of two individuals in connection with an alleged
conspiracy to launder cryptocurrency stolen during a 2016 hack of
Bitfinex, a virtual currency exchange. IRS-CI Cyber Crimes Unit special
agents were critical in unraveling a sophisticated laundering
technique, enabling them to trace, access and seize the stolen funds.
As well as being the largest cryptocurrency seizure, this was also the
largest single financial seizure recorded by the Federal Government.
In regard to recent events, CI is prepared to support the U.S.
Government's efforts to impose sanctions on Russia. CI has a track
record of successfully rooting out and stopping illegal kleptocracy
money flowing into or through the U.S. CI's special agents expertly
target those who launder money, including active investigations
involving Russian oligarchs and politicians, as well as those who
facilitate the illicit movement of money on behalf of sanctioned
individuals or organizations. Agents on the Global Illicit Financial
Team and throughout CI are not only experts in tracing assets and
understanding the complex global financial world; they also work
seamlessly with our domestic and global law enforcement partners to
ensure the integrity of the U.S. financial system on behalf of U.S.
taxpayers.
Resource Challenges
Despite the progress we have made, our ability to enforce the tax
laws against noncompliant taxpayers with complex returns continues to
be hampered by a lack of resources. We can no longer audit a
respectable percentage of large corporations, and we are often limited
in the issues reviewed among those we do audit. These corporations can
afford to spend large amounts on legal counsel, drag out proceedings
and bury the government in paper. We are, quite simply, ``outgunned''
in our efforts to assure a high degree of compliance for these
taxpayers. It is unacceptable for the Nation's tax administrator to be
outgunned when appropriately challenging the return positions of some
of the most sophisticated taxpayers. We must receive the resources to
hire and train more specialists across a wide range of complex areas to
assist with audits of entities (taxable, pass-through, and tax-exempt)
and individuals (financial products, engineering, digital assets,
cross-border activities, estate and gift planning, family offices,
foundations, and many others).
A lack of resources also threatens to reduce the effectiveness of
our criminal investigative work. Much like other operating divisions in
the IRS, CI is close to its lowest staffing level in the past 30 years.
With fewer agents, we have fewer cases and fewer successful
convictions. A strong, robust criminal tax enforcement presence
provides significant deterrence to those willing to evade their lawful
obligations to our country. Without adequate resources, we risk sending
a much less powerful message to would-be and active tax evaders.
Because of our current funding and staffing limitations across our
enforcement functions, we are forced to make difficult decisions
regarding priorities, the types of enforcement actions we employ, and
the service we offer. Limited IT resources preclude us from building
adequate solutions for efficiently matching or reconciling data from
multiple sources. As a result, we are often left with manual processes
to analyze reporting information we receive. Such is the case with data
from the Foreign Account Tax Compliance Act (FATCA). Congress enacted
FATCA in 2010, but we have yet to be appropriated any significant
funding for its implementation. This situation is compounded by the
fact that when we do detect potential noncompliance or fraudulent
behavior through manually generated FATCA reports, we seldom have
sufficient funding to pursue the information and ensure proper
compliance. We have an acute need for additional personnel with
specialized training to follow cross-
border money flows. They will help ensure tax compliance by improving
our capacity to detect unreported accounts and income generated by
those accounts, as well as the sources of assets in offshore accounts.
In other programs, we have information but are unable to select all
high-risk cases identified due to resource and funding constraints. In
these situations, to the detriment of tax administration, we must make
difficult enforcement decisions based on resources, return on
investment, coverage of all types of taxpayers, and other high priority
work. For example, our information document reporting programs are
identifying potential discrepancies with taxpayers who have received
Form 1099-K, Payment Card and Third-Party Network Transactions
(including potential non-filers), but not all of these have been
addressed due to resource constraints.
As we make enforcement decisions, we try to balance resource
limitations across a number of factors, including evaluating overall
compliance effect and focusing resources into special projects. For
example, we currently have fewer than 2,000 revenue officers, the
lowest number of field collection personnel since the 1970s, and we
have over 100,000 collection cases in active inventory. In addition to
our active inventory, we have over 1.5 million cases (more than 500,000
of which are considered high priority) awaiting assignment to these
same 2,000 revenue officers. We have classified roughly 85 percent of
those cases as high priority, many of which involve delinquent business
employment taxes.
In discussing our resource situation, another major concern is our
ability to investigate and take enforcement actions against abusive
transactions. While we are doing our best with the resources available
to us, it is important to point out that the lack of funds and staffing
makes it increasingly difficult for us to keep up with--much less stay
ahead of--those who promote abusive transactions and the tax evaders
who engage in them. Shelter promoters continue to innovate and invent
new ways of gaming the system. We continue working to find them and
identify their methods, but in order to ensure we can take meaningful
enforcement actions against them, it is critical that we receive
adequate resources.
It is becoming easier for tax shelter promoters to pitch their
wares to the wealthy, and we are concerned such pitches are taking
hold. While we are doing what we can, we need more resources if we hope
to keep these activities in check and continue our efforts to inform
taxpayers about the problems with these transactions so they will be
dissuaded from participating in them. These activities shift the
required funding of our country onto the backs of wage earners.
Everyone should pay their fair share, and no one should be able to
inappropriately avoid their obligations.
looking to the future: irs taxpayer experience office
Along with our day-to-day efforts to help taxpayers and enforce the
tax laws, our agency is also committed to delivering on the promise of
a new IRS. We are continuing the work begun in 2019 with passage of the
Taxpayer First Act (TFA) to develop an innovative approach to the
future of tax administration that will better serve everyone, including
those in underserved communities. The IRS is using the implementation
of the TFA to make significant improvements in the way we serve
taxpayers, enforce the tax laws in a fair and impartial manner, and
ensure our workforce collaborates and is well-trained.
A key driver of these efforts is our Taxpayer Experience Office,
launched last year to unify and expand the work being done across the
agency to serve taxpayers. The Taxpayer Experience Office sets the
strategic direction for improving the taxpayer experience and
identifies opportunities to make continuous improvements in real time
for taxpayers and the tax professional community.
The Taxpayer Experience Office will identify changing taxpayer
expectations and industry trends, focus on customer service best
practices, and promote a consistent voice and experience across all
taxpayer segments by developing agency-wide taxpayer experience
guidelines and expectations. The office will be adding staff in the
coming months to help support the effort.
Some of the areas of improvement in the near term include expanding
customer callback, expanded payment options, secure two-way messaging
and more services for multilingual customers. These activities build on
recent improvements such as digital tools to support EIPs and advance
CTC payments, online chat, and the online tax professional account.
the president's fy 2023 budget
The President's FY 2023 budget proposal for the IRS provides $14.1
billion, an increase of $2.2 billion, or 18 percent more than the FY
2022 Annualized Continuing Resolution level of $11.9 billion, to
administer the Nation's tax system fairly, collect more than $4
trillion in gross taxes to fund the government, and strengthen tax
compliance. Because the administration drafted the FY 2023 budget
submission ahead of the enactment of the FY 2022 Omnibus, the
submission was not able to reflect the final enacted FY 2022 funding
levels. The budget includes initiatives to improve the taxpayer
experience that should ultimately lead to increased voluntary tax
compliance. The request also aims to ensure we stay current with the
paper inventory and improve telephone and in-person service;
facilitates better oversight of high-income and corporate tax returns;
and accelerates the development of digital tools to enable smarter
communication with taxpayers. In addition, the administration continues
to support a multiyear investment in IRS enforcement to increase tax
compliance. An appropriate level of funding for the IRS will allow the
agency to continue enhancing the taxpayer experience, narrowing the tax
gap to ensure equitable administration of the tax code, protecting IRS
systems and taxpayer data, and modernizing our information technology
systems.
Specific Funding Areas
The FY 2023 budget requests a total program increase of $1.31
billion, including the following:
Putting Taxpayers First: $320.2 million to continue
implementing the Taxpayer First Act (TFA), which requires the IRS to
put in place a Taxpayer Experience Strategy to improve the taxpayer
experience with the IRS. The IRS's Taxpayer Experience Office, in
partnership with key internal and external stakeholders and subject
matter experts, identified certain areas of focus to inform development
and implementation. The FY 2023 request focuses on: continuing to
protect taxpayer data, increasing outreach and taxpayer education
efforts, developing strategies to reach underserved communities, and
providing human resources support for implementing the TFA.
Enhancing Taxpayer Service: $389.1 million for increasing the
telephone Level of Service (LOS) and enhancing information technologies
to improve taxpayer services. This investment will build on the IRS's
efforts to improve telephone services for the underserved, such as
those who are deaf or hard of hearing, limited English proficiency
communities, and victims of identity theft. This investment provides a
projected LOS of 85 percent in FY 2023 assuming phone demand returns to
pre-pandemic levels and the IRS can provide in-person services at pre-
pandemic levels. The increase in funding also will improve the ways
taxpayers interact with the IRS by enhancing and expanding the range of
modern, digital tools provided by the IRS to deliver a service
experience comparable to that available in the private sector. By
empowering taxpayers to address certain needs without requiring live
assistance, development of these tools is essential to the IRS's long-
term success in satisfying taxpayer expectations and meeting the
ongoing growth in demand for assistance.
Increasing Compliance to Ensure Fairness: $469.3 million to
allow the IRS to continue improving upon its compliance strategies and
enforcement activities--including examination, collection, and
investigation--to ensure fairness in the tax system and narrow the tax
gap. We continue to develop innovative approaches to understanding,
detecting, and resolving potential noncompliance, which helps to
maintain taxpayer confidence in the tax system. It is important to note
the IRS has an overall enforcement return on investment (ROI) of about
$5 for every $1 invested compared to the IRS appropriated budget, not
including significant deterrence effects.
Maintaining Critical IT Operations: $39.5 million to sustain
these operations to maintain optimum network performance and
functionality. The IRS continues to transform its technological
landscape, and it has made progress on its modernization journey to
provide taxpayers with a seamless customer experience, while empowering
employees with the tools and systems needed to provide top quality
services and enforce the tax law. These successes have increased the
need to sustain critical IT operations to maintain optimum network
performance and functionality. The IRS continues to deploy and
incorporate new, modernized tools for taxpayers, tax professionals and
employees. Taxpayer service improvements (additional digital services,
up-to-the-minute account information, etc.), enterprise efficiency
advances (automation, artificial intelligence, machine learning, etc.)
and new employee tools (case management, collaboration, learning
platforms, etc.) all require additional bandwidth to sustain a high
volume of users processing digitalized capabilities.
Fostering Economic Development in Underserved Communities:
$10.2 million to allow the IRS to cultivate new opportunities for
adults and students in underserved communities. One focus of our
efforts is the Mississippi delta region, which currently has the
highest rate of poverty in the United States, excluding the U.S.
territories. As an initial step, we are opening a new Automated
Collection System (ACS) call site in Clarksdale, MS, and have announced
plans to hire contact representatives to work at the call site.
Initiatives in other regions are already underway, including a
significant staffing increase for our ACS operation in Puerto Rico. We
have increased staff at this site from approximately 79 employees in FY
2020 to more than 400 as of February 2022. We plan to add another ACS
call site in Puerto Rico during 2022 that will accommodate an
additional 400 employees. The expansion offers employment to Puerto
Rico residents and allows for a significant increase in bilingual ACS
employees to better serve taxpayers with limited English proficiency.
Structural Changes to IRS Appropriations to Improve Mission Delivery
The President's budget also proposes a change to the appropriations
language that would allow Taxpayer Services and Enforcement funding to
be used for certain associated support costs that are currently
reserved for Operations Support funding. Currently, Taxpayer Services
and Enforcement funding only pays for an employee's labor cost, not the
cost to hire the employee nor the IT equipment and space needed to make
them productive. There are significant benefits to this change: By
including support costs, future IRS budgets would reflect the full cost
of Taxpayer Services and Enforcement. The changes would also prompt IRS
business units to be more efficient with their support costs because
they would stand to directly benefit from savings.
In addition to the IRS's FY 2023 budget request, stable, multiyear
funding for the IRS is necessary to facilitate the types of longer-term
investments that the agency needs to make to adequately serve the
American people and enforce the tax laws.
legislative proposals in the president's fy 2023 budget
Along with the funding requested in the President's FY 2023 budget
request, we are also asking for Congress's help legislatively in
several important areas that would improve tax administration,
including the following:
Information reporting by financial institutions and digital
asset brokers. Over time, the U.S. has established a broad network of
information exchange relationships with other jurisdictions based on
established international standards. The information obtained through
those relationships has been central to recent successful IRS
enforcement efforts against offshore tax evasion. The ability to
exchange information reciprocally is particularly important in
connection with the implementation of the Foreign Account Tax
Compliance Act (FATCA). Currently, however, the U.S. provides less
information to foreign governments than we receive from them. The
proposal would expand reporting by financial institutions and digital
asset brokers in a number of ways--for example, by requiring financial
institutions to report the account balance for all financial accounts
maintained at a U.S. office and held by foreign persons. These new
reporting requirements would enable the IRS to provide equivalent
levels of information to cooperative foreign governments in appropriate
circumstances to support their efforts to address tax evasion by their
residents. The proposal would be effective for returns to be filed
after December 31, 2023.
Require reporting by certain taxpayers on foreign digital
asset accounts. Section 6038D(b) of the Internal Revenue Code contains
an annual reporting requirement for individuals in regard to two
categories of foreign financial assets, but there is no reporting
requirement under this section for digital assets. Against this
backdrop, tax compliance and enforcement with respect to digital assets
is a rapidly growing problem. The global nature of the digital assets
market offers opportunities for U.S. taxpayers to conceal assets and
taxable income by using offshore digital asset exchanges and wallet
providers. The proposal would amend section 6038D(b) to require
reporting with respect to a new third category of asset: that is, any
account that holds digital assets maintained by a foreign digital asset
exchange or other foreign digital asset service provider. Reporting
would be required only for taxpayers that hold an aggregate value of
all three categories of assets in excess of $50,000. The proposal would
be effective for returns required to be filed after December 31, 2022.
Extend the statute of limitations for certain tax assessments.
Section 6501 of the Internal Revenue Code generally requires the IRS to
assess a tax within 3 years after the filing of a return. But for
complex audits in the largest cases, critical issues may not be
identified until late in the process of an examination, and in many
cases these issues cannot be pursued further due to time and resource
constraints. The proposal would amend section 6501 to extend the 3-year
statute of limitations to 6 years if a taxpayer omits from gross income
more than $100 million on a return. This change would give the IRS
enhanced agility and flexibility in evaluating and staffing its case
inventory and appropriately allocating its limited enforcement
resources.
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.
Expand and increase penalties for return preparation and e-
filing. Inappropriate behavior by paid tax return preparers harms
taxpayers through the filing of inaccurate returns, erroneous refunds
and credits and personal tax return noncompliance. Tax return preparer
misconduct continues, in part, because the amounts of the penalties
under current law do not adequately promote voluntary compliance. The
proposal would increase the amount of the tax penalties that apply to
paid tax return preparers for willful, reckless or unreasonable
understatements, as well as for forms of noncompliance that do not
involve an understatement of tax.
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.
conclusion
Chairman Wyden, Ranking Member Crapo, and members of the committee,
thank you again for the opportunity to update you on the filing season
and the President's FY 2023 budget proposal for the IRS.
We continue to balance multiple unprecedented demands, including
continuing the filing season and work on important new tax provisions.
We remain focused on numerous taxpayer-related issues, and we have
pursued innovative ideas and processes not previously deployed by the
IRS in an effort to make improvements to the current inventory and
provide meaningful taxpayer services.
The reality at the IRS is that we know we need to do better; we're
committed to doing better, and we are trending in a positive direction.
We appreciate your patience and understanding and the many expressions
of gratitude we have received for the efforts of our employees, who
have consistently stepped forward despite their own health and safety
concerns. Our employees are doing everything they can. But we need
Congress to help us by providing adequate resources and a sustained,
multiyear investment in the agency.
I continue to be extremely proud of our workforce and their
dedication to helping American taxpayers fulfill their tax
responsibilities and resolve tax issues.
______
Questions Submitted for the Record to Hon. Charles P. Rettig
Questions Submitted by Hon. Ron Wyden
Question. The IRS Criminal Investigation Division (CI) plays an
important role in enforcing sanctions on Russia and tracing the
financial holdings of Russian oligarchs. It's been made clear to me
that CI needs more resources to tackle the sophisticated networks of
opaque shell companies and nominees to identify Russian assets. Yet of
all of the requests the administration made for the recently passed
Ukraine supplemental funding package, the request for additional
resources for CI to apply their expertise to Russian oligarchs was the
only one rejected by our Republican colleagues.
Do you believe CI has all of the resources it needs to assist with
investigations and enforce sanctions against Russian oligarchs?
If CI does not get the resources it needs in a timely fashion, do
you believe that will give the oligarchs time to move their assets out
of the reach of the United States government?
Answer. IRS Criminal Investigation's (CI) current investigative
priorities cover three broad areas: traditional/core mission tax
crimes, tax-related and other financial crimes, and narcotics related
financial crimes. U.S. law enforcement agencies are encountering
complex transnational organized crime conspiracies that involve a
hybrid of criminal elements, including international money laundering,
illicit use of virtual currency, cyber hacking, threat financing,
prohibited technologies, and exploiting emerging payment systems to
avoid detection and prosecution
On March 2, 2022, Attorney General Merrick B. Garland announced the
launch of Task Force KleptoCapture, an interagency law enforcement task
force dedicated to enforcing the sanctions, export restrictions, and
economic countermeasures. The task force is designed to isolate Russia
from global markets and impose serious costs for this unjustified act
of war, by targeting the crimes of Russian officials, government-
aligned elites, and those who aid or conceal their unlawful conduct. CI
is an integral member of this task force and plays a crucial role
assisting Treasury bureaus and other government entities with sanctions
enforcement.
CI is also currently working with OFAC and the Financial Crimes
Enforcement Network to identify, develop, and add new individuals and
entities to the Specially Designated Nationals and Blocked Persons List
(SDN List) as part of Treasury's Russian Elites, Proxies, and Oligarchs
Task Force, which leads the Treasury effort to block or freeze
sanctioned Russians' assets, freeze or seize sanctioned Russians' high-
value goods, and heavily restrict sanctioned Russians' access to the
international financial system. CI has analyzed cryptocurrency
addresses associated with geographical regions of Joint Chiefs of
Global Tax Enforcement (J5) by focusing on international enablers using
a map which displays user activity and movement. This advanced
capability can identify key users of cryptocurrencies (such as
Oligarchs) and track their movement over time.
CI will continue to participate in the sanction efforts with our
limited resources. This requires redeploying special agents from other
enforcement efforts. Should additional funding become available, CI
would use the funding for the following needs to continue to assist the
government's collective sanctions enforcement efforts, while
maintaining adequate coverage of the other mission focuses.
Hiring additional special agents, analysts, and
investigative staff.
Direct investigative costs: travel, transcription and
translation services, investigative data analytics, data
management, enforcement costs, undercover operations, etc.
Investigative technology: data storage and management
systems, servers, information technology infrastructure,
additional commercial licenses, and contractor support.
Secure facility: secure storage and communication
capabilities to handle sensitive and classified information.
Additional investigative support at the above-mentioned
taskforces would increase CI's ability to gather, analyze, and
act on available intelligence related to sanctions enforcement,
and other investigations targeting transnational criminal
organizations.
These additional tools and software are instrumental for CI to
identify and seize oligarchs' assets before they are out of the reach
of the United States Government and identify the enablers and
facilitators of illicit money on behalf of sanctioned individuals and
entities. These much-needed tools and resources would help CI continue
to make a significant impact in the area without diverting resources
from other enforcement areas.
Question. There's nothing worse than calling the IRS, navigating
the phone tree, and then sitting on hold. The IRS has started using
customer callback technology, which allows callers to request a call
back from the IRS when the next employee is available. This makes a lot
of sense, but it is only available on some of the IRS's phone lines.
When will the IRS start using customer callback on all of its
lines?
Answer. The IRS first offered callback services to approximately
300,000 callers in Fiscal Year 2019 as a pilot on one toll-free
application.\1\ In Fiscal Year 2020, the IRS expanded customer callback
to five toll-free applications and offered callback services to more
than 1 million callers. In Fiscal Year 2021, the IRS further expanded
customer callback to 16 toll-free applications, offering services to
approximately 7.3 million callers.
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\1\ A single phone line can include multiple toll-free applications
depending on the nature of the inquiry. An application is a systemic
way of grouping calls by a similar topic, for routing and reporting
purposes at a more granular level. Customer Callback services are being
deployed at the application level rather than the product line level.
In January 2022, the IRS further expanded customer callback to 31
toll-free applications and through April 15, 2022, offered services to
approximately 5.9 million callers and to 70 percent of viable toll-free
live service demand. Cumulatively, the IRS has offered callback
services in English and Spanish to nearly 14.8 million callers covering
toll-free telephone services in the Wage and Investment, Small
Business/Self-Employed, National Taxpayer Advocate, and Tax Exempt and
---------------------------------------------------------------------------
Government Entities business operating divisions.
In April 2022, the IRS began transitioning to a long-term
Enterprise Solution with a target launch in December 2022 on our
baseline of 31 toll-free applications. Further expansion is planned in
Fiscal Year 2023 and Fiscal Year 2024 to optimize the use of the
technology to improve the taxpayer experience. The IRS has a long-term
goal of offering callback services to 95 percent of viable toll-free
live service demand by Fiscal Year 2024.
Question. How would the President's proposed budget accelerate
these timelines?
Answer. The proposed budget request would improve the taxpayer
experience, ensure we stay current with improved telephone service, and
accelerate development of digital tools to enable smarter communication
with taxpayers. An appropriate level of funding for the IRS will allow
the agency to continue enhancing the taxpayer experience.
Question. I understand that part of the backlog is due to the fact
that IRS employees have to transcribe paper returns manually. The IRS
does not use automated scanning technology like many states. For
example, if you fill out your Oregon State tax return on your computer
and then mail it, the return will print with a bar code that the
Department of Revenue can scan like a box of cereal at the grocery
store. Nobody has to transcribe anything. Oregon has been doing this
since 2006.
Another technology called optical character recognition (OCR)
transcribes returns, even if you fill them out with a pencil or the bar
code is smudged. While this technology makes some mistakes, humans make
even more.
I understand the IRS plans to update its tax forms with 2D bar
codes over the next 5 years, is negotiating with tax software companies
to include bar codes on forms printed using software, and is running
pilots to test OCR.
The IRS can't go through another filing season with the same
backlogs and delays that we have seen over the last 2 years. When will
the IRS start using scanning technology to transcribe individual income
tax returns?
Answer. The IRS has been using various technologies to scan tax
returns for more than 35 years, with an emphasis on optical character
recognition (OCR) scanning information tax returns such as withholding
document processing. The IRS implemented the Service Center
Recognition/Image Processing System (SCRIPS) for individual tax returns
before 2000. We used SCRIPS Forms 1040-EZ, various business tax returns
such as Forms 940, Employer's Annual Federal Unemployment (FUTA) Tax
Return and Form 941, Employer's Quarterly Federal Tax Return.
Scanning Forms 1040-EZ through SCRIPS was discontinued when the
volumes of that form type decreased, and the form changed from a one-
page document to a front and back 2-page document. In more recent
times, the Form 1040-EZ also became obsolete.
The IRS has several ongoing pilot projects to improve the
efficiency and accuracy of processing paper tax returns with, optical
character recognition (OCR) or 2D barcoding. These projects are:
V-Coded Return Pilot. A V-coded return is when the taxpayer
used software to prepare the return, printed the return and
mailed it to the IRS. Using a vendor, this pilot was designed
to enable remote scanning and validation of Forms 1040 that are
V-coded to be submitted using Modernized e-File (MeF). The goal
is to accelerate this pilot so it will be scanning tax year
2022 Forms 1040 V-coded and Forms 940 and 941 in filing season
2023.
OCR Scanning Service Pilot. This pilot used a third-party
contractor's OCR capability to scan Form 940 business returns.
The contractor will scan and submit the returns using MeF.
2D Barcode Pilot. This pilot implemented 2D bar codes to
digitally intake data from Forms 8918 (Material Advisor
Disclosure Statement) and Forms 8886 (Reportable Transaction
Disclosure Statement). In December 2021 IRS released Form 8918
with 2D bar codes. Form 8886 was to follow with production of
the 2D bar code form in March 2022. The IRS has received
approximately 1,000 Forms 8918 to date, of which 253 were on
the old paper form and 837 on the new paper forms with 2D bar
codes. However, only 78 percent of the 2D bar-coded paper forms
received could be fully read into IRS systems, requiring close
scrutiny of the data. We are working to determine actions to
reduce the error rate. Before considering using 2D bar codes
for Form 1040, we need to engage with the software industry to
update industry standards to align them with how we intake and
process data. The industry would have to agree to provide such
code in forms printed after using their software to prepare the
tax return. We will start that engagement, develop a plan on
how it would work and report back to you with the results.
In addition to pursuing scanning, we also plan to make more forms
available to be e-filed. We are also reviewing administrative policies
to determine whether we can make changes so more people are eligible to
e-file.
We believe a multi-faceted approach is necessary to address the
paper inventory the IRS receives yearly.
We caution that the expected benefit from bar codes and OCR would
diminish if Congress modifies provisions of the Internal Revenue Code s
shortly before the filing season or, as happened recently, during the
filing season, increasing the likelihood of errors. For example, IRS
and software vendors' ability to respond and produce accurate forms may
preclude timely inclusion of bar codes or QR codes, resulting in more
submissions with unreliable codes.
Question. How would the President's budget accelerate this
timeline?
Answer. The proposed budget request would improve the taxpayer
experience by ensuring we stay current with improved telephone service
and accelerate development of digital tools to enable smarter
communication with taxpayers. An appropriate level of funding will
allow the IRS to continue enhancing the taxpayer experience and
modernizing our information technology.
Question. In July, the IRS began to pay out the Child Tax Credit
monthly for the first time. The American Rescue Plan made an historic
expansion to the credit, boosting it to $3,000 per child (and $3,600
per child under age 6) and making the full credit payable at very low
incomes. Families received monthly checks of up to $300 per child. Up
to half of the credit was paid in advance. Now they need to reconcile
those amounts on their returns.
What has the administration been doing to help make sure taxpayers
can claim the other half of the child tax credit?
Answer. To assist taxpayers with calculating the Child Tax Credit,
IRS issued Letter 6419, 2021 Total Advance Child Tax Credit (CTC)
Payments, to more than 57 million taxpayers who received advance Child
Tax Credit payments. The letter provided a summary of the total amount
the taxpayer received. The letter instructed taxpayers to use this
information to complete their tax return. For taxpayers who misplaced
or never received the letter, the IRS added the information to the
IRS's Online Account. The IRS has performed broad outreach advising
taxpayers about reconciling the Child Tax Credit advance payments and
where to find the amounts issued to them. The IRS also has Frequently
Asked Questions, including information about repayment protection,
available on IRS.gov.\2\ These FAQs were also issued as a news
release.\3\
---------------------------------------------------------------------------
\2\ https://www.irs.gov/credits-deductions/filing-season-2021-
child-tax-credit-frequently-asked-questions.
\3\ https://www.irs.gov/newsroom/2021-child-tax-credit-and-advance-
child-tax-credit-payments-resources-and-guidance.
The IRS shared the Advance Child Tax Credit outreach materials with
Volunteer Income Tax Assistance (VITA)/Tax Counseling for the Elderly
(TCE) partners. VITA/TCE partners shared this information directly with
their clients, posted information on their web pages and social media.
Additionally, the IRS incorporated this information in VITA/TCE
training materials for Filing Season 2022 to assist volunteers with
---------------------------------------------------------------------------
preparing the returns.
In 2021, to promote awareness of Advanced Child Tax Credit (AdvCTC)
and assist taxpayers who were not automatically enrolled to receive
monthly payments, we hosted AdvCTC events in Taxpayer Assistance Center
(TACs).
In 2022, to reach working, lower income taxpayers, those less able
to take off from work during the week, we provided expanded
opportunities for face-to-face service beyond normal TAC office hours,
with an emphasis on refundable credits. We targeted approximately 90
TACs nationwide to provide expanded services on the second Saturday of
each month from February through May. During the February, March,
April, and May events, more than 700 IRS employees volunteered to
assist nearly 15,000 taxpayers.
Question. You testified last year that the IRS is ``outgunned''
when it comes to auditing large partnerships and the wealthy
individuals that own them. This is especially concerning given that
around 70 percent of all partnership income accrues to the top 1
percent of households. In fact, an individual earning less than $25,000
a year was 12 times as likely to be audited as a partnership in 2020.
And to make matters worse, the Treasury Inspector General for Tax
Administration (TIGTA) found that 78 percent of the IRS's audits of
these large partnerships resulted in no change at all.
What changes has the IRS implemented over the past year and what
changes does it have planned to fix this glaring problem?
Answer. Several efforts are underway that are dedicated to
increasing and improving partnership examination coverage. For example,
we launched the Large Partnership Compliance program (LPC) at the end
of FY 2021 to support and increase our focus on identifying and
auditing high risk partnership issues. We've undertaken form
improvements to get better data and are updating our case selection
models. The IRS's increased focus on high-income individuals, and the
entities they control, is another compliance touch point that will
increase enforcement coverage of partnerships. Also, to support our
efforts to improve how we audit partnerships, we've recently completed
a partnership-focused hiring initiative that increased staff of the
subject matter experts and field agents who examine these returns. We
have just begun a second round of partnership-focused hiring.
With respect to TIGTA's audit, the high no change rate reported was
based on the early results of partnerships subject to the newly
implemented audit procedures under the Bipartisan Budget Act. They do
not include the results of closed examinations for the existing
partnership audit procedures under TEFRA or deficiency procedures. In
addition, we explained that, generally, the first cases to close each
tax year are no change cases. It can take several years to close
partnership returns where we are developing complex issues. Based on
prior experience, we anticipate that the final no change rate will be
lower.
______
Questions Submitted by Hon. Mike Crapo
Question. As you know, Congress recently made changes to the tax
code to provide or modify certain refundable credits, including the
recovery rebate credit (the so-called stimulus check) and the child tax
credit. Because these are advance credits, they must be reconciled on
the following year's tax return. The National Taxpayer Advocate and
others have testified that these reconciliations on 2021 tax returns
resulted in delays and other problems for millions of taxpayers.
Please describe how reconciliation of tax credits, including
advance-paying credits, has impacted taxpayers during the 2022 tax
filing season, including changes to refund amounts and whether it has
delayed refunds and the length of such delays.
Answer. To claim the Tax Year 2021 Child Tax Credit (CTC),
taxpayers must complete Schedule 8812, Credits for Qualifying Children
and Other Dependents. If the taxpayer doesn't correctly determine the
amount of CTC they are eligible to receive based on their 2021 tax
return, the return cannot be processed and is routed to our Error
Resolution System. Through the Error Resolution System processing, the
IRS will correct the amount the taxpayer is eligible to receive and
continue processing the return. A notice is sent to the taxpayer
explaining the change to the Child Tax Credit amount and why the change
was made.
For Filing Season 2022, the IRS implemented a new tool to
accelerate the resolution of e-filed returns that include errors such
as calculating the Child Tax Credit, Earned Income Credit, and the
Recovery Rebate Credit. The tool resolves these types of errors and
issues the notice to the taxpayer with minimal human intervention. This
has greatly reduced the amount of time it takes to process most returns
with these types of errors on e-filed returns. The automation allows us
to focus employee resources on paper inventories with the errors or e-
filed returns with more complex issues requiring manual review.
Question. Comparing individual tax returns for 2021 to 2020, has
there been an increase in the number of taxpayers who owe tax on their
returns, so-called ``balance due'' returns? If so, what are those
figures, including number of taxpayers as well as the dollar amount of
tax owed?
Answer. We do not have this information to share at this time.
Question. Some taxpayers may not be aware that they are required to
file a tax return this year in order to obtain the second half of the
child tax credit. Does the IRS have an estimate for the number of
taxpayers who received the Advance Child Tax Credit payments in 2020
but who have yet to file their 2021 tax returns?
Answer. While our data is not updated yet for tax year 2021, we
estimate approximately 16 million taxpayers have received advance
payments of the Child Tax Credit in 2021 but have yet to file their
2021 tax return.
Question. It has been almost a year since ProPublica announced it
was in the possession of a huge trove of private taxpayer information.
I understand TIGTA immediately commenced an investigation, and I
understand you cannot comment on that ongoing investigation.
However, the reality is that ProPublica continues to publish what
it claims is private taxpayer information. As the Commissioner of the
IRS, it is your responsibility, not TIGTA's, to ensure that all private
taxpayer information is secure.
As Commissioner, can you give any assurances to the American
taxpayers that any vulnerabilities that may have existed in the lead up
to the initial ProPublica publication have been addressed, or would you
say that, almost one year later, it is possible that taxpayer
information is just as vulnerable today as it was a year ago?
Answer. The IRS is committed to protecting taxpayer data and
continually works to enhance the security of taxpayer data through
continual investments in cybersecurity that ensure the IRS aligns with
Federal guidance and other directives. Due to the mutable nature of
technology and the challenging environment in the
government-wide threat landscape, the IRS leverages robust tools and
technologies to harden the network against unauthorized access. This
includes collection and review of application and platform security
audit trails, identity management, provisioning and deprovisioning for
just-in-time access and expanding coverage of data loss prevention.
Question. On February 7, 2022, the IRS stated it will ``transition
away from using a third-party service for facial recognition to help
authenticate people creating new online accounts [and] [t]he transition
will occur over the coming weeks. . . .'' As of April 2022, although it
is one of a few options, the IRS still uses third-party facial
recognition to authenticate new online accounts.
When will the IRS follow through with its statement to ``transition
away from using a third-party service for facial recognition to help
authenticate people creating new online accounts?''
Answer. On February 21, 2022, the IRS announced an alternative
option for taxpayers to choose a non-biometric option to authenticate
their identity. We no longer require facial recognition to establish an
online account; eliminating that requirement was the point of the
statement in February.
Question. The new alternative to the biometric extraction option,
has been reported as requiring taxpayers to follow a 17-step process to
verify their identity. Is there data available the new alternative is
not an overly burdensome to taxpayers? Is there data available on how
many people start, but then abandon the alternative to the biometric
approach?
Answer. The new alternative verification option is a 7-step
process. To utilize the live interview feature, taxpayers:
1. Navigate to the IRS application login page and select
``Create an account with ID.me.''
2. Select the Video Chat Agent option and then select
``Continue.''
3. Select ``Get Started'' and follow the prompts to: fill in
their personal information; confirm their Social Security
number; select identity documents for validation; select the
option to take a photo or upload an image of the identity
documents; and upload documents (front and back).
4. Once documents are uploaded, they are reviewed live by an
ID.me Video Chat Agent.
5. Taxpayers then receive an email from ID.me inviting them to
join a video call with an ID.me Video Chat Agent.
6. When prompted, taxpayers select ``Join Video Call to speak
with a Video Chat Agent.''
7. Taxpayers show the Video Chat Agent their documents, answer
a few questions, and complete the verification process.
For the period February 21, 2022, through December 31, 2022:
Of those who selected the alternative option and choose to
verify on a video call, 43.4 percent upload the required
identity documents and attempt to verify.
Of those who selected the alternative option and submitted
approved documents, 88.1 percent successfully verified on a
video call.
Those who are not successfully verified always have the
option to retry (e.g., reupload documents, upload different
documents, etc.).
Eight percent of those who choose the alternative option
abandon the alternative flow and ultimately verify via the
self-service option.
Question. The IRS's February 7, 2022 press release states it is
transitioning away from third-party facial recognition. Does this mean
the IRS might develop its own biometric extracting software?
Answer. No, the IRS is not developing biometric extracting
software.
The original proposal that lead to the biometric extraction
requirement included a provision where the mobile phone application
used to submit a selfie could be used to track taxpayers. In
particular: ``The use of mobile phones is required in order for the
applicant to complete the IAL2 identity proofing process. Mobile phones
are used as a piece of identity evidence themselves and to capture
additional identity evidence (e.g., photo of government issued
identification document). Geolocation can be gleaned from the Mobile
Network Operators (MNOs) in the event of an investigation into a
user.''\4\
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\4\ https://www.irs.gov/pub/irs-pia/id-me-pia.pdf.
Question. What is the IRS's current position on capturing
---------------------------------------------------------------------------
``additional identity evidence'' through a taxpayer's mobile phone?
Answer. We have investigated geolocation technology through various
vendors; however, the IRS does not have a current position or plans for
capturing this type of evidence.
Question. In FY 2021, the IRS received about 282 million telephone
calls. During the same period, robo-calling services emerged allegedly
using software to deluge the IRS phone lines in order for robo-call
customers to ``jump the line'' and minimize their hold times.
Of the 282 million telephone calls, how many were robo-calls?
Answer. The IRS does not have a technology to definitively detect
and/or deflect robo-calls. Until a technology solution is procured, the
only tool the IRS has to assess robo-dialers is historical telephone
data. Telephone data has its limitations. For instance, telephone data
may show a call was answered and lasted 60 seconds, but it won't know
whether the IRS customer service representative (CSR) interacted with a
human being or if the call was dead air (when no taxpayer paid to skip
the line, or no company representative was available at the time).
Furthermore, the technology companies used to contact the IRS make
a significant difference in our ability to detect and quantify their
calls. Some organizations use older technology to contact the IRS and
generally use one or two telephone numbers to reach us. These companies
have higher call volumes and are easier to detect; others use newer
technology which uses a variety of different telephone numbers to reach
us, making it much harder to detect and quantify.
The IRS is in pursuit of technologies to help detect, quantify, and
potentially block calls from robo-dialers in real-time. We anticipate
having a technology solution in Fiscal Year 2023.
Question. Are robo-calls clogging IRS phone lines?
Answer. These calls can impact our service delivery if no one
purchased the space in line or there's no company representative
available to handle the call when we answer. Customer Service
Representatives (CSRs) lose valuable time asking whether someone is on
the line and the call is a missed opportunity for other taxpayers
attempting to reach the IRS. The systems cause competition for the
limited resources the IRS uses to queue calls.
Question. Has the IRS contacted the Federal Communication
Commission about its possible robo-call problem?
Answer. The IRS will explore this issue further with the Federal
Communication Commission.
Question. Please provide your opinion about the degree robo-callers
are affecting IRS telephone service.
Answer. Robo-calls have an impact on IRS call queues, but to what
extent is unknown until new technologies are procured to help detect,
quantify, and potentially block robo-calls.
We sought to counter these companies through various actions. We
implemented Customer Callback (CCB) in 2020. The CCB solution gives
taxpayers the opportunity to bypass waiting in queue to instead be
contacted by the IRS when the next CSR becomes available. We believe
offering a government opportunity to receive a call back, will deter
taxpayers or tax professionals from paying for or using other sources
to hold their position in line when calling. CCB tracks the taxpayer's
place in line and places a call to the taxpayer which frees up the
taxpayer to do other things while waiting for the callback.
We have expanded CCB to cover approximately 70 percent of our toll-
free telephone demand. During Fiscal Year 2022, we have offered this
option to more than 5.3 million taxpayers, with an acceptance rate
exceeding 57 percent and a reconnection rate of more than 91 percent.
We estimate a savings of about 1.7 million taxpayer hours related to
these efforts. We plan to continue expanding callback with a goal of 95
percent of our demand provisioned for callback by Fiscal Year 2024.
We continuously pursue solutions to help distinguish calls made
from organizations using some form of technology that can impact
service delivery online or through our phone system. These tools
require hardware and software investments. Securing funds to deploy the
necessary hardware and software (targeting 2022 after Filing Season)
would give us the opportunity to identify and block calls placed
through auto-dialer technology.
Question. In your testimony you alluded to a substantial cost to
the IRS of implementing 2D bar codes as described in the Taxpayer
Advocate Directive. You also suggested, however, that the President's
budget would include funds to implement the technology.
I was unable to locate any line-item reference in the President's
budget that is focused on implementing 2D bar code technology.
How much would it cost the IRS to adopt this technology?
Answer. A caution about the expected benefit from bar codes and OCR
is that tax law changes enacted by Congress shortly before the filing
season begins or, as happened recently, during the filing season,
increase the likelihood of errors. For example, IRS and software
vendors' ability to respond and produce accurate forms may preclude
timely inclusion of bar codes or QR codes, resulting in more
submissions with unreliable codes.
To improve the efficiency and accuracy of processing paper tax
returns, the IRS has had several projects ongoing for the past couple
of years leading to the use of optical character recognition (OCR) or
2D barcoding. These projects are:
V-Coded Return Pilot. A V-coded return is when the taxpayer
used software to prepare the return, printed the return and
mailed it to the IRS. Using a vendor, this pilot was designed
to enable remote scanning and validation of Forms 1040 that are
V-coded to be submitted using Modernized e-File (MeF). The goal
is to accelerate this pilot so it will be scanning tax year
2022 Forms 1040 V-coded and Forms 940 and 941 in filing season
2023.
OCR Scanning Service Pilot. This pilot used a third-party
contractor's OCR capability to scan Form 940 business returns.
The contractor will scan those returns submitted using MeF.
2D Barcode Pilot. This pilot implemented using 2D bar codes
to digitally intake data from Forms 8918 (Material Advisor
Disclosure Statement) and Forms 8886 (Reportable Transaction
Disclosure Statement). In December 2021 IRS released Form 8918
with 2D bar codes. Form 8886 was to follow with production of
the 2D bar code form in March 2022. The IRS has received
approximately 1,000 Forms 8918 to date of which 253 were on the
old paper form and 837 on the new paper forms with 2D bar
codes. However, only 78 percent of the 2D bar coded paper forms
received were able to be fully read into IRS systems requiring
close and ongoing scrutiny of the data. Additional analysis is
being performed to assess potential actions to reduce the error
rate. Before the IRS can consider using 2D bar codes for Form
1040, we need to engage with the software industry to make
updates to industry standards to align them with how we intake
and process data. The industry would have to agree to provide
such code in forms printed after using their software to
prepare the tax return. We will start that engagement, develop
a plan on how it would work and report back to you with the
results. In assessing the pilot results, the final costing
would be dependent on the use cases and scope we would
ultimately pursue.
In addition to pursuing scanning, we are also planning to make more
forms available to be e-filed. We are also reviewing administrative
policies to determine if changes are possible to make more people
eligible to e-file.
We believe that a multi-faceted approach is necessary to address
the paper inventory that the IRS receives yearly.
Question. By comparison, how much will the tax preparation industry
need to spend in order to implement such technology?
Answer. The IRS does not know the costs the tax preparation
industry would incur to add bar codes to certain paper returns
taxpayers file with the IRS. The individual tax preparation companies
would determine these costs.
Question. The IRS has hundreds of millions of dollars of unspent
COVID-19-
related funds specifically allocated to business systems modernization.
Can the IRS provide any reasons why these funds have not been
utilized to implement 2D bar codes?
Answer. The IRS received $1.46 billion from the American Rescue
Plan, appropriations that expire on September 30, 2023, ``for the
administration of the advance payments, the provision of taxpayer
assistance, and the furtherance of integrated, modernized, and secure
Internal Revenue Service systems.'' As of May 3, 2022, the IRS has
obligated $683 million: $397 million to administer the third round of
Economic Impact Payments and provide taxpayer assistance, and $286
million for IT modernization. Of the remaining amount, the IRS has a
robust plan in place to obligate the funding by the statutory deadline.
The IRS will use $430 million to address the unprecedented backlog of
paper correspondence and paper tax returns that still need to be
processed. The $284 million remaining for IT modernization will be used
to address cybersecurity and other critical ongoing modernization work.
The IRS has implemented a 2D bar code pilot. This pilot implemented
using 2D bar codes to digitally intake data from Forms 8918 (Material
Advisor Disclosure Statement) and Forms 8886 (Reportable Transaction
Disclosure Statement). In December 2021 IRS released Form 8918 with 2D
bar codes. Form 8886 was to follow with production of the 2D bar code
form in March 2022. The IRS has received approximately 1,000 Forms 8918
to date of which 253 were on the old paper form and 837 on the new
paper forms with 2D bar codes. However, only 78 percent of the 2D bar-
coded paper forms received were able to be fully read into IRS systems
requiring close and ongoing scrutiny of the data. Additional analysis
is being performed to assess potential actions to reduce the error
rate. Before the IRS can consider using 2D bar codes for Form 1040, we
need to engage with the software industry to make updates to industry
standards to align them with how we intake and process data. The
industry would have to agree to provide such code in forms printed
after using their software to prepare the tax return. We will start
that engagement, develop a plan on how it would work and report back to
you with the results. In assessing the pilot results, the final costing
would be dependent on the use cases and scope we would ultimately
pursue.
In addition to pursuing scanning, we are also planning to make more
forms available to be e-filed. We are also reviewing administrative
policies to determine if changes are possible to make more people
eligible to e-file.
We believe that a multifaceted approach is necessary to address the
paper inventory that the IRS receives yearly.
Question. During the hearing it was claimed that the IRS has the
lowest headcount this year since 1974. Since 1974, however, there has
been a multifold increase in worker productivity levels due to
technological and human resources advances.
Have productivity levels with respect to IRS employees kept pace
with general worker productivity trends?
If not, why not? If so, what is the utility of comparing the
current IRS headcount with its headcount in 1974?
For example, does the IRS maintain that it needs to have a
commensurate or better headcount in order to fulfill its mission, and
if so, why?
Answer. The IRS is the primary source of funding for the United
States government and collected more than $4 trillion in gross taxes in
FY 2021. We make it possible for the government to perform its vital
functions and be effective on everything from education to defense. But
as the past 2 years show, we have become more than a tax administration
agency. We have effectively supported economic growth and recovery
through issuing three rounds of Economic Impact Payments and 6 monthly
Advance Child Tax Credit payments, while fulfilling our core mission,
including delivery of two extended tax filing seasons. This
unprecedented scope of responsibilities illustrates the significant
role the IRS plays in the overall economic health of our country.
Comparing the ratio of net revenue collected to cost of
administration,\5\ the IRS is among the most efficient national tax
administration authorities.
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\5\ The Organisation for Economic Co-operation and Development's
Tax Administration 2021 document includes Comparative Information on
OECD and other Advanced and Emerging Economies. The United States was
among the 5 most efficient out of 59 countries on their Cost of
Collection metric. Tax Administration 2021: Comparative Information on
OECD and other Advanced and Emerging Economies. Read online (https://
read.oecd-ilibrary.org/taxation/tax-administration-2021_cef472b9-
en#page182).
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
.epsThe IRS has become more productive since 1974, but the IRS's
task has also grown significantly. For example, the number of
individual returns has nearly doubled since 1974.\6\ IRS activities,
and especially IRS compliance activities, are labor-
intensive. Because of the nature of the IRS's work, fewer staff
directly translates into reduced access to service and less enforcement
activity, imperiling the foundation of taxation--voluntary compliance.
The IRS must visibly enforce the tax laws to maintain high rates of
voluntary tax compliance. For these reasons, I am concerned that low
IRS staffing levels are harmful to the Nation's financial well-being.
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\6\ Individual returns filed rose from 81.4 million in 1974 to
157.2 million in 2020.
In recent decades, the Nation's tax law has become more complex,
the number of taxpayers has risen, and the size and complexity of the
U.S. economy has increased significantly.\7\ The chart above shows the
relationship between individual returns filed and IRS staffing levels.
Since peaking in 1992, IRS staff has decreased to 1974 levels, while
the number of returns filed continues to increase. To the extent that
the IRS has been able to continue to fulfill its mission, this
demonstrates improved productivity. However, much of the IRS's work is
inherently labor-intensive, and these reductions have come at a cost--
see example below.
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\7\ For example: gross tax collections rose from $269 billion in FY
1974 to $4.1 trillion in FY 2021, and U.S. GDP rose from $1.5 trillion
in FY 1974 to $22.4 trillion in FY 2021--roughly a factor of 15 for
each.
The IRS's productivity improvement is partially attributable to
improvements in IRS technology, notably with electronic filing and
online account services. But technology has experienced underinvestment
also. Part of the administration's strategy to modernize the tax system
is to address this underinvestment in IRS information technology.\8\
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\8\ The administration described the IRS challenges with compliance
at length in a white paper: The-American-Families-Plan-Tax-Compliance-
Agenda.pdf (https://home.treasury.gov/system/files/136/The-American-
Families-Plan-Tax-Compliance-Agenda.pdf).
However, even with improved technology, IRS compliance activities
involve manual steps. For example, the Automated Underreporter (AUR)
system can automatically compare the details of a tax filing to
independently reported information returns and generate notices when
there are discrepancies. When this happens, taxpayers call or reply by
letter to the IRS with questions and additional information. IRS needs
sufficient staff to answer those questions and evaluate the information
provided to fairly resolve any discrepancies. When IRS lacks the staff
to respond to the anticipated correspondence, we purposely hold back on
some AUR cases, knowing we won't be able to answer questions when the
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taxpayer calls.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
.epsAnother example is examination--an inherently manual exercise.
Examining tax returns, and especially complicated tax returns, requires
corresponding with a taxpayer, reviewing their documentation, and
assessing the appropriate tax liability. The IRS's ability to conduct
these examinations is a direct function of the trained staff available.
It is important to remember that, depending on the type of exams, these
staff directly generate additional tax revenues of more than $5 for
every $1 spent. This chart from the FY 2020 IRS Data Book shows the
effect of dwindling staff on the number of returns the IRS was able to
examine in the last 10 years. Put simply, fewer staff resulted in fewer
audits.
While there is nothing inherently special about 1974, the
comparison highlights how IRS staffing has failed to keep pace with the
growth in the U.S. population and economy. I used that comparison to
illustrate how our staffing levels have regressed significantly, to the
detriment of the IRS's ability to fulfill its mission of helping
taxpayers and enforcing the tax law.
Question. In the hearing, it was insinuated that a key problem the
IRS faces with respect to its operating budgets is that spending bills
are sometimes not passed on time and the IRS must operate under a
continuing spending resolution (CR). Bearing in mind that all agencies
face similar pressures, what is unique about the IRS that makes
operating in a CR challenging?
Additionally, there have been calls for multiyear funding for the
IRS as a solution to the myriad of problems plaguing the IRS. Other
agencies, such as the Social Security Administration, have likewise
called for multiyear funding, which Congress has been highly reluctant
to grant given that it removes (or diminishes) Congress's oversight
power.
What is unique about the IRS such that it requires multiyear
funding?
How large a factor does the IRS believe operating under a CR and/or
not having multiyear funding is in terms of the IRS's ability to
deliver on its mission?
Answer. This year's individual filing season started on January
24th and closed on April 18th. Through April 22nd, IRS processed nearly
134 million tax returns, issued nearly 89 million refunds--totaling
more than $267 billion, answered over 20 million calls (through live
assistance and automation), provided face-to-face services to more than
434,000 taxpayers, and prepared over 2 million returns through our
volunteer program. Operating under continuing resolutions (CRs) poses
challenges to IRS operations, particularly in the Taxpayer Services
account as we prepare for the Filing Season. A significant amount of
the activity in this account occurs when most CRs occur, prior to and
during the 3-month filing season that starts in January. In this
respect, IRS is different from other agencies whose activities are more
evenly spread over the fiscal year. Filing and account services--which
currently make up more than one-third of IRS staffing--must be fully
staffed and trained by the start of filing season. IRS begins planning
as early as October prior to Filing Season to ensure we provide the
service customers expect from the IRS. Each fall, IRS brings on
thousands of customer service representatives who require several weeks
of training to be fully ready to provide for taxpayer needs during the
filing season.
IRS is a public-facing agency that directly interacts with and
affects nearly every American taxpayer. Multiyear appropriations will
allow IRS to carry over a planned amount of funding that would be
available in addition to the funds allocated during the CR and provide
IRS the ability to implement multiyear workforce planning and hiring,
resulting in better service for America's taxpayers. Most hiring is a
long process in a normal operating environment. Under a CR, hiring is
put on hold due to funding uncertainty, leaving little time to proceed
with hiring and spend labor dollars once a budget is passed. In
addition, the IRS requires large government contracts that may need up
to 9 months to bid and award before funding expires on September 30th.
Multiyear funding would allow the IRS to implement its hiring plans and
complex contracts uninterrupted throughout the year, positioning IRS to
better meet the needs and expectations of taxpayers through improved
levels of service and compliance efforts.
IRS's Business Systems Modernization appropriation is a good
example of the power of multiyear funding. The 3-year account allows
IRS to build complex IT modernization plans that span longer than the
current fiscal year, because funding levels are known beyond September
30th. Inconsistent funding levels in our 1-year account mean plans need
to be replanned when funding levels change, leading to both costlier
projects and delays. IRS requires more consistent multiyear
modernization funding to bring IRS processing into the modern age and
away from paper.
Question. In our February hearing on IRS customer service issues,
several witnesses made statements with respect to the particular budget
allocations made by the IRS's budget request. Generally, the IRS's
budget is allocated among four activity-based accounts: (1) taxpayer
services, (2) enforcement, (3) operations support, and (4) business
systems modernization. The requested funding level for each of these
activities reflects an agency's priorities. Put simply, money is spent
on the ``important'' activities, and the more funding one activity
receives, the more important the activity.
With that as a backdrop, do you believe that the current IRS budget
request demonstrates that the IRS's top priority is taxpayer service?
Answer. All initiatives in the IRS's FY 2023 Congressional
Justification (CJ) are high-priority. Besides continuing our
enforcement investments, IRS seeks to restore taxpayer services
activities to a level America's taxpayers expect and deserve, while
maximizing efficiency and productivity.
Our FY 2023 request highlights our urgent need to continue
enhancing the taxpayer experience by providing services that help them
meet their tax obligations with minimal burden. Another high priority
in our request is a proposal to improve congressional appropriations
for support services that house, hire, and equip IRS employees. We
propose to allocate mission support costs back to the mission
appropriations--Taxpayer Services and Enforcement--so that when
Congress seeks to provide resources to the IRS, you are funding both
the labor and the support costs that make taxpayer services or
enforcement activities possible.
Funding Taxpayer Services is critical to successfully delivering on
our tax administration mission, and remains a high priority. Using the
appropriated FY 2022 funding level that was not available when the
administration submitted the Congressional Budget Justification, the
IRS budget request increases the Taxpayer Services funding level by
21.8 percent compared to our overall requested increase of 12.0
percent. This increase in funding, along with the supporting costs
required in Operations Support for telecommunications, laptops, etc.,
will allow us to dramatically increase Taxpayer Services by answering
85 percent of incoming phone calls, fully staffing our walk-in sites,
keeping current with incoming paper correspondence and paper returns,
and providing the type of taxpayer service that Americans deserve and
expect. Requesting the largest funding increase for Taxpayer Services
demonstrates that the IRS considers those activities essential to our
mission, and among our highest priorities.
Question. The centralized partnership audit regime is designed to
streamline IRS enforcement for partnerships subject to its rules,
including the largest and most complex partnerships which may not opt
out of the regime. In its March 17th report on the IRS's implementation
of the centralized partnership audit regime, TIGTA identified that with
respect to the hundreds of examinations conducted by the IRS under this
regime between 2016 and 2019 just over 78 percent of the examinations
overall resulted in no change to tax liability (79 percent when focused
solely on the audits conducted by the IRS large business and
international division on the very largest and most complicated
partnerships). Stated differently, just under 22 percent of these
audits overall identified any potential noncompliance. With respect to
audits focused on the very largest and most complex partnerships, no
change rates have increased year-over-year since enforcement under the
new regime began. Stated differently, IRS-identified potential
noncompliance by these partnerships has decreased year-over-year since
the regime was enacted, including a zero percent identified
noncompliance rate in 2019.
Further, TIGTA identified that the IRS on average spent nearly 25
percent more time working a ``no change'' audit under this regime than
it spent working a case with the next most time-consuming type of
disposition.
There are a number of conclusions that could potentially be drawn
from these statistics. TIGTA recommended that the IRS take specific
measures to decrease the high no-change rate. Such recommendations
would ultimately redirect IRS resources to where they are most
effective. The IRS disagreed with two out of the three recommendations.
Given the ``no change'' data TIGTA highlighted in its report, isn't
it prudent to better understand where the IRS should best devote its
finite resources in selecting centralized partnership audit cases?
Answer. We agree it is prudent to better understand where the IRS
should devote our finite resources. As we explained to TIGTA, we do not
select returns based on the audit procedures to which a return would be
subject. We select our work based on the tax compliance risk of each
partnership tax return.
There are several efforts underway specifically dedicated to
improving our efforts to identify partnership compliance risk. For
example, we recently launched the Large Partnership Compliance program
(LPC) to identify risk on the largest and most complex partnerships.
We've undertaken form improvements to gather better data and are
updating our case selection models. Also, to support our efforts to
improve how we audit partnerships, we've recently completed a
partnership-focused hiring initiative that increased staff to both the
subject matter experts and field agents who examine these returns. We
have begun a second round of partnership-focused hiring.
The high no change rate TIGTA reported was based on the early
results of partnership returns subject to the newly implemented audit
procedures under the Bipartisan Budget Act. TIGTA's report does not
include the results of closed examinations for existing partnership
audit procedures under TEFRA or deficiency procedures. In addition, we
explained that generally, the first cases to close for each tax year
are those that are no changed. It can take several years to close
partnership returns where we are developing complex issues. Based on
prior experience, we anticipate that the final no change rate will be
lower.
Question. In its March 28th report on so-called lien foreclosure
collections actions,\9\ TIGTA identified that with respect to primary
residences--that is, a taxpayer's home--the IRS used lien foreclosures
far more often than it did comparable levy collection actions, 88
percent of the time to 13 percent. As you know, levy collection actions
provide affected taxpayers many rights and protections that lien
foreclosures do not. TIGTA recommended that the IRS work with Treasury
to develop a legislative proposal to ensure that the protections
applicable to levy collection actions are likewise available for lien
foreclosures.
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\9\ https://www.treasury.gov/tigta/auditreports/2022reports/
202230026fr.pdf.
The IRS disagreed with this recommendation, arguing that lien
foreclosures adequately protect taxpayer rights despite lacking many of
the taxpayer-friendly features of levies (such as full, as opposed to
limited, judicial review). The IRS also noted that in any case making
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these changes would benefit few taxpayers.
I'm somewhat concerned with this response. There are a variety of
circumstances where the IRS believes lien foreclosures should be
utilized, including situations where the statute of limitations for
collections actions is fast approaching. Troublingly, on this point
TIGTA identified that often IRS delays in either working the collection
action--or worse still, delays in the case being picked up by IRS
collections in the first instance--at least contributed (if not caused)
the looming deadline.
Does the IRS have any substantive objections to taxpayers being
provided the same rights and protections in lien foreclosures that they
have with respect to levies?
Answer. Taxpayers are offered similar protections with a lien
foreclosure as with an administrative seizure. While these tools serve
different purposes and are used in different circumstances, the IRS
forecloses a lien on a principal residence only as a last resort, after
taxpayers are offered numerous opportunities to resolve their tax
liabilities. Taxpayers are afforded numerous rights and protections
throughout the foreclosure process, prior to and during litigation. For
example, Collection Due Process rights are granted with both enforced
levy action and Notice of Federal Tax Lien filings.
The IRS provides administrative protections in lien foreclosure
cases. Federal law protects taxpayer rights through a neutral third-
party, a district court, with broad equitable powers to review the
merits of all claims before ordering a sale.\10\ Before initiating
foreclosure on a principal residence, the IRS must consider the same
precautions as those required for seizures of principal residences.
Specifically, the IRS must attempt to contact the taxpayer and consider
other payment options. Also, when the taxpayer indicates that
foreclosure on a principal residence may create economic hardship, the
IRS must consider the taxpayer's ability to secure future housing,
assist the taxpayer in completing the Taxpayer Advocate Service (TAS)
assistance request, and forward the request to TAS. These actions occur
prior to recommending a foreclosure suit on a principal residence to
the Office of Chief Counsel and the Department of Justice.
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\10\ United States v. Rodgers, 461 U.S. 677 (1983).
The IRS cannot administratively levy and sell a principal residence
where the tax liability belongs to one of multiple owners, if the
person liable for the tax debt has only a beneficial interest in the
property or, where the person liable for the tax fraudulently transfers
the property away. These reasons are the most likely cause for pursuing
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foreclosure on a principal residence.
A court must resolve who has what interest in the property.
Although taxpayers do not have a right of redemption in the lien
foreclosure process, we have seen only about 5 percent of taxpayers
take advantage of the right of redemption in the levy process. Further,
the possibility of redemption lowers the sale price of the property in
the levy process. Consequently, lien foreclosures result in more tax
liability being satisfied, benefiting both the taxpayer and the United
States.
Question. Particularly given the role the IRS itself has to play in
some instances in the need to use a lien foreclosure at all, does the
IRS agree it would be a more ``fair'' outcome for taxpayers to have
those same protections regardless of the collections approach?
Answer. As TIGTA's audit report acknowledged, the IRS reviewed the
imminent collection statute expiration date (CSED) lien foreclosure
cases. Based on our review, we implemented steps to improve our
processes in imminent CSED cases. To avoid missing time frame
deadlines, we agreed to remind our employees to take timely actions in
these cases and reassign cases when practicable.
When enforcement action becomes necessary, we evaluate a variety of
factors and circumstances to determine the most appropriate course of
action. We use the appropriate collection device based on the facts of
each case. Despite the difference in processes, the IRS has policies
and procedures for each collection tool to ensure taxpayers' rights are
protected.
The IRS's mission is to provide America's taxpayers top-quality
service by helping them understand and meet their tax responsibilities,
while applying the tax law with integrity and fairness to all. We
strive to comply with the law and protect taxpayer rights throughout
the collection process, including cases requiring administrative
seizure or lien foreclosure.
Question. Does the IRS agree that the implementation of the
Schedules K-2 and K-3, including complicated instructions such as the
January 18th and April 12, 2022 updated FAQs, as well as the lack of a
timely efiling option, is making (and has made) this filing season more
difficult than it needs to be?
As further background for this, National Taxpayer Advocate Erin
Collins called paper the IRS's kryptonite, and there is currently a
tremendous backlog of tax returns and correspondence. Notwithstanding,
the IRS decided to push out two complex 39-page schedules that are
possibly required to be filed by millions of pass-through entities.
There is no statutory mandate to implement these forms for this tax
filing season. Despite considerable discussion in the tax community,
many practitioners continue to wonder:
Who of my constituents has to actually file these forms?
Whether the IRS will accept these forms in an electronic format?
As you are aware, in some instances my constituents are being
required to manually pull their financial data and handwrite the
information to properly complete these schedules.
How is this prudent for the American public?
Answer. The Schedules K-2 and K-3 replaced existing required
reporting on the Schedules K and K-1 and attached statements and
footnotes. The Schedules' standardized reporting format will clarify
reporting obligations for partners and flow through investors,
ultimately easing flow through return compliance.
The Schedules K-2 and K-3 are completed by flow through entities
that have relevant international items, as provided in forms,
instructions, and FAQs. See specifically FAQs 1-4 for additional
background on the benefits and reasons for the Schedules K-2 and K-3.
The IRS has taken steps to limit and clarify filing and reporting
requirements suggested by taxpayer comments and feedback. See
specifically FAQ #15. Completion and filing Schedules K-2 and K-3 does
not impact or relate to the IRS's backlog issues. Flow through entities
have been filing the Schedules K-2 and K-3 via PDF without issue. In
addition, the MeF/XML filing capability for the Form 1065 became
available on March 20, 2022. Finally, Notice 2021-39 provides penalty
relief to those who make a good faith effort to comply with the new
schedules for tax year 2021.\11\
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\11\ See FAQ #10 and IRS Notice 2021-39, https://www.irs.gov/pub/
irs-drop/n-21-39.pdf.
Question. I understand that the IRS will be releasing a new
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estimate of the tax gap this summer.
Will your estimate focus on ways to better understand the various
factors that contribute to taxpayer errors and omissions, particularly
on tax returns that are completed by individual income tax filers?
Answer. The methodology for the new TY 2014-2016 tax gap estimates
is similar to the approach used for our prior estimates. The tax gap
methodology reports estimates by type of tax (e.g., individual or
corporate) and whether the gap is the result of nonfiling, underpayment
or underreporting. The data underlying the tax gap analysis is not
granular enough to identify factors contributing to taxpayer errors and
omissions. As part of our tax gap estimates, we publish individual
income tax underreporting tax gap amounts. We also use the net
misreporting percentages for certain line items from the individual
income tax return. Outside of the tax gap framework, IRS has ongoing
research to better understand line-item anomalies that may provide
insight into factors contributing to errors and omissions on returns.
Question. For example, will the study include an analysis of tax
errors and/or fraud by method of preparation, such as those using an
unregulated preparer?
Answer. The current tax gap estimates do not include an analysis of
errors or fraud by method of return preparation. This type of analysis
may be conducted in the future, depending on agency priorities and
resource availability.
Question. Do you agree that trying to determine which methods of
filing are subject to greater rates of error and/or fraud could have
value as Congress and the IRS formulate new approaches to close the tax
gap?
Answer. The IRS agrees that determining which methods of filing are
subject to greater rates of error and/or fraud is valuable for
formulating new approaches to address noncompliance. One study the IRS
conducted focused on the overclaim rates for refundable tax credits by
tax preparation method. In general, this research shows the overclaim
rates on returns done by paid preparers are slightly lower than self-
prepared returns. Further research would need to be conducted to
determine root causes for the overclaim rates.
Question. Does the IRS believe that so-called ``ghost preparers''
contribute to the tax gap and if so, is the IRS aware of how much they
do?
Answer. The IRS uses the term ``ghost preparers'' to refer to
individuals who complete tax returns on behalf of their clients without
providing the required information to indicate the return was prepared
by someone other than the taxpayer. Prior research and worked cases
show that ghost preparers frequently add overstated or fraudulent
credits to tax returns to inflate the refunds issued to the taxpayers,
while usually not including the compensation the ghost preparer
received for preparing the return. One ghost preparer can be
responsible for the submission of hundreds of bad returns. In some
cases, the fraud is unknown to the ghost preparer's clients. To that
end, ghost preparers can contribute to the tax gap in various ways
including: failing to report or underreporting income earned from any
return preparation; filing fraudulent returns that yield refunds; and
claiming deductions that the taxpayers are not entitled to claim.
The IRS continues to refine our processes and develop tools to
identify ghost preparers and the returns they prepared. The IRS uses
data and research methods to identify commonalities and shared
characteristics of ghost preparers. Although we can stop a large
percentage of suspicious returns using filters, the size of the ghost
preparers' contribution to the tax gap cannot be confirmed. The IRS has
initiated a research study to help identify ghost preparers with
preliminary results expected in FY 2023. Leveraging these results, the
IRS will test potential enforcement treatments in FY 2023 and 2024.
Question. Does the IRS currently possess data that could shed light
into how these ghost preparers are able to circumvent the current rules
and regulations?
Answer. There are minimal rules and regulations for Federal tax
return preparers related to the preparation and submission of tax
returns. To prepare a return for compensation, the preparer must be 18
years old and have a valid Preparer Tax Identification Number (PTIN).
Paid tax return preparers must include their PTIN on taxpayer returns.
Ghost preparers generally fail to provide any or all of the
required identification information in the paid preparer block on the
taxpayer's return. The taxpayer's return appears to be self-prepared.
There may be indicators that the return was not self-prepared, but the
return belongs to the taxpayer, not the preparer. Unless there are
specific indicia of fraud on the return, the IRS must process the
taxpayer's return as there is no requirement that a taxpayer use a paid
preparer or report to the IRS that a paid preparer was used in the
completion of the return.
Ghost preparers often use commercially available software or file
the returns on paper. While using these filing methods makes it
difficult to distinguish between legitimate taxpayer-filed returns and
ghost-prepared returns, some ghost preparers use repeating patterns. By
searching for these patterns in the data, the IRS has been able to find
certain returns that appear to have been created by ghost preparers.
Question. Do you agree that this tax gap estimate, and future tax
gap estimates, should attempt to quantify how ghost preparers impact
the tax system and specifically the tax gap?
Answer. Compliance studies outside of the framework of the tax gap
methodology are a better approach to quantify the impact of ghost
preparers on the tax system because they would yield more detailed
information, allowing for a better understanding of the scope of the
problem and identification of potential mitigations to the problem.
That said, regulation of paid tax return preparers would provide the
most benefit to the tax system and may have a comparable impact on the
tax gap. A more competent tax return preparer community allows the IRS
to better distinguish preparers in need of additional outreach and
education from preparers intent upon defrauding the tax system and to
apply the appropriate resources accordingly. Without greater oversight
of paid tax return preparers, the impact of ghost preparers on tax
administration and the tax gap will continue to be a non-specific
estimate.
Question. Will the IRS accept the National Taxpayer Advocate's
recommendation to exercise its authority under section 7508A to
postpone the 2-year period for filing a refund suit in a U.S. district
court or the Court of Federal Claims for up to 1 year for all notices
and claim disallowances mailed within the last 2 years? If not, why
not?
Answer. This would be novel application of the IRS's authority
under section 7508A. In a typical disaster relief situation, the IRS
can postpone the time for filing a refund suit if taxpayers are
affected by a federally declared disaster. In this situation, the IRS
is affected by a disaster in the sense that pandemic-related backlogs
could delay our ability to administratively process taxpayers' cases
before the 2-year period to file a refund suit expires. There is no
federally declared disaster preventing taxpayers from timely filing
refund suits to protect their rights, and taxpayers do not need to wait
for the IRS before doing so. Taxpayers who filed a timely claim for a
refund but haven't received a written response from the IRS within 6
months can file suit in the appropriate district court or the Court of
Federal Claims. The National Taxpayer Advocate's recommendation to
apply section 7508A in this manner is not something the IRS has
previously contemplated and would require Treasury approval.
______
Questions Submitted by Hon. Robert Menendez
Question. Over the past 20 years, the IRS has provided an
administrative waiver of penalties, including for late-filing
penalties, late-payment penalties, and failure-to-deposit penalties, to
taxpayers who have been tax compliant for the previous 3 years or who
have not previously been required to file a return. This procedure is
referred to as ``first-time abatement.'' This is an important tool for
taxpayers who have an isolated filing or payment compliance issue, but
it can only be used once every 3 years. Reasonable cause penalty
waivers, on the other hand, are granted based on a facts-and-
circumstances test where taxpayers spell out their situation and try to
prove how they exercised ordinary business care and prudence. In 2020,
when taxpayers and their advisers were struggling with COVID-related
health issues, new childcare arrangements, and work concerns, tax
practitioner groups argued that reasonable cause penalty relief should
be based on COVID impacts and that the IRS should consider a special
one-time COVID-related first-time abatement. As this tax filing season
continues, millions of unprocessed pieces of taxpayer correspondence
remain and most taxpayers are unable to reach the IRS by phone.
Are you considering allowing taxpayers to qualify for ``reasonable
cause relief'' due to the impacts of the pandemic and backlog? If so,
would the IRS implement such relief in a way that would ensure
taxpayers are not required to request relief by writing to the IRS?
Answer. On August 24, 2022, the Internal Revenue Service issued
Notice 2022-36 granting penalty relief to most people and businesses
who filed certain 2019 or 2020 returns late.
The IRS is also taking an additional step to help those who paid
these penalties already. Nearly 1.6 million taxpayers will
automatically receive more than $1.2 billion in refunds or credits.
These payments were completed by the end of September.
This relief applies to forms in both the Form 1040 and 1120 series,
as well as others listed in Notice 2022-36. To qualify for this relief,
any eligible income tax return must have been filed on or before
September 30, 2022.
Question. The IRS has faced longstanding challenges in its hiring
capabilities due to pandemic-related challenges and competition with
the private sector. You noted that the IRS is seeking to hire for 5,000
vacant positions this year and that the IRS has made 2,500 conditional
offers. However, the agency has fallen short of this goal, only hiring
about 3,805 new employees to date. Your testimony did not distinguish
between the two categories of jobs the IRS is seeking to fill to reduce
the backlog: submission processing and accounts management. According
to the National Taxpayer Advocate, Erin Collins, submission processing
positions are considerably more difficult to fill as employees must
reside near one of the IRS submission processing centers in Ogden,
Kansas City, or Austin, and are not eligible for remote work. Even with
the recently secured direct hiring authority, the IRS still faces
systemic barriers to hiring employees, compounded by the fact that
52,000 employees are expected to retire or leave the agency over the
next 6 years.
Can you provide a breakdown for the submission processing and
accounts management positions the IRS is seeking to fill, and how many
positions in each respective category have been filled thus far?
Accordingly, how does the IRS plan to hire for these more difficult to
fill submission processing positions? Does the IRS's hiring strategy
for in-person positions differ from easier-to-fill accounts management
positions?
Answer. Since March 2022, the IRS's hiring strategy has focused on
filling 5,000 Clerk and Tax Examiner (TE) positions for Submission
Processing for FY 2022. As of August 31, 2022, Submission Processing
has filled 2,987 Clerk/TE positions (i.e., applicants have accepted
firm job offers or have onboarded). In addition, 1,428 applicants
accepted tentative offers and are in the onboarding process. To help
fill additional positions to meet the Submission Processing goal, the
IRS held Direct Hiring events in Austin (March 24th/25th, May 11th/12th
and June 21st/22nd), Ogden (March 31st/April 1st, May 25th/26th and
June 29th/30th), Kansas City (March 18th/19th and June 7th/8th),
Philadelphia (August 10th), Memphis (August 18th), and Brookhaven
(August 25th).
Hiring for 5,000 Customer Service Representative (CSR), Clerk, and
TE positions in Accounts Management began in June 2022 in preparation
for the FY23 Filing Season. As of August 31, 2022, Accounts Management
has filled 3,503 positions. In addition, 4,129 applicants accepted
tentative offers and are in the onboarding process. Direct Hiring
events began in June 2022 and were held in Andover (June 1st), Atlanta
(June 2nd/3rd), Philadelphia (June 14th and August 10th), Fresno (June
16th/17th), Cincinnati (June 22th/23th), Memphis (August 18th),
Guaynabo, PR (August 19th), and Brookhaven (August 25th). Applicants
began onboarding August/September 2022 (CSR) and into October 2022
(Clerks/TE).
Question. You have stated on multiple occasions that the IRS will
be ``healthy'' by the end of calendar year 2022. When discussing
taxpayer customer service with Senator Toomey, you state that
``healthy'' is viewed in the eyes of the taxpayer. You also mention
that historically, the target has been around 70 percent in terms of
level of telephone service.
Could you define what you consider to be a ``healthy'' amount of
backlog at the IRS?'' Please specify what the threshold is for number
of outstanding returns and pieces of taxpayer correspondence that
adheres to your standard for a ``healthy'' agency.
Answer. While addressing unprecedented backlogs of correspondence
and unprocessed paper returns, the IRS delivered a successful 2022
filing season processing over 140 million individual returns and
issuing over 96 million refunds for over $292 billion thru May 20,
2022.
Healthy projected inventories vary by function. In our Submission
Processing function, healthy inventory for individual paper returns
waiting to be processed is about 100,000; business paper returns
waiting to be processed is about 500,000; returns in our Error
Resolution System, Rejects, and Unpostables is about 900,000; and Form
1040-X amended returns is about 30,000. In our Accounts Management
function, healthy inventory would be about 1,000,000, which includes
amended individual 1040-X returns, amended business returns, tentative
net operating loss carryback claims, individual and business general
correspondence, and internal account maintenance.
To achieve this goal of getting healthy, we created surge teams of
experienced employees to focus on reducing the volume of paper returns
and correspondence. Additionally, we are concentrating on hiring 10,000
new employees, using direct hiring authority, and holding job fairs, as
well as offering financial incentives. We are also developing and
improving automated tools to better manage our resources and assist
taxpayers, such as voice and chat bots, and a new automated tool that
is closing error resolution cases.
______
Questions Submitted by Hon. John Barrasso
Question. Many of the issues the IRS currently faces, such as the
paper backlog, slow processing times, and errors, are a result of the
number of paper returns the IRS receives. Decreasing the amount of
paper filings could alleviate some strain on the IRS's resources and
result in better service for taxpayers.
Despite the many incentives to file electronically, a good number
of paper filings occur because the IRS does not accept some forms in
digital format. Some forms cannot be e-filed. Even among those forms
recently converted to digital, some are still manually processed. For
example, in 2021, the IRS received 3.6 million amended individual tax
return forms. If the IRS could automatically process these 3.6 million
forms, processing delays would be significantly decreased.
What is the agency's plan for expanding electronic forms and
electronic filing?
Answer. All IRS forms are available electronically, but not all
forms can be filed electronically. Generally, electronic filing helps
reduce errors and speed processing. Nearly all individual tax returns
are available to be filed through the Modernized Electronic Filing
(MeF) system. A small number of forms remain paper based. Adding these
paper-based forms to the existing technology platform (Modernized
eFile) requires funding. If fully funded, the IRS could dedicate the
necessary resources to modernizing the Individual Master File and
providing more digital options. Generally, the IRS considers which
forms are the best candidates for MeF based on their volume and the
ongoing cost of development and maintenance. Almost 94 percent of
individual tax returns were filed electronically in FY 2021.
Along with the funding requested in the President's FY 2023 budget
request, we are also asking for Congress's help with legislation in
several important areas to improve tax administration, including
expanded authority to require electronic filing for forms and returns.
The proposal requires electronic filing for taxpayers reporting larger
amounts or complex business entities meeting certain thresholds. The
Secretary would also be authorized to determine which additional
returns, statements, and other documents must be filed electronically
to ensure efficient administration of the internal revenue laws without
regard to the number of returns that a person files during a year.
The IRS continues to add new electronic forms and increase the
availability of electronic filing for taxpayers. Funding and resources
drive IRS priorities and determine the scope of electronic forms that
can be completed in any given year. We are working on a solution for
external stakeholders to submit web-based, adaptive forms to improve
the taxpayer experience and streamline internal processing of forms
that are currently only available for paper filing. These adaptive
forms will generate 2D bar codes for stakeholders that choose to print
and mail them, to allow faster and more accurate electronic data
conversion.
Question. The IRS began the 2021 filing season with roughly 8
million unprocessed taxpayer returns from 2020, a number substantially
higher than previous years. While the IRS was facing this large
backlog, Congress passed the American Rescue Plan Act during the middle
of last year's filing season.
The bill required the IRS to implement major new policy changes and
greatly expanded its role beyond that of a revenue collection agency.
It required the IRS to do all of this during the middle of a filing
season while still working out from under the backlog of 2020. This
delayed refunds for people who were just trying to follow the law and
pay their taxes.
Can you identify the challenges created by such changes during the
middle of the filing season and the impact they have on taxpayers?
Answer. The IRS is an administrative agency and will take steps to
deliver whatever is asked of us. If Congress enacts legislation, IRS
employees will move quickly to implement it, as we did with major
provisions of the Coronavirus Aid, Relief and Economic Security Act,
COVID-Related Tax Relief Act of 2020, and the American Rescue Plan Act.
The combination of the pandemic, new tax laws and numerous other
factors led to an unprecedented amount of unprocessed tax returns and
correspondence remaining in the IRS inventory during 2021.
Passing sweeping legislation in the middle of the filing season,
especially one in which a global pandemic, has driven historic taxpayer
demand, creates serious challenges to our front-line employees. Most of
our yearly employee update training occurs prior to the filing season
starting and late legislation cannot be immediately implemented by the
frontline IRS employee as it must first be translated into procedures
for employees to follow. Once procedures are created, training must be
developed and delivered while systems are being updated for use. The
extent of the changes needed are dependent on the complexity of the
legislation.
With the current backlogs of inventory and the level of service on
our toll-free lines, many taxpayers have been unable to get an
appointment and have chosen to walk into the Taxpayer Assistance
Centers (TACs) which creates challenges for our TAC staff. We had an
approximately 200 percent increase in appointments scheduled for filing
season 2022 compared to filing season 2021.
From a tax forms and publishing standpoint upon enactment of COVID-
related legislation, like the American Rescue Plan Act, we had to
immediately send messages to taxpayers and software companies about how
to use existing forms to claim the unemployment exclusion, and how to
report on returns the Suspension of Repayment of Excess Advance Payment
of the Premium Tax Credit (PTC). We had to retroactively update our
instructions for tax year 2020, after we had already started updating
tax year 2021 products. 2021 forms had to be updated to reflect all the
new provisions, which was a significant undertaking, and then undo
those changes because most were only for one tax year. This led to
instructions and publications being delayed for release to printing and
electronically for taxpayers.
The IRS pursued significant actions during the 2021 filing season
to address the return and correspondence inventory. Due to resource
limitations and numerous unique factors tied to new legislation and the
pandemic, we entered the 2022 filing season with a significant
inventory of unprocessed returns and correspondence.
We continue to balance multiple unprecedented demands, including
continuing the filing season and work on important new tax provisions.
We remain focused on numerous taxpayer-related issues, and we have
pursued innovative ideas and processes not previously deployed by the
IRS to make improvements to the current inventory and provide
meaningful taxpayer services.
______
Questions Submitted by Hon. Sherrod Brown
Question. In 2021, more than 2,800 VITA sites--many still dealing
with the ongoing ramifications of COVID-19--prepared nearly one million
returns generating more than $1.7 billion in refunds to lower-income
families. Impressively, VITA sites maintained a 96-percent accuracy
rate--the highest in the industry.
Still, there is room for this model private-public partnership to
grow. Our office, along with other Senate offices, are pushing to
increase VITA funding from $30 million in FY 2022 to $45 million in FY
2023. Funding VITA at $45 million would help programs grow tax credit
outreach, increase capacity to file virtual returns, and build needed
support of low-income tax filers due to decreased IRS capacity.
What additional steps is the IRS taking to increase the good work
and efficiency of this critical program?
Answer. While the IRS would be grateful to receive additional
Volunteer Income Taxpayer Assistance and Tax Counseling for the Elderly
(VITA/TCE) funding, we also need additional funding for infrastructure
improvements and additional staffing. Increasing grant funding without
a corresponding increase in staff may be challenging.
The IRS continues to focus on the growth of the VITA/TCE programs.
In response to the pandemic, we offered VITA/TCE partners alternatives
to the preferred face-to-face tax preparation service model, including
drop off/pick-up, combination (in-person and virtual) and 100-percent
virtual. These alternative service options will continue to be
available to VITA/TCE partners to serve their communities.
Approximately 9,000 VITA/TCE sites provided free tax preparation
services during Filing Season 2022, filing slightly more than 2 million
returns with a 96-percent accuracy rate. Additionally, the IRS
implemented a more streamlined volunteer recruitment process. Potential
volunteers can go through the IRS.gov portal to attend one of multiple
volunteer orientation sessions. The volunteers are then paired with a
partner/site in their local community.
Question. Revenue Procedure 2022-12, authorizing simplified filing
for TY 2021, mentions the EITC, but requires filers to provide their W-
2 data in order to claim the credit. Why are simplified filers required
to provide this data, when the IRS already receives W-2 data from
employers, and low-income populations struggle to access their tax
documents? Specifically, why is it not possible to calculate EITC
payments later in the year, after the initial crunch of tax season, and
issue EITC as plus-up payments in a batch job later in the summer or
the fall--much like the IRS issued plus-up EIPs throughout 2020? What
resources would it take for the IRS to do such automation?
Answer. Unlike the Economic Impact Payments (EIPs), the Earned
Income Tax Credit (EITC) has an earned income requirement, in addition
to other eligibility requirements (with respect to qualifying children
and otherwise) to which a taxpayer must attest when claiming the EITC
on the return. Unlike the EITC, the EIP required the IRS to make
advance payments and specifically authorized the IRS to rely on
information in prior year returns. While the IRS could, in theory,
estimate the taxpayer's earned income and adjusted gross income from
the filer's W-2 information to adjust the amount of EITC claimed on a
return and make a ``plus-up'' payment based on W-2 information not
reported on the return, such a program could lead to improper payments
of the EITC because the W-2 information submitted to the IRS may not
provide a complete picture of the taxpayer's earned income and adjusted
gross income. The IRS must calculate separate totals to determine both
credit eligibility and the correct credit amount.
Other items of income, such as gig income, may not be reported to
the IRS. Even gig income and other non-employee compensation reported
to the IRS by third parties can't just be added to earned income
because the amount reported is a gross payment that does not take into
account any offsetting expenses that offset the payments if included in
gross income and earned income. Including gross amounts of gig economy
and other non-employee compensation payments may result in inflated
self-employment tax liabilities for the taxpayer.
Additionally, the IRS currently notifies taxpayers who appear
eligible for EITC and fail to claim it on their return. These taxpayers
will generally receive a CP 09 or CP 27 Notice inviting them to submit
their information to determine eligibility for the EITC. The taxpayer
must claim the EITC so that they can attest to the fact that they both
qualify for the credit (for example, that their qualifying children
satisfy the relationship and residency requirements), and that they
want to receive the refundable credit, in addition to establishing the
earned income and other computational requirements for EITC. Further,
some taxpayers intentionally decline to claim the EITC despite meeting
the eligibility requirements, due to religious objections or other
sincerely held beliefs.
Question. When during the year does the IRS have W-2 data available
for use? When during the year does the IRS begin using its W-2 data for
enforcement actions? When during the year does the IRS have 1099 data
available for use? When during the year does the IRS begin using 1099
data for enforcement actions, or for the Automated Underreporter
Program?
Answer. The Protecting Americans from Tax Hikes (PATH) Act of 2015
accelerated the due date of the Forms W-2 and the Form 1099-MISC for
non-employee compensation to January 31st. The IRS starts receiving the
Forms W-2s from the Social Security Administration (SSA) in early
January. The information is provided to the IRS within days of receipt
at the SSA. The Form W-2 information is consumed by IRS systems,
including the Return Review Program (RRP), and available for our
identity theft and non-identity theft filters. During the filing
season, the IRS consumes Form W-2 information on our systems daily. We
leverage the earlier availability of Form W-2 data to systemically
verify information reported on taxpayers' returns against third-party
information reporting daily and release the returns that verify.
In a pre-refund environment, using the Form W-2 reduces improper
payments and reduces taxpayer burden, if the income reported on the
return matches the information reported by the employer. The refunds
are released once the wages/
withholding are verified. The IRS leverages the Form 1099-Miscellaneous
for non-employee compensation or the Form 1099-NEC as an indicator the
taxpayer is acting as an independent contractor or self-employed. This
information reduces the risk that a taxpayer may submit a false or
bogus Schedule C to claim refundable credits to which the taxpayer may
not be entitled. If there is withholding included on the Form 1099, the
withholding will be verified. If there is an unresolved discrepancy
within tolerance, the taxpayer may be contacted with a proposed
adjustment to income, withholding, and/or refundable credits in our
Automated Questionable Credit Program or Withholding Only claim
disallowance program.
Both W-2 and Form 1099 data become available in late July for post
processing compliance. This is when the Automated Underreporter Program
begins the process of matching filed tax returns to information
returns, such as the W-2 and Forms 1099 series. This is also the time
when the data is available for field examiners for use in their open
audits.
Question. The IRS has implemented a procedure to automatically
correct EIP3 and advance payment amounts reported by taxpayers.
When was this process implemented?
Answer. The tool was released and started live production on
January 18, 2022.
Question. How does this process work, and how quickly does it make
corrections?
Answer. Incoming electronic returns are sorted according to the
errors specified in the tools programming, known as FixERS. Those
returns are processed through the FixERS tool which resolves the errors
using return information and IRS records. The program assigns a code
resulting in a letter sent to the taxpayer explaining the automated
corrections to the tax return. The tool processes electronically filed
returns at an approximate rate of 1,000 returns per hour.
Question. Are there any situations in which the automated process
does not work?
Answer. There are cases that the FixERS tool can't resolve. When
the tool encounters a return that exceeds the boundaries of its
programming, it refers the return for manual review.
Question. How frequently and why?
Answer. Approximately 3 percent of electronically filed returns
processed through the FixERS tool are not resolved by the tool due to
additional errors found on the return exceeding the boundaries of the
FixERS programming. The 3 percent are suspended for manual review.
Question. Has this process been communicated to taxpayers?
Answer. General tax return correction processes and procedures
(i.e., Internal Revenue Manuals) are available to the public on
IRS.gov.
In addition, I publicly shared use of the automation tool with the
House Ways and Means Oversight Subcommittee on March 17, 2022 during my
testimony on the 2022 filing season.,
Question. If the amounts are automatically corrected, why are
taxpayers still required to report their own advance payment amounts?
Answer. The American Rescue Plan Act, subtitle G, Part I, 2021
Recovery Rebates to Individuals, and Part II--Child Tax Credit, allows
advance refunds of the Recovery Rebate Credit and Child Tax Credits as
credits against income tax.
Adjusted gross income (AGI), and dependents used for eligibility
and calculation of total tax and credits the taxpayer reports may
differ from information in IRS records. Additionally, the taxpayer may
experience life changes not known to the IRS at the time of the advance
payment, such as a marriage or birth of a child.
Question. Can the IRS similarly use automation to utilize other
data held by the agency, including income data for purposes of
calculating credit amounts?
Answer. We are exploring areas of expansion for use of similar
automation tools.
The IRS is authorized to use income information in its possession
to calculate the amount of a credit a taxpayer is entitled to receive
when the credit is based on the taxpayer's income. If the taxpayer
understates or overstates their income, and the correct calculation
results in an increase in tax, or a reduction of the refundable credits
the taxpayer has already claimed, the IRS may issue a notice of
deficiency to the taxpayer to adjust the amount of tax or credit. The
Internal Revenue Code provides authority to adjust a math error,
instead of requiring a notice of deficiency.
The IRS also has authority to reduce the amount of tax reported on
the return when the amount is overstated. Similarly, if the amount of a
tax credit the taxpayer claimed is understated, the IRS is authorized
to issue a refund to the taxpayer when it determines there is an
overpayment (which can occur when a tax return understates refundable
credits).
However, the IRS must make assumptions about the taxpayer's
eligibility for a credit if the taxpayer has not previously claimed the
credit. These assumptions increase the risk of improper payments,
compared to taxpayers who claimed a credit in the wrong amount. For
instance, with the EITC, we need to know from the taxpayer whether they
meet certain eligibility requirements, particularly whether their
children meet relationship and residency tests. For the child tax
credit, we may need to know if they have a Form 8332 the custodial
parent signed to give up their claim for the credit. This type of
information is generally not volunteered by the taxpayer in the absence
of the taxpayer making an affirmative claim for the credit. Requiring
this type of information on a return that is filed with the IRS before
any type of adjustment can be made minimizes improper payments.
Question. What data can you share about usage of the IRS/Fillable
Forms Non-Filer Tool last year, so outreach efforts can improve and be
more effective this year in reaching families?
How many households used the IRS/Fillable Forms Non-filer Tool last
year?
Answer. For processing year 2021, approximately 1.3 million
households with distinct primary account Social Security Numbers (SSNs)
attempted to use the Non-filer Signup Tool to claim the Advance Child
Tax Credit or missing stimulus payments.
Question. How many of them successfully filed a return that was
accepted by the IRS?
Answer. Of those approximately 1.3 million households,
approximately 390,000 returns were accepted via the portal.
Additionally, regular e-file channels accepted more than 350,000
returns.
Question. How many of these returns were routed to some form of
manual review?
Answer. We aren't aware of existing data indicating the IRS/
Fillable Forms Non-filer Tool had a higher rate of manual review.
Question. What was the median wait time for these returns before
receiving payments, and what fraction of them waited for longer than 3
weeks?
Answer. IRS does not have this data.
Question. If relevant, what caused higher-than-average wait times
among these returns?
Answer. Inherently, manual review of a return requires more time
and human interaction to view and resolve questions or errors found on
the return.
Question. What fraction of households who used simplified filing
last year misreported their RRC amount? What was the average magnitude
of the error?
Answer. IRS does not have this data.
Question. How many children do you estimate did not receive the CTC
last year because their families did not file a tax return?
Answer. IRS does not have this data.
Question. How many households who used simplified filing last year
had more than $2,000 of W-2 income and thus were likely eligible for a
meaningful amount of EITC?
Answer. In tax year 2019, approximately 890,000 taxpayers filed
simplified returns. They reported more than $2,000 in wages and less
than the maximum income allowed for the Earned Income Tax Credit
(EITC). In tax year 2020, this figure was approximately 12,000. Please
note that for tax year 2020, the period for taxpayers to file
simplified returns was limited to June 2021 through November 15, 2021,
because the return was for taxpayers who needed to claim advance
payments of the Child Tax Credit and did not file a tax year 2019 or
tax year 2020 return.
Question. Can the IRS assure Ohioans abroad that they will have
continued access and the ability to set up an online IRS account
without needing a U.S. address or U.S. phone number?
Answer. Yes, international taxpayers, including Ohioans living
abroad, may establish and access online accounts. Taxpayers without a
U.S. address or U.S. phone number can create an IRS account for access
to online services using the modernized platform. If taxpayers have
difficulty proving identity with the self-service option, they can
verify their identity via video chat with an ID.me Trusted Referee.
Question. As you know, the American Rescue Plan Act temporarily
expanded and improved the Earned Income Tax Credit for people without
eligible children by increasing the amount and expanding the eligible
age range, including a specific provision to lower the age to 18 for
youth who have been in foster care and youth at risk of homelessness.
As you might imagine, this specific provision benefits potentially
hundreds of thousands of young people who may never have filed taxes
before and likely don't know they qualify for this critical benefit for
the first time. Please describe what outreach the IRS has taken,
including coordination with other agencies and the States and local
communities, to ensure young adults with experience in foster care and
youth at risk of homelessness are being reached about the EITC and how
to claim the benefit?
Answer. The IRS hosts an annual ``EITC Awareness Day,'' a
nationwide collaboration with national and local partners to increase
awareness of refundable credits. For each Awareness Day, IRS invites
community organizations, elected officials, State and local governments
and other entities throughout the Nation to raise awareness of the
EITC. We encourage external stakeholders to promote the EITC to
taxpayers and tax professionals by hosting local events, contacting
local media, and in social media communications. Concentrated
traditional and social media activity helps us reach the broadest
possible range of eligible taxpayers, including underserved populations
and newly eligible taxpayers. The 16th annual EITC Awareness Day was
held on January 28, 2022. The IRS messaging included social media
communications that addressed American Rescue Plan (ARP) provisions for
qualified former foster youths and qualified homeless youths.
Information is posted on IRS.gov including frequently asked questions
regarding qualified former foster and homeless youths.\12\ In addition,
the EITC Assistant helps taxpayers determine if they are eligible and
if they have a qualifying child or children, and it estimates the
amount of the EITC they may receive.\13\
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\12\ EITC FAQs: IRS Issues Questions and Answers About the Tax Year
2021 Earned Income Tax Credit, Internal Revenue Service, https://
www.irs.gov/newsroom/irs-issues-questions-and-answers-about-the-tax-
year-2021-earned-income-tax-credit.
\13\ EITC Assistant: Use the EITC Assistant, Internal Revenue
Service, (https://www.irs.gov/credits-deductions/individuals/earned-
income-tax-credit/use-the-eitc-assistant).
The IRS also created Publication 5585, Child-Related 2021 Tax
Credits, educational flyer that explains refundable credits.
Circulating Publication 5585 has been instrumental in expanding this
outreach initiative. The publication was shared with all VITA/TCE
partners, local Taxpayer Advocate Offices and became the foundation for
another new publication, Publication 5607, You Could Receive a Tax
Refund even if You're Not Required to File. In addition, the IRS is
planning to conduct targeted outreach to individuals raising children
who lost both parents, foster children, and those living in domestic
abuse centers and/or homeless shelters. To accomplish this, we will
identify and share information with individuals and agencies/
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organizations actively serving these populations.
Question. The IRS has had its budget slashed over the past decade,
with funding down roughly 20 percent since 2010 and some departments
seeing even steeper cuts. Under your leadership, the IRS has also taken
on new responsibilities as part of the Federal Government's response to
the pandemic, providing rounds of stimulus payments and monthly Child
Tax Credits, which provided a financial lifeline to millions of
families but strained an already over-burdened agency.
As you've previously acknowledged, the IRS's budget cuts present a
serious challenge to the agency's operation, across departments. The
audit rates on large corporations and millionaires have fallen by over
half since 2010. The agency's IT system, integral for the health and
security of our tax system, is woefully outdated. Insufficient funding
has even made it hard for the IRS to answer most taxpayers' phone
calls.
Following the overdue but insufficient 6 percent increase in
funding for the IRS in the 2022 omnibus, Congress must continue to
rebuild the IRS after years of cuts. President's Biden's budget for
2023 proposes to increase IRS appropriations by 12 percent over the
2022 level, which would make important progress but still be about 13
percent short of inflation-adjusted funding levels in 2010. Further,
the House-passed Build Back Better legislation would provide roughly
$80 billion in mandatory funding for the IRS over 10 years.
Can you elaborate on the urgency and importance of this funding for
the agency? How would this funding be used, and how would it help
address the challenges the IRS faces as it confronts this and future
filing seasons?
Answer. The IRS is the primary source of funding for the United
States Government. The IRS collected more than $4 trillion in gross
taxes in FY 2021. This revenue makes it possible for the government to
perform its vital functions ranging from education to defense. As the
past 2 years have shown, we are more than a tax administration agency.
The support we provided to the Nation during the COVID-19 pandemic
illustrates the IRS's significant role in our country's overall
economic health.
As you note, since 2010 the IRS has experienced a dramatic decrease
in funding in real terms. Because of this reduction, the number of
returns the IRS is not able to examine is at historic levels. A recent
GAO report discussed this problem at length.\14\ The following table
from the 2021 IRS Data Book illustrates this problem succinctly. Across
the board, the number of returns examined dropped significantly between
tax years 2011 and 2019.
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\14\ https://www.gao.gov/products/GAO-22-104960.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
.epsThe IRS estimates the tax gap from 2011-2013 was $441 billion.
Preliminary research suggests the gross tax gap for 2019 could be
approximately $600 billion. Providing $80 billion in multiyear funding
to the IRS--on top of the proposed discretionary budget request would
allow the IRS to address this trend and increase amounts of tax owed
but not paid. This problem has taken years to develop, though, and it
will take years to reverse--that is why a 10-year infusion of mandatory
funding would be so beneficial. The Biden administration \15\ and I
\16\ have written extensively on this topic. The proposal contains
elements that address three aspects of the problem:
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\15\ https://home.treasury.gov/system/files/136/The-American-
Families-Plan-Tax-Compliance-Agenda.pdf.
\16\ https://www.warren.senate.gov/imo/media/doc/
Warren%20et%20al%20response%20to%20
Warren%20082721.pdf.
1. Provide the world-class customer service that taxpayers
deserve, which includes funding to increase staff and
technology for taxpayer services to provide taxpayers the
resources they need to voluntarily pay their taxes.
2. Modernize our tax administration information technology to
ensure IRS employees have the tools they need to assist
taxpayers and identify and target noncompliant taxpayers.
3. Build the IRS's enforcement capacity to address areas where
our tax gap analysis indicates underpayment of taxes such as
high income, partnerships, and business returns.
Providing $80 billion in multiyear funding, on top of a
complementary discretionary investment, includes would gradually
restore IRS's enforcement capability and train a new generation of
enforcement staff. The phased approach is necessary because it takes
time to rebuild. For example, the skills necessary to audit complex
returns take years to develop. It is important to recall, though, that
from the perspective of the United States Government, IRS enforcement
staff pay for themselves many times over. Investments in IRS's
enforcement capacity generates about $5 of income to the Treasury for
every $1 they cost, based on historical experience.\17\ The
Congressional Budget Office (CBO) has confirmed this overall investment
would pay for itself and more.\18\
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\17\ IRS Research Division estimated Build Back Better Act large
business Enforcement staff returning $5.0 and small business
enforcement staff returning $6.3 for every dollar of cost assuming a 7-
year career and collections for that period plus 10 years thereafter.
The model assumes Revenue Agents assess tax liability during their 7-
year career and the IRS continues to collect on those assessments after
they leave. These estimates are based on historical actuals for a mix
of examination work that IRS expects would be worked with Build Back
Better Act funds.
\18\ https://www.cbo.gov/publication/57620.
The $80 billion in mandatory funding also includes funding for
Taxpayer Services appropriation. In tandem with the existing annual
appropriations for taxpayer service, this funding would allow the IRS
to hire additional staff to directly assist American taxpayers.
Voluntary tax compliance is the cornerstone of our tax system. The IRS
wants to make it as easy as possible for taxpayers who want to pay
their fair share, but need our help to do so. Modernization is another
critical element in expanding the IRS's ability to meet taxpayers'
service needs. We are making meaningful progress with modernization
efforts and promptly delivered recently enacted financial assistance
and administrative relief to hundreds of millions of deserving and
needy Americans. However, insufficient funding slows the speed at which
we can deliver services to taxpayers and increase our efficiency
---------------------------------------------------------------------------
through technology.
With substantial new investment in modernization, IRS could support
efforts to continue implementing its Integrated Modernization Business
Plan for upgrading IT systems and retiring legacy applications. This
funding will enable the IRS to advance significant modernization
initiatives that directly benefit taxpayers. These initiatives include
digital communications, customer callback, and Enterprise Case
Management, all of which will allow our customer service to staff to
provide more comprehensive service to taxpayers.
Question. For people who cannot use ID.me to create an IRS online
account, what is the alternative for them to access information about
their tax filing history?
Answer. Taxpayers may access the Where's My Refund? (WMR) and
Where's My Amended Return? (WMAR) online tools at IRS.gov to check the
status of their Form 1040, Individual Income Tax Return and Form 1040X,
Amended U.S. Individual Income Tax Return.
We are currently working to expand WMR technology. We recently
added multiyear technology to allow taxpayers the ability to view
refund information for multiple years. In FY 2023 we plan to expand
capabilities to provide more detailed messaging on refunds delayed due
to math errors and the identify theft filters for the taxpayer
protection program. We are focused on expanding refund trace
capabilities as well as modernizing and internationalizing the WMR
application.
Taxpayers may request a transcript by faxing or mailing Form 4506-
T, Request for Transcript of Tax Return. Transcripts are available for
the following returns: Form 1040 series, Form 1065, U.S. Return of
Partnership Income, Form 1120, U.S. Corporation Income Tax Return, Form
1120-A, U.S. Corporation Short-Form Income Tax Return, Form 1120-H,
U.S. Income Tax Return for Homeowners Associations, Form 1120-L, U.S.
Life Insurance Company Income Tax Return, and Form 1120-S, U.S. Income
Tax Return for an S Corporation. Return transcripts are available for
the current year and returns processed during the prior 3 processing
years.
Electronic Tax payments may be made by using the below options:
Direct Pay; debit or credit card; and online account.
Question. What do you know about the effectiveness of the IRS
notices mailed in September 2020 to inform people about their potential
eligibility to claim the economic impact payment? How many people filed
returns when IRS sent EIP notices in September 2020 based on employment
info? Of the 9 million notices sent, how many were undeliverable? How
many redelivered to a new address? How many received a response?
Answer. The IRS sent Economic Impact Payment (EIP) notices to
nearly 9 million recipients from September 17, 2020, through October 2,
2020. The IRS used the United States Postal Service (USPS) Address
Correction Service reports, which provide codes for non-delivery to
attempt to deliver returned EIP notices.
There were 1.6 million notices determined to be undeliverable
putting the Secure Destruction rate at approximately 17.9 percent.
Analysis of these codes showed that most error codes related to
addressees no longer being located at the address and/or their
forwarding order had expired.
Question. In its recent report, TIGTA said there 51,000 cases of
individuals mistakenly marked as living in a territory, who did not
receive their EIP for this reason.
In 2021, IRS staff provided my staff with an estimate that 500,000
individuals were affected by this problem. Why was the 51,000 figure
later reported by TIGTA so different from the earlier estimate provided
by IRS?
Answer. The figure TIGTA provided was based on reports the
territories provided. The IRS took a broader approach and reviewed
individuals who had a Federal tax history. We also allowed individuals
to attest they were not residents of the territories and did not
receive a payment from the territories.
Question. How many individuals were mistakenly marked as living in
a territory?
Answer. The territories provided the IRS with individuals who filed
a tax return with the territory and who they intended to issue an EIP
territory payment. The IRS used listings the territories provided to
mark approximately 946,000 accounts to prevent duplicate Economic
Impact Payments (EIPs) (one from the U.S. Treasury and one from the
Territory).
Question. Has the IRS successfully reversed the territory marker
for all of the individuals found to be affected by the mistaken marker?
Are there other individuals mistakenly marked with the territory
marker, that have not yet been reversed? If so, when will the marker be
reversed for these individuals?
Answer. The IRS has reversed approximately 663,000 markers. Any
individual who believes they were eligible to receive an EIP from the
U.S. Treasury, but did not receive one, may claim the 2021 Recovery
Rebate Credit on their Federal income tax return (Form 1040).
______
Questions Submitted by Hon. Maria Cantwell
Question. Updating the IRS's technology needs to be at the top of
the agency's to-do list. We've seen throughout the pandemic the
problems with taxpayers having to call the IRS to get their tax
questions answered.
IRS call volumes have soared in the last year, and in 2021 only one
in nine callers were able to actually reach an IRS employee. The GAO
recently testified in this committee that the IRS expects customer
service representatives to answer only about 35 percent of incoming
calls during the 2022 filing season.
As you know, the IRS is piloting its use of online chat features,
but right now limiting it to resolving collection notices. It has not
been expanded to allow taxpayers to chat with customer service
representatives about their tax questions.
A 2019 GAO study compared the IRS's online communication
capabilities with other nations. It found that taxpayers in the U.K.,
Australia, and New Zealand were able to securely chat online with their
tax agencies to get answers to their tax questions. And we don't even
need to look abroad to find these capabilities: California and
Alabama's revenue agencies offer similar online chat services.
As we look at increasing funding for the IRS, we need to invest in
the agency's technology and workforce to bring it into the 21st
Century.
As part of that 2019 report, the GAO recommended the IRS set
targets to reduce taxpayers' burden through the development of new
online services. Would the development of online services like those
we've seen from California and other countries to allow direct
communication with IRS staff help improve taxpayers' ability to get
their questions answered?
Answer. Developing online services that allow taxpayers to directly
communicate with the IRS would presumably help taxpayers get answers to
their questions and conduct business with the IRS more seamlessly. Key
assumptions are the IRS has the staffing resources to support what
could be an influx in demand and the IRS has sufficient modernization
funding to support the technology enhancements.
The IRS continues expanding the type of transactions taxpayers can
conduct through IRS Online Account. We recently integrated
functionality to make payments more seamless and to establish a payment
plan if needed. Through Online Account, you can now: access tax
records; make and view payments; manage communication preferences; view
your balance; view or create payment plans; and view Tax Pro
authorizations.
Question. Will you commit to establishing these kinds of online
communications services in order to help taxpayers get their questions
answered quickly and securely?
Answer. The IRS will continue exploring opportunities to modernize
digital service to address taxpayer inquiries quickly and securely.
Funding will determine which opportunities we can pursue and the pace
at which the IRS can expand online services. Our future technology
direction includes a fully digital experience for all taxpayers,
including small business owners, corporations, and tax professionals,
through an expanded IRS Online Account.
Question. In your testimony you stated that the IRS lacks sustained
sufficient multiyear funding for IT modernization. I strongly support
this funding as investments in this technology would speed up the
filing of paper tax returns and improve communication with taxpayers.
The National Taxpayer Advocate's Annual Report to Congress stated
that paper processing remains the IRS's biggest challenge. As of
February 5th, the IRS still had 8.5 million paper returns that need to
be processed. The only way we are going to prevent these kinds of
backlogs from happening again and again is by modernizing the IRS's
technology.
Beyond the ability of taxpayers from being able to get their
answers to tax questions online, I am also broadly concerned about the
lack of information technology upgrades in the IRS.
To help reduce call volumes during tax season, the IRS has directed
taxpayers with questions about the status of their refund to use the
agency's online Where's My Refund? tool.
But the GAO in a report from this February found a number of issues
with this tool, primarily that it provides very limited information to
taxpayers. The tool only displays whether a return has been received,
approved, or sent. It does not, for example, alert a taxpayer if there
has been a delay in processing their return due to an error or another
reason, which slows the process down.
This resulted in increased call volumes as taxpayers tried to get
more information on the status of their tax refund--the exact problem
Where's My Refund? is supposed to help with.
According to the GAO, the IRS has no plans to modernize the refund
tool due to a lack of funding, even though this would help the IRS
better serve taxpayers, lower call volumes, and reduce costs.
The President's budget requests $310 million for IT upgrades
through the IRS's business systems modernization program, including $78
million specifically for IT systems to improve taxpayer services. How
would this funding allow the IRS to improve communication with
taxpayers?
Answer. These multiyear funds are used for development,
modernization, and enhancement activities that support the IRS mission,
including efforts to improve communication with taxpayers. For example,
this funding will be used to expand IRS Online Account capabilities to
improve the taxpayer experience, enhancing self-
service options to establish and submit payment plans, as well as to
make and view tax payments. The funding will enable the IRS to expand
Tax Pro Account, providing authorized tax professionals with
capabilities that modernize certain paper-based processes to help
resolve issues with the IRS on behalf of their clients. In FY 2023, the
IRS will continue to expand the Tax Pro capabilities to include the
ability to view and manage authorizations and enable taxpayers to
initiate new authorization requests online. These capabilities will
reduce taxpayer and tax professional burden, the number of submitted
paper forms, and the time it takes to submit authorizations. Taxpayers
and tax professionals will also benefit from additional data accuracy
and security because the process confirms and protects their identity.
The IRS will continue to expand taxpayer access to digital notices,
allowing taxpayers to choose to opt in or opt out of receiving paper
notices and receive notifications through email or text message. This
investment will increase taxpayer response rates to notices, reduce
burden on taxpayers and the IRS, reduce printing and postage
requirements, and promote more efficient interactions.
Question. Will you commit to updating the Where's My Refund?
application to provide more information to taxpayers on the status of
their refunds?
Answer. The IRS recently expanded Where's My Refund? (WMR)
technology. We added technology to allow taxpayers the ability to view
refund information for multiple years. In 2023 we plan to expand
capabilities to provide more detailed messaging on refunds delayed due
to math errors and identify theft filters for the taxpayer protection
program. In addition, we are focused on expanding refund trace
capabilities, as well as modernizing and internationalizing the WMR
application.
We recognize the importance of providing transparency in the refund
processing status. The IRS has acknowledged that Where's My Refund? has
limitations. We are in the early stages of making enhancements to
Where's My Refund?, an initial step for an IT modernization effort. In
June of 2022, we updated WMR to make it possible for taxpayers to get
high-level processing status for multiple tax years. For example, if
the IRS has records for a taxpayer's 2020 and 2021 returns, and the
taxpayer enters the refund amount matching your 2020 return, WMR would
display the status of the 2020 refund.
The IRS tracks the status of a refund from start to finish.
Currently, WMR provides the following information: high-level
processing status; refund date; high-level offset and math error
information; contact information for further questions; and helpful
links for additional information.
______
Questions Submitted by Hon. Rob Portman
Question. In late December, Treasury released final regulations on
Foreign Tax Credits (FTCs), which would deny creditability to a
substantial portion of foreign taxes and result in double taxation on
American companies. These ``updated regulations'' were promulgated
under the guise of preventing Digital Services Taxes (DSTs) from
receiving credits.
My understanding is that the regulations would deny a tax credit
for foreign taxes paid on royalties when the underlying intellectual
property (IP) is located here in the United States. This result would
not occur if the IP were located in the relevant foreign jurisdiction.
Without consulting Congress and against the advice of the companies who
utilize foreign tax credits, the Department of the Treasury has
unilaterally issued regulations that will incentivize offshoring of
both jobs and IP, undermining bipartisan efforts to do the opposite. We
should be encouraging these investments here at home, not driving them
to our competitors.
The regulations' effective date is immediate, giving companies
little time to adapt to the radically different system than the one
they have operated under for decades.
This requires time to review and analyze foreign tax law to
determine its characterization under this new regime, and many
companies are struggling to meet the deadlines.
With the IRS now already facing substantial challenges, has the
agency begun reviewing foreign law to determine which foreign taxes are
eligible for credits under the new regime? If not, when do you plan to
start preparing for this change and how long do you anticipate it will
take to train audit agents and appeals on which country's taxes are
eligible for the foreign tax credit?
Answer. The IRS is coordinating with subject matter experts and
counsel to review the creditability of various foreign taxes. To assist
with this effort, the IRS obtained access to translations of many
foreign tax laws to help examiners understand and analyze these foreign
taxes. The IRS's Large Business and International division has
conducted informal workshops on the new regulations and plans to
conduct more detailed, formal training. Training and formal and
informal guidance on this new area of the tax law is expected to be
iterative and evolve with developments in the law and the IRS's
understanding taxpayers' issues over several years.
The Independent Office of Appeals has a group of Appeals Officers--
International Specialists. This group predominately works cases
involving international issues, including Foreign Tax Credit issues.
Appeals has delivered training to our Appeals Officer--International
Specialists on the general provisions of Tax Cuts and Jobs Act. Appeals
will not encounter issues related to these new regulations for several
years, given the effective date of the regulations and the fact that
Appeals works cases after IRS revenue agents complete audits. We
generally provide just-in time training to our employees. To be
effective, training in new and complicated areas is delivered soon
after receiving the cases. We will collaborate with Counsel as we plan
training on these credibility rules.
Question. The bipartisan infrastructure bill I led was signed into
law last year and included a provision to provide more certainty for
Americans looking to invest digital assets.
This would ensure that crypto investors receive the same tax
documents from their brokers that stock traders receive, mainly a 1099-
B, which in turn will enable them to file their taxes more easily and
promote higher compliance.
This is one of our first efforts to incorporate digital assets like
crypto into the tax code, so it is important that we help provide
clarity into what this law means for the millions of taxpayers who hold
crypto assets.
In December, we urged Secretary Yellen to engage in rulemaking for
this provision as quickly as possible, in particular with how
``broker'' is defined. As we described in that letter, it was our
intent that the reporting requirements only cover brokers who enable
the transfer of digital assets for consideration--and not other parties
which are ancillary to the process.
What is the status of these regulations?
Answer. The IRS and the Treasury Department are working on a notice
of proposed rulemaking (NPRM) to implement information reporting rules
for brokers of digital assets. We share Congress's goal to achieve
greater certainty for Americans looking to invest in digital assets.
This is especially important because section 80603 of the
Infrastructure Investment in Jobs Act (IIJA) is one of the first
efforts to address digital assets and incorporate them into our
Nation's tax code, as digital assets become increasingly prevalent and
mainstream.
Question. Can you assure me that congressional intent will be taken
into consideration throughout the rulemaking process?
Answer. The IRS and the Treasury Department are aware of a colloquy
between Senator Portman and Senator Warner about the purpose and
meaning of the modification made by section 80603 of the IIJA to the
definition of ``broker'' in section 6045(c). This colloquy is part of
the legislative history of the IIJA amendment to the definition of
``broker'' in section 6045(c). The IRS and the Treasury Department are
considering these statements as they develop the NPRM. They are
consistent with the IRS's and the Treasury Department's view that
ancillary parties who cannot get access to information that is useful
to the IRS are not intended to be captured by the reporting
requirements for brokers. For example, persons who are just validating
transactions through a consensus mechanism are not likely to know
whether a transaction is part of a sale. And persons who are only
selling storage devices used to hold private keys, or merely write
software code are not carrying out broker activities. The IRS and the
Treasury Department also will consider the extent to which other
parties in the digital asset market, such as centralized exchanges and
those often described as decentralized exchanges and peer-to-peer
exchanges, should be treated as brokers given the clarification section
80603 provides. The IRS and the Treasury Department intend to propose
regulations that address the concerns expressed in the colloquy
regarding the definition of broker.
Question. The 2020 CARES Act allowed taxpayers to carryback net
operating losses arising in a taxable year beginning after December 31,
2017, and before January 1, 2021 to each of the 5 taxable years
preceding the taxable year in which the loss arose. Generally,
taxpayers had to file claims for refund on paper (Form 1139 for
corporations or Form 1045 for individuals). In a report from January
2022, the Government Accountability Office (GAO) found that the IRS was
poorly prepared to contend with the influx of these paper refund
claims. GAO found that the average time for refunds was approximately
165 days, well exceeding the 90-day statutory limit on the issuance of
refund. In addition, the Taxpayer Advocate reported in January 2022
that the IRS is not providing information on refund wait times for the
inventory backlog. These carrybacks were enacted to provide cash to
taxpayers to offset costs and losses they incurred during the pandemic,
but delays have meant that many taxpayers have not been provided the
intended relief.
My office has received reports that there has been a sharp increase
in the denial of these carryback refund claims filed a year ago. These
denials are supposedly for ``missing information'' or other
administrative reasons related to the refund claims. Per Internal
Revenue Manual 21.5.9.4.3, such denials are not to be issued until the
IRS has contacted the designated IRS contact for the taxpayer and
requested the missing information or stated other reasons for errors in
the claim for refund. However, it is my understanding that no such
requests for information or other requests have been made to many of
these taxpayers. Some were only made aware of this denial when they
received a``216C letter'' from the IRS stating their claim was denied.
One taxpayer has an IRS liaison out of the Cincinnati Service Center to
assist them and such liaison had no answer for why a denial was issued.
I am told that if claims for refund are denied, taxpayers will have
to file amended returns for the carryback years, and if these amended
returns are refused in about 6-12 months, file suit in court. For
publicly traded businesses, this process will likely require them to
restate financial statements.
Are you aware of such denials of CARES Act carryback refund claims?
Answer. In all cases, IRS employees attempt to analyze the
documents and correct minor math errors in the submitted forms so they
can be processed. The Internal Revenue Manual (IRM) 21.5.9.4.3 states
that employees must determine if missing information could make the
Form 1139, Corporation Application for Tentative Refund, processable;
if so, they make two attempts to contact the taxpayer to obtain
specific missing information. Most return rejects occur when taxpayer
figures do not match IRS's posted figures, or multiple errors prevent
processing. When rejected, a Letter 216C is issued to the taxpayer with
an explanation and states how to correct the return.
Question. Is it possible that erroneous denials have increased as
part of the effort to clear away past year return backlogs?
Answer. The IRS has an effective and rigorous training strategy.
Recent legislation has required the IRS to skill up additional staff to
handle the demand. Employees must follow the IRM guidance, but
erroneous rejects could occur occasionally. If this occurs, they can be
identified through various quality review channels or by the taxpayer.
If they are identified in quality review or by the taxpayer, the cases
are reopened for correction. A timely filed application for tentative
refund identified as erroneously rejected (IRS error) will be corrected
without the taxpayer having to file an amended return Form 1120-X,
Amended U.S. Corporation Income Tax Return.
Question. Can you explain why it appears that the Internal Revenue
Manual procedures on contacting taxpayers before denying these
carryback claims are not being followed?
Answer. Our quality review of carryback cases does not indicate
this to be a recurring issue.
Question. What are the options for taxpayers whose claims for
refund have been denied erroneously?
Answer. Rejected cases include Letter 216C or other appropriate
letters, to explain the reason for rejection and how to correct it. The
letters include a toll-free phone number and a mailing address for
corrections to be returned. If an application for tentative refund was
timely filed but erroneously rejected (IRS error), and the erroneous
rejection is identified through quality review or notification by the
taxpayer, the IRS will correct it without the taxpayer having to file
an amended return.
Question. Can you provide my office with a contact at the IRS who
has reviewed these denials and can offer assistance if a taxpayer's
claim was erroneously denied?
Answer. We would be glad to research any outstanding constituent
cases on the matter if your staff provides our Legislative Affairs team
with the appropriate privacy release documentation.
______
Questions Submitted by Hon. Maggie Hassan
Question. Taxpayers in my State are struggling with the large IRS
backlog in processing amended tax returns. Many families have reached
out to my office because they missed their original opportunity to
claim Economic Impact Payments on their tax returns--and are still
stuck waiting for their Economic Impact Payments while the IRS
processes their amended return.
I've raised these concerns with you before, but I continue to hear
from Granite Staters about these IRS delays. What more are you doing to
expedite processing of tax returns in general--and amended returns
specifically.
Answer. We are utilizing overtime, including mandatory overtime,
and redirecting resources as available. We are also currently using a
new automated tool, called FixERS, to expedite the resolution for
millions of taxpayers normally requiring manual review. This tool has
had positive results dramatically expanding efficiencies. We are
prioritizing work in a first-in, first-out order, with refund returns
given priority.
While we began intaking Form 1040-X returns electronically, Tax
Examiners in our Submission Processing function and Customer Service
Representatives in our Accounts Management function must input
adjustments manually. We are using overtime and redirecting resources
as available.
Accounts Management continues to use surge employees. As of April
18th, there were almost 900 former Accounts Management employees
assisting with amended return case processing. We have seen a
significant increase in amended return closures as a result of adding
these surge employees. We expect the surge employees to remain in our
Accounts Management function through at least the end of this fiscal
year.
Question. I've introduced legislation to raise the threshold
determining when casual users of online marketplaces have to receive a
1099-K tax form. Casual sellers who sell used goods online typically
don't owe any income tax on those sales--but could nevertheless easily
get a 1099-K under the $600 threshold.
If many of these casual users are selling their personal items for
less than they purchased them, do you agree that, under the $600
threshold, the IRS will receive significantly more tax forms in the
future for online sales of used goods that do not show any taxable
income?
Answer. The Form 1099-K is an information return. A taxpayer can
use the information in the form with their other tax records to
determine their correct tax. Whether the taxpayer has a tax liability
depends on whether the proceeds from the asset sale are greater than
the taxpayer's basis in the asset. Changes from the American Rescue
Plan Act to information reporting requirements for payments settled by
third party networks do not change the taxability of payments. If a
taxpayer receives a Form 1099-K for a non-taxable transaction and is
audited by the IRS, the individual can provide the facts and
circumstances to support the non-taxable determination.
Beginning with calendar year 2022, third-party settlement
organizations must file and furnish a Form 1099-K to payees if the
aggregate amount of payments to a participating payee exceed $600. This
is less than the prior reporting threshold of $20,000 and 200
transactions for third-party settlement organizations. We agree the
volume of Form 1099-K filings will increase with the $600 threshold;
however, we are unable to quantify that increase at this time.
Question. You have previously stated your support for remote
notarization, which allows consumers and small businesses to remotely
and securely notarize important documents. Thirty-nine states,
including New Hampshire, have passed laws supporting remote
notarization.
Will the IRS permanently extend its rule making this common-sense
solution available to taxpayers?
Answer. Notice 2020-42 \19\ provided relief through December 31,
2020, from the physical presence requirement, allowing for remote
notarizations under certain conditions. IRS Notice 2021-03 \20\
extended this relief, subject to certain requirements. IRS Notice 2021-
40 \21\ extended the temporary relief again, through June 30, 2022, if
the notarization meets certain requirements in IRS Notice 2021-03. In
May, we released IRS Notice 2022-27,\22\ which provides an additional
6-month extension, through December 31, 2022, of the temporary relief,
if the notarization meets certain requirements in IRS Notice 2021-03.
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\19\ 2020-26 Internal Revenue Bulletin (IRB) 986, published on June
22, 2020.
\20\ 2021-2 IRB 316, published January 11, 2021.
\21\ 2021-28 IRB 15, published July 12, 2021.
\22\ Released on May 13, 2022.
Following the publication of the various notices extending the
temporary relief, the Department of the Treasury (Treasury) and the IRS
received comments from numerous stakeholders about the physical
presence requirement. While some stakeholders requested permanent
relief from the physical presence requirement, other stakeholders asked
that we keep the physical presence requirement, describing concerns
---------------------------------------------------------------------------
about potential fraud and spousal coercion.
Treasury and the IRS are currently reviewing the stakeholder
comments to determine whether to keep the physical presence requirement
in Treasury Regulation section 1.401(a)-21(d)(6)(i) without
modification, or to propose modifications.
______
Questions Submitted by Hon. James Lankford
Question. In February, the Taxpayer Advocate, Erin Collins,
testified before the Senate Finance Committee. Her testimony noted that
as of late December 2021, the IRS had backlogs of 6 million unprocessed
original individual returns, 2.3 million unprocessed amended individual
returns, and more than 2 million employer's quarterly tax returns.
According to the IRS's website, as of April 1, 2022, the IRS had 7.1
million unprocessed original returns, which includes returns received
before 2022 and new tax year 2021 returns. In addition, as of April 2,
2022, there were 2.2 million unprocessed amended individual returns
(Forms 1040-X), and as of April 6, 2022, 1.9 million unprocessed
employer quarterly Federal tax returns (Forms 941).
Do all of these unprocessed returns require manual processing?
Answer. Generally, no. This figure may include current and prior
year, paper and electronic, business and individual returns, and
returns that will be processed both with, and without, human
intervention. We process returns in the order in which we receive them.
We continue to work to reduce our amended return inventory using surge
teams, employees we temporarily reassigned to processing. The surge
team initiative moved hundreds of existing employees with previous
processing experience to address the backlog.
Question. How many of these unprocessed returns are from this
filing season vs. prior filing seasons? Please provide a breakdown of
unprocessed returns and the tax year to which they correspond.
Answer. Unprocessed returns are a mixture of returns that have not
yet been input into the system and returns that have been input and
require further manual processing. We are unable to breakdown
unprocessed returns by tax year until they are processed.
IRS completed the processing of all error free individual income
tax returns taxpayers filed in 2021 as of June 24, 2022. As of August
5, 2022, we have approximately 140,000 business paper returns we
received in calendar year 2021 waiting to be processed. For individual
paper returns received in calendar year 2022, as of August 5, 2022,
there are about 7.9 million waiting to be processed and about 6.2
million business paper returns waiting to be processed.
Question. How do you balance existing backlogs with other returns
being filed in real time for this filing season?
Answer. Returns filed electronically with no errors are processed
within normal time frames without manual intervention. We work returns
with errors within 14 days of receipt by either making corrections or
sending correspondence to the taxpayer for additional information. We
process paper returns in a first-in, first-out order, so we will work
the current year paper returns once the returns of the same type we
received prior to January 1, 2022, are input.
Question. You have announced a plan to get the IRS ``healthy,''
allowing the IRS to eliminate backlogs and get back to standard
processing times by the start of the 2023 filing season.
Are you on track with that plan?
Answer. The IRS is making every effort to redirect resources with
the goal of getting healthy. Actions the IRS has taken to address the
inventory include surge teams, mandatory overtime, innovating to
expedite case closures and suspending various notices.
Question. When exactly do you expect to eliminate backlogs--at
least for returns and correspondence related to prior filing seasons?
Answer. We have redeployed and reallocated resources throughout the
IRS and have implemented innovative strategies in an ongoing effort to
provide a meaningful reduction in our inventories. We continue pursuing
innovative strategies to fulfill our commitment to return inventories
to a healthy level.
Question. Earlier this year, the IRS announced ``surge teams'' and
the reassignment of 1,200 employees from existing jobs to processing
positions to help with the backlog. Based on your April 5, 2022 letter
in response to a letter that I sent on January 25, 2022, it is my
understanding that you have recently moved 800 employees back into key
accounts management positions and intend to move 700 employees into
submissions processing.
Have those ``surge teams'' worked to eliminate the backlog?
Answer. Yes, as we had anticipated, the surge teams are helping
reduce inventory at each of our processing sites.
Question. Do you still intend to have those employees reassigned
through September of this year?
Answer. We plan to keep the surge team employees in their
reassigned roles through the end of this year.
Question. What is the plan for timely processing after that time?
Answer. Once we achieve healthy inventory levels, we expect to have
adequate staffing to remain timely.
Question. In your testimony, you mentioned the creation of the
Taxpayer Experience Office, an office launched last year to unify and
expand the work being done to serve taxpayers. You noted that that
office will focus on customer service best practices and will add staff
in the coming months to support that effort.
Please provide areas of improvement that the Taxpayer Experience
Office has identified thus far with respect to customer service and
taxpayer experience.
How are you moving forward with those recommendations?
Answer. To drive the IRS strategic direction for improving the
taxpayer experience, the Taxpayer Experience Office identified key
activities the IRS is focusing on over the next 5 years. These
activities include the commitments in the President's Executive Order
on Transforming Federal Customer Experience and Service Delivery to
Rebuild Trust in Government. We developed the Taxpayer Experience
Strategy (TXS) with input with internal and external stakeholders. As
the Taxpayer First Act Report to Congress describes, the TXS has the
following focus areas, representing goals the IRS hopes to achieve over
the next several years:
1. Expanded Digital Services
The IRS will expand access to digital information and assistance,
offering an improved experience for people who prefer online self-
service. We will: enhance the IRS's Online Account for individual
taxpayers and expand this service to tax professionals and businesses;
enhance authenticated online self-services to include account updates,
full interaction history, and issue status; and increase electronic
filing receipts and scanning/data capture for paper filings, secure
document exchange, and more.
2. Seamless Experience
The IRS will offer personalized online interfaces for taxpayers and
their authorized tax professionals. We will: enable taxpayers to seek
service and information through the channel of their choice; pass
taxpayer information from one interaction to the next employee or
channel, streamlining processes and expediting resolution; and offer
live web chat and train telephone employees to provide IRS navigation
support.
3. Proactive Outreach and Education
The IRS will educate the taxpayer community by proactively
providing information in the language, timing, and method taxpayers
need or prefer. We will: leverage multiple means including social
media, trusted partnerships, customized digital options, and new
technology to deliver information and personalized messages; and
increase taxpayer confidence in meeting their tax obligations through
this additional education.
4. Focused Strategies for Reaching Underserved Communities
The IRS will establish a consolidated program to engage with
historically underserved communities to address issues of
communication, education, transparency, trust, and of the limited
access to quality products and services. We will: develop custom
strategies for each underserved segment based on focused research, best
practices, and learning from partners on ways to better interact with
these communities; and provide personalized education and outreach to
ensure taxpayers are engaged, heard, informed, and clearly understand
their obligations.
5. Community of Partners
The IRS will create and facilitate a collaborative, interactive
network of partnerships across the tax ecosystem and consolidate
existing efforts. We will: bring innovative ideas and approaches to our
stakeholder and trusted partner collaborations; collaboratively explore
new ways to better serve the needs of different taxpayer segments and
provide appropriate assistance; and seek new partnerships to better
reach and interact with our taxpayers.
6. Enterprise Data Management and Advanced Analytics Capabilities
The IRS will develop an Enterprise Data Management strategy with a
cross-
enterprise understanding of customer experience, emerging needs and
expectations, and operational data. This strategy will: assist in
understanding customer profile, behavioral and transactional data, and
customer support services; use a central repository of integrated data
from IRS systems that stores current and historical data; and improve
compliance efforts, resolving cases faster and focusing on addressing
issues with the largest effects.
Although planning is still underway to successfully implement the
TXS, the IRS has already made considerable near-term progress across
various focus areas and capabilities including:
Expanding Customer Callback. In Fiscal Year (FY) 2022,
customer callback expanded from 16 applications to 30, meaning
over 70 percent of our toll-free demand is eligible for
customer callback. We plan to continue expanding, with a goal
of 95 percent by FY 2024.
Expanded Taxpayer Outreach. We established special Saturday
Taxpayer Experience Days in several key locations to expand
availability of in-person assistance.
Increased Services for Multilingual Customers. We translated
Form 1040 into Spanish, expanded over-the-phone interpreter
services, and developed a multilingual insert for the top 20
notices. We've also made Form 1040, its main schedules and six
publications available in Spanish, Braille, and large print and
developed a long-term enterprise-wide strategy to improve the
services we provide to multilingual taxpayers.
Improvements to Digital Tools to Support Economic Impact
Payments and the Advance Child Tax Credit. We supported the
American Rescue Plan by allowing taxpayers to opt-out, update
qualifying children, link bank account, and change status for
receiving advance payments of the Child Tax Credit. We also
successfully gave citizens the ability to monitor the status of
Economic Impact Payments and enter bank information through the
Get My Payment tool on IRS.gov. We launched this tool only 3
weeks after the enactment of the Coronavirus Aid, Relief, and
Economic Security (CARES) Act.
Enhanced Digital Communications. We have improved online
chat and deployed online tax professional accounts. With online
chat, taxpayers and their authorized representatives can
securely interact with designated IRS revenue agents and tax
examiners. We also launched a feature allowing taxpayers to
digitally control their representatives with Power of Attorney
or view their tax records with a Tax Information Authorization.
We released this feature in July 2021.
Expanded Partnerships. We expanded partnerships with
multiple Federal agencies to send Economic Impact Payments to
groups without requiring the affected taxpayers to file a
return or take any action.
Forms Modernization. We enabled digital submission of Forms
2848, Power of Attorney, Form 8821, Tax Information Disclosure
Authorization, Form 911, Request for Taxpayer Advocate Service
Assistance, and Form 3949-A, Information Referral.
Question. In February, Jessica Lucas-Judy, the Director of
Strategic Issues at the Government Accountability Office (GAO),
testified before this committee on this year's filing season. In her
testimony, Lucas-Judy detailed the difficulties taxpayers had
contacting the IRS last filing season, noting that while the IRS
answered more calls than previous years, the volume of calls
contributed to a very low answer rate.
According to GAO, during the 2021 filing season the IRS
disconnected 53 percent of calls due to lack of a customer service
representative, taxpayers abandoned 27 percent of calls, and taxpayers
received a busy signal on 2 percent of calls. Additionally, according
to the Taxpayer Advocate, only 11 percent of calls were answered by IRS
customer service representatives in FY 2021.
It is a primary responsibility of the IRS to provide adequate and
ample customer service to the public.
In response to a letter that I sent to you on January 25, 2022 and
also noted in your testimony, you said that the IRS is working to
expand ``Customer Callback,'' which allows taxpayers to select a
callback when estimated wait times are higher than 15 minutes. In your
testimony, you estimate that that function has saved taxpayers more
than 1.3 million hours.
What else can the IRS do to address call volume, hold times, and
low answer rates?
Answer. The IRS has begun expanding live taxpayer-assistance
services. These services include new technologies such as automated
self-service voice bots and chat bots with artificial intelligence and
natural language technology. These automated services provide immediate
information access without waiting for a customer service
representative. Additionally, the IRS is exploring live chat technology
with customer service representatives as an alternative to phone calls.
When successful, these new services will help to reduce telephone
demand. We will continue to utilize Direct-Hire authority to hire
individuals without regard to sections 3309-3318 of title 5, United
States Code, to fill these critical roles.
Question. What can you do to ensure that those answering the phones
are able to provide adequate and complete assistance to taxpayers?
Answer. Employees receive a comprehensive training on phone and
paper inventories, as applicable. New hire and existing employees
receive regular training updates and Critical Filing Season Readiness
Training prior to the filing season. Our goal is to ensure these
employees maintain a strong knowledge base to assist taxpayers. Our
Accounts Management function maintains a robust quality review process
to identify error trends and metrics. This process enables them to
provide feedback when necessary. IRS leadership has calls with field
locations to provide this feedback according to established quality
goals.
Question. In a letter from you dated February 7, 2022, you said
that the IRS received 145 million calls from January 1st through May
17th of last year--more than 4 times the number of calls received in an
average year. You also note that on March 15th of last year you
received approximately 1,500 calls per second--a 600-percent increase
in normal call traffic.
Understanding that this is an unprecedented level of inbound calls,
how do those numbers--those incredibly high call volumes--compare to
what you're seeing this filing season?
Answer. For the 2022 filing season, from January 1st through April
16th, we received 56 million net attempts, which are the overall volume
of callers dialing IRS product lines for automated live assistance
during open and available hours, compared to 124 million net attempts
for the same time frame (January 1st through April 17, 2021) last year.
Question. What are most people contacting the IRS about? The Child
Tax Credit? Recovery Rebate Credit? An unprocessed prior year return?
Another error?
Answer. During Filing Season 2022 most taxpayer calls we received
are about: Individual Master File (IMF) accounts; IMF math errors; IMF
refunds; Where's My Amended Return?; Affordable Care Act; Business
Master File accounts; National Taxpayer Advocate; Practitioner Priority
Services; and Taxpayer Assistance Center (TAC) (requesting a TAC
appointment).
Question. Earlier this year, the IRS announced 5,000 open positions
at IRS campuses, but you noted at a House Ways and Means hearing in
March that you had only filled 211 of those spots.
I understand that it can take the IRS months to hire an employee--
oftentimes applicants will look for and find another job in that time,
as they can't wait for months to get the job. The National Taxpayer
Advocate's 2021 report says that on average, it took 88 days to hire an
IRS employee in FY 2021 and 120 days in FY 2020.
The IRS was recently granted direct hiring authority--through an
OPM approval and the recent FY 2022 omnibus spending bill that passed
in March. You have previously stated that direct hiring authority will
allow you to hire on a more competitive basis, allowing you to fill
positions and address backlogs and processing more quickly.
Your testimony before this committee states that you have been
granted direct hiring authority for 10,000 positions--hoping to onboard
5,000 now and 5,000 over the course of the next year.
What exact positions were these grants of direct hiring authority
for?
Answer. Office of Personnel Management (OPM)-approved direct hire
authority (DHA) for filing season positions, on February 18, 2022, as
follows:
Clerks GS-0303 02 and above
Clerks GS-0305 02 and above
Data Transcribers GS-0356 02 and above
Computer Assistants GS-0335 02 and above
Computer Operators GS-0332 02 and above
Mail Processing Equipment Operators GS-0350 02 and above
Tax Examiners GS-0592 04 and above
Remittance Perfection Clerks GS-0503 04 and above
Accounting Technician GS-0525 04 and above
Individual Taxpayer Advisory Specialist GS-0501 04 and above
Tax Specialist GS-0526 04 and above
Contact Representative GS-0962 05 and above
Under the Consolidated Appropriations Act, 2022, DHA has also been
approved for up to 400 Human Capital positions and up to 350
Information Technology positions, as outlined below, that directly
support the IRS's work to get inventory back to healthy levels.
Human Resource Specialists GS-0201 07 and above
Information Technology Specialist GS-2210 07 and above
Computer Engineers GS-0501 04 and above
Computer Scientist GS-1550
Question. How will these hires help address backlogs?
Answer. All direct hire authority (DHA)-approved positions are
critical to addressing IRS's urgent staffing needs. These 12 approved
filing season position series will support millions of taxpayers, from
individuals to businesses, who depend on IRS assistance, return and
refund processing, and other support and services. The additional
approved positions include Human Resource Specialists, critical to
onboarding and training new hires, and Information Technology
Specialists, Computer Engineers, and Computer Scientists, critical to
updating our technology to address current backlogs and reduce the risk
of future backlogs. The IRS is integrating scanned data and content
management systems to improve digital intake of paper form data. This
integration will improve paper data intake by reducing manual
transcription and paper document storage. Taxpayers will be able to
access their sensitive financial and tax information securely and
easily from any device; they will also be able to resolve issues
quickly and proactively using a variety of services.
Question. Before the committee, you said that 2,200 positions had
been filled thus far. What is your plan to fill the remaining spots?
Answer. We plan to continue using the approved direct hire
authority (DHA). We will also use all available recruitment resources,
including: merit promotion, delegated examining, Veteran's and Schedule
A appointing authorities, reemployed annuitants, Pathways recent
graduates and Presidential Management Fellows, transfers, and
reinstatements.
Question. Are these long-term positions?
Answer. We are filling most long-term positions with career and
career conditional appointments. Available positions include temporary,
term and permanent jobs.
Question. How long does it take for these new hires to complete
training and begin working in the field? Are these new hires able to
help with existing backlogs?
Answer. Training times depend on the job series and occupation.
Generally, new hire Clerks take between 1 to 3 weeks to complete
training and new hire Tax Examiners take between 3 to 6 weeks to
complete training. The exact time needed depends on the functional
area. After training is completed, new hires will be able to help with
existing backlogs.
Question. Earlier this year, GAO testified that the IRS reported an
attrition rate of 17 percent for processing center staff at the end of
FY 2021. This is more than twice the agency's overall attrition rate of
7.6 percent. At the same time, the IRS encountered challenges hiring
enough new processing staff, only meeting about 67 percent of your
stated goal. GAO noted that for every 10 newly hired returns processing
staff, the IRS needed about 4 to offset attrition.
What is the cause of that attrition level?
Answer. The IRS cannot definitively answer the cause of the
attrition level.
Question. What recommendations do you have to better retain IRS
employees?
Answer. The IRS's engagement and retention efforts focus on
fostering a collaborative and inclusive culture, supporting employees
with training opportunities and clear career paths, enhancing
succession planning and knowledge transfer, and designing proactive
talent management strategies to address business needs and workload
demand. We are confident enhancing these efforts will lead to better
staff retention.
Question. Do you believe that the Biden administration's vaccine
mandate led to attrition and early retirements?
Answer. Individuals may consider many factors when deciding to
retire or separate from Federal service. The IRS doesn't speculate
about whether the vaccine mandate factored into an individual's
decision to voluntarily separate or retire. We do not track this
information.
Question. How many early retirements have you seen in 2021 and
2022?
Answer. The IRS retirement trend for FY 2020 was 3.4 years beyond
eligibility. This trend rose to 3.9 years beyond retirement eligibility
in FY 2021. Thus far in FY 2022, the data is trending down to 3.0 years
beyond retirement eligibility.
Question. What were the causes of those early retirements?
Answer. The IRS is unable to determine the exact cause of the
downward trend of beyond retirement eligibility requests. The analysis
indicates a combination of factors, such as the usual factors of
ability to carry over leave beyond 240 hours and age of workforce and
unusual factors from the pandemic, led to the increase in retirements.
Question. How many early retirements were the result of the Biden
administration's vaccine mandate?
Answer. The IRS does not track an individual's reason for retiring
from Federal service.
Question. In late December, days before the end of the year, the
Treasury Department released final regulations pertaining to foreign
tax credits. These regulations were published in the Federal Register
on January 4, 2022, and in a number of instances, are effective
immediately. As such, these regulations are already impacting business
decisions and financial statements.
We've heard a number of concerns from taxpayers regarding these
regulations, including their significant departure from precedent
without any congressional action or direction, and the broad impact
they will have on the creditability of certain income and withholding
taxes. U.S. businesses have reached out to us concerned about the
regulations' impact on their ability to compete and grow
internationally, which would result in fewer jobs here in the U.S.
Has the IRS considered postponing the effective date of these
regulations to give businesses more time to understand how they will
affect their operations, or re-
proposing the provisions that were not included in the proposed
regulations?
Answer. The final regulations released in December 2021 adopted the
proposed regulations released in November 2020 in all substantive
respects, while incorporating changes made after careful consideration
of the numerous comments submitted through a public process. Since the
final regulations were released, the IRS has engaged with numerous
stakeholders and is considering whether any further changes or
clarifications would be warranted. As the first part of that process,
on July 26th, the Treasury Department and the IRS released technical
corrections to the final regulations, which provide clarifications to
the final regulations that apply to the same taxable periods as the
final regulations.
Question. If not, is there concern that if foreign tax credits are
denied for royalty withholding taxes because IP is located in the
United States, that taxpayers may actually be incentivized to move
their IP offshore?
Answer. As noted above, since the final regulations were released,
the IRS has engaged with numerous stakeholders and is considering
whether any further changes or clarifications would be warranted. As
the first part of that process, on July 26th, the Treasury Department
and the IRS released technical corrections to the final regulations,
which provide clarifications to the final regulations that apply to the
same taxable periods as the final regulations. Additionally, the
Treasury Department and the IRS have previously announced that they
anticipate releasing additional proposed guidance regarding the
treatment of royalty withholding taxes as soon as possible.
Question. The Social Security Administration recently announced
that Social Security offices will restore in-person services, including
for people without an appointment, beginning on April 7, 2022. This is
a welcome development, as many constituents are in need of in-person
assistance.
Are IRS Taxpayer Assistance Centers back to pre-pandemic staffing
levels and appointment availability?
Answer. The IRS began to shut down Taxpayer Assistance Centers
(TACs) in March of 2020 due to the COVID-19 pandemic. We began to
reopen offices to the public in June of 2020. All TACs were re-opened
by May 24, 2021, except for six IRS TACs that are in the Social
Security Administration office buildings.
In March of FY 2020, TAC had about 1,160 employees. In FY 2022, as
of April 2022, TAC staffing is approximately 1,150 employees. We
developed a Taxpayer Assistance Hiring and Expansion Strategy. We
worked closely with our internal partners to identify underserved areas
of the country to expand our TAC footprint. Through this coordination,
we identified almost 60 potential locations throughout the country.
We have five new TAC offices scheduled to open in late FY 2022 and
early FY 2023. This strategy also has a staffing plan for our current
TACs to meet the taxpayer needs. This strategy of establishing new TACs
and staffing existing locations will allow us to provide more outreach
to underserved communities and online support for taxpayers who can use
virtual services.
Question. It is my understanding that the IRS and its unions have
recently come to an agreement on the return-to-office plan for the IRS.
That plan states that during the week of April 24, 2022, executives,
managers, and supervisors who have not been in the office regularly
will be required to report as needed. During the week of May 8, 2022,
employees without an approved telework agreement will have to return to
the office, and during the week of June 25, 2022, employees who have
not been required to report back to the office will be required to
return. However, those with a valid telework agreement will simply
follow the terms of their agreement, which may or may not require them
to return the week of June 25, 2022.
How many IRS employees telework now? This represents what
percentage of total IRS employees? What are these positions?
Answer. As of August 27, 2022, 59,600 or 73 percent of IRS
employees (excluding Chief Counsel) telework part time and 151 or 0.18
percent telework full time. (The 2,258 Chief Counsel employee
population is excluded in the telework reporting data for the 81,718
IRS employees. Many Chief Counsel employees are eligible for part-time
telework; very few are eligible for full-time telework.) Approval for
participation in the IRS Telework Program is within a supervisor's
authority and is not guaranteed for an employee. Telework may not be
suited for all positions and is not an employee entitlement. The
operational needs of the IRS are paramount. The mission of the IRS,
roles and responsibilities of a particular office, and the extent that
the employee meets the eligibility requirements determine whether and
to what extent telework is approved.
Question. What percentage of IRS employees do you anticipate
teleworking after the broader return to office date of June 25th?
Answer. We completed our return to office plan in June 2022. We
anticipated between 73 percent and 78 percent of IRS employees would
telework part-time, meaning at least 1 day per week, and well under 1
percent would telework full-time after the return to office.
Question. What percentage of IRS employees teleworked prior to the
COVID-19 pandemic?
Answer. Pre-pandemic, which the Office of Personnel Management
defines as beginning March 10, 2020, 51 percent of the workforce
teleworked at least 1 day a week.
Question. How were these dates--particularly the June 25th reentry
date--determined?
Answer. The IRS approached return to office planning consistent
with government-wide guidance. The administration is committed to
collaborating with labor partners; this plan reflects extensive
conversations with the National Treasury Employees Union about ensuring
a safe environment. The IRS phased in this plan to ensure a smooth
transition with minimal disruption to taxpayers, operations, and
employees.
Question. In a March 8, 2022 response to Senate Finance Committee
Republicans regarding a December 2021 letter that we sent concerning
IRS privacy protections, you reiterated that the Treasury Department,
Office of the Inspector General, FBI, and DOJ were each conducting
independent investigations of ProPublica's claim to have 15 years of
protected data from the tax returns of thousands of Americans.
Are you aware of the status of any of those investigations?
How often do you communicate with those agencies?
To your knowledge, has the IRS or Treasury asked ProPublica for a
copy of the information that they claim to have from the returns of
thousands of taxpayers?
Answer. I am not aware of the status of these investigations and do
not communicate with them regarding their investigations. The IRS has
not requested a copy of the information that ProPublica has in their
possession.
______
Questions Submitted by Hon. Elizabeth Warren
Question. The Child Tax Credit is a historic child anti-poverty
effort that brings over 100 billion Federal dollars to around 67
million children in the U.S.\23\ However, millions of families have
missed out on claiming this credit.\24\ IRS data shows that the Earned
Income Tax Credit, another credit that helps to reduce poverty, also
frequently goes unclaimed by qualifying taxpayers.\25\ Data on
unclaimed tax credits is a critical tool in efforts to reach eligible
families.
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\23\ Shah Family Foundation, ``Tax Benefits Outreach in
Massachusetts,'' 2021, p. 3, https://static1.squarespace.com/static/
5e25d642e0556233b7fc89d2/t/61d32932b3e9d606167e4b99/1641
228600898/FindYourFunds+Outreach+Report+2021.pdf.
\24\ Department of Treasury, ``By ZIP Code: Number of Children
Under Age 18 With a Social Security Number Who Are Not Found on a Tax
Year 2019 or 2020 Tax Return but Who Appear on a Tax Year 2019 Form
1095 and Associated Number of Policy Holders,'' June 2021, https://
home.treasury.gov/system/files/131/Estimated-Counts-of-Children-
Unclaimed-for-CTC-by-ZIP-Code-2019.pdf.
\25\ Internal Revenue Service, ``EITC Participation Rate by States
Tax Years 2011 Through 2018,'' December 2021, https://www.eitc.irs.gov/
eitc-central/participation-rate/eitc-participation-rate-by-states.
The IRS released data on the number of children under age 18 with a
Social Security number who are not found on a Tax Year 2019 or 2020 tax
return but who appear on a Tax Year 2019 Form 1095.\26\ Does the IRS
have this same data for Tax Year 2021 and does the IRS plan to release
it to assist in outreach efforts? If not, why not?
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\26\ Department of Treasury, ``By ZIP Code: Number of Children
Under Age 18 With a Social Security Number Who Are Not Found on a Tax
Year 2019 or 2020 Tax Return but Who Appear on a Tax Year 2019 Form
1095 and Associated Number of Policy Holders,'' June 2021, https://
home.treasury.gov/system/files/131/Estimated-Counts-of-Children-
Unclaimed-for-CTC-by-ZIP-Code-2019.pdf.
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Answer. We do not have this data at this time.
Question. The IRS released data on Earned Income Tax Credit
participation rates for Tax Years 2011-2018.\27\ Does the IRS have this
same data for Tax Years 2019-2021 and does the IRS plan to release it
to assist in outreach efforts? If not, why not?
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\27\ Internal Revenue Service, ``EITC Participation Rate by States
Tax Years 2011 Through 2018,'' December 2021, https://www.eitc.irs.gov/
eitc-central/participation-rate/eitc-participation-rate-by-states.
Answer. We posted Tax Year 2019 participation rates on the IRS.gov
webpage later this year and we expect to post the Tax Year 2020
participation in 2023. The IRS collaborates with the U.S. Census Bureau
to produce the Earned Income Tax Credit participation rates. The report
provides information 3 years behind the current tax year to facilitate
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data collection and estimation procedures.
Question. The IRS has previously released data on Federal
individual income tax filers by ZIP code, including how the taxpayers
filed.\28\ Can the IRS provide data on the number of returns filed by
non-filers in 2021 by ZIP code and month, including the number of
individuals who filed that are non-filers--including people who are not
required to file a return and separately, people who hadn't filed
returns in the last 3 years--and how they filed? And can the IRS
provide the number of these individuals who filed full returns and how
they filed returns (such as paid tax preparers, VITA), and the number
of individuals who filed simplified returns and how they did so (such
as IRS non-filer portal, GetCTC, and paper simplified returns)? If not,
why not?
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\28\ Internal Revenue Service, ``SOI Tax Stats--Individual Income
Tax Statistics--ZIP Code Data (SOI),'' December 7, 2021, https://
www.irs.gov/statistics/soi-tax-stats-individual-income-tax-statistics-
zip-code-data-soi; Brookings Institution, ``Earned Income Tax Credit
(EITC) interactive and resources,'' December 21, 2016, https://
www.brookings.edu/interactives/earned-income-tax-credit-eitc-
interactive-and-resources/.
---------------------------------------------------------------------------
Answer. We do not have this data.
Question. How many low-income filers have received a Letter 5071C
or 6331C this year, and how many were able to successfully verify their
identities?
Answer. This calendar year through April, approximately 1.3 million
returns for taxpayers with an adjusted gross income of less than
$50,000 received a letter 6331C or 5071C letter. We resolved and closed
about 390,000. The remainder are open pending taxpayer authentication.
A taxpayer may authenticate their identity by phone, online or in
person at a Taxpayer Assistance Center. If the authentication is
successful, we complete the processing of the taxpayer's return and
quickly release the refund, generally within 21 days if there are no
other issues.
The IRS's pre-refund return selection process is critical to
protect taxpayers from identity theft refund fraud and prevent lost
revenue. We select a return for further review when it matches
characteristics of an at-risk return in one of the many filters. We
select returns for additional authentication only when they break our
established filters or patterns. Each year, the refund returns that
have suspicious indicators of refund fraud out of the individual tax
returns processed represent only about 3 percent of returns filed.
Question. I appreciate the tremendous efforts of the IRS to serve
taxpayers even as it faces long-term underfunding and pandemic-related
challenges. Through the end of 2021, the IRS issued more than 175
million third-round Economic Impact Payments (EIPs) which served as a
critical economic lifeline.\29\ Families who did not receive an EIP are
eligible for the money in the form of a Recovery Rebate Credit (RRC)
when they file their taxes. However, these families have to correctly
input information on their tax returns to claim the credit. Similarly,
the IRS issued about $16 billion to over 36 million families in the
final batch of advance Child Tax Credit (CTC) payments in 2021, but
families may remain eligible for half or more of the CTC amount to
which they are entitled.\30\ In order to claim it, however, they need
to accurately account for the advance CTC payments that they have
received so far on their tax returns. Thus, it is more important than
ever for low-income taxpayers to file and do so accurately.
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\29\ Internal Revenue Service, ``All third Economic Impact Payments
issued; parents of children born in 2021, guardians and other eligible
people who did not receive all of their third-round EIPs can claim up
to $1,400 per person through the 2021 Recovery Rebate Credit,'' January
26, 2022, https://www.irs.gov/newsroom/all-third-economic-impact-
payments-issued.
\30\ Internal Revenue Service, ``Families will soon receive their
December Advance Child Tax Credit payment; those not receiving payments
may claim any missed payments on the upcoming 2021 tax return,''
December 15, 2021, https://www.irs.gov/newsroom/families-will-soon-
receive-their-december-advance-child-tax-credit-payment-those-not-
receiving-payments-may-claim-any-missed-payments-on-the-upcoming-2021-
tax-return.
However, according to Erin Collins, the National Taxpayer Advocate,
the IRS issued over 11 million math error notices relating to RRC
claims and nearly 14 million math error notices overall.\31\ These
error notices are sent to taxpayers when there are discrepancies
between a tax return and IRS records, such as on EIP and CTC payments
or W-2 income.
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\31\ National Taxpayer Advocate, ``Annual Report to Congress
2021,'' January 2022, pp. 2-3, https://www.taxpayeradvocate.irs.gov/wp-
content/uploads/2022/01/ARC21_Full-Report.pdf.
What is the average and maximum delay in processing and receiving
tax refunds, if eligible, that taxpayers face if they make a math error
---------------------------------------------------------------------------
on EIP and CTC payment amounts or W-2 income?
Answer. Currently, the average delay for returns that fall out for
error correction is 10 days. The maximum time is currently 14 days. We
either then correct the return, send correspondence to the taxpayer
about any changes, and issue refunds, or we send correspondence to the
taxpayer requesting additional information. At this point, the time for
resolution depends on the time it takes the taxpayer to respond.
Question. How are math errors on EIP and CTC payment amounts or W-2
income impacting the IRS backlog and burden on the IRS?
Answer. Some types of math errors have more effect on the IRS than
others. All math errors add to the processing time of tax returns and
increase overall inventories. The continued increase in electronic
filing will lead to an overall decrease in math errors and a higher
probability of automated resolution.
This filing season, we can correct most simple errors with Economic
Impact Payments (EIPs) and Child Tax Credit (CTC) with our automated
tool FixERS. Therefore, these errors have a very insignificant effect
on our inventory and our ability to deliver a timely product.
However, we need additional resources to review, correspond with
taxpayers, and correct other types of errors, such as W-2 errors,
because these errors must be addressed manually. Manually addressing
these errors diverts resources from paper return processing.
Question. The IRS has made efforts to make available to taxpayers
the amount in EIP and CTC payments that they have received via IRS
online accounts and letters to taxpayers. Do you have any data on the
extent to which those steps have helped taxpayers file accurately? What
are the limitations of these efforts in addressing math errors?
Answer. We do not have data available on this as we can't establish
a direct link between available information and filing accuracy.
______
Questions Submitted by Hon. Sheldon Whitehouse
Question. Under section 501(c)(4) of the tax code, an organization
can be exempt from tax if it is operated exclusively for the promotion
of social welfare. Treasury regulations further provide that to qualify
for this tax exemption, its primary activity must be the promotion of
social welfare, which does not include political campaign intervention.
In practice, this means that a 501(c)(4) cannot spend more than 50
percent of its funds on political campaign intervention.
Let's say there are four 501(c)(4) organizations that are
affiliated with one another, potentially sharing staff or even office
space. The first spends half of its budget on political campaign
intervention and gives the other half to the second organization, which
proceeds to spend half of that on political campaign intervention and
give the other half to the third organization, and so-on. In the end,
over 90 percent of the budget of the four nominally separate
organizations has been spent on political campaign intervention.
You said during your appearance before this committee that under
these circumstances, IRS agents would likely ``consolidate if it's
really a money circle,'' and therefore find what is effectively a
single organization to have engaged in impermissible activity.
Has the IRS ever identified fact patterns of this nature or similar
and if so, what enforcement actions, if any, has it taken in response?
What tools or additional resources does the IRS need to effectively
identify these schemes?
Answer. The IRS receives information about noncompliance through
analyzing quantitative information (Form 990 data) and internal and
external referrals of alleged noncompliance. Taxpayer privacy law under
Internal Revenue Code (IRC) section 6103 prevents us from discussing
specific cases or taxpayers.
An organization's eligibility for an IRC section 501(c)(4) Federal
income tax exemption is based on all the facts and circumstances. A
``facts and circumstances'' analysis, here, means determining whether
activities promote social welfare or constitute political campaign
intervention, and measuring the organization's social welfare
activities relative to its total activities.
This facts-and-circumstances analysis creates considerable
confusion for the public and the IRS when making IRC section 501(c)(4)
determinations and evaluating ongoing IRC section 501(c)(4) compliance.
The Consolidated Appropriations Act, 2021, states that ``none of the
funds made available in this or any other Act may be used by the
Department of the Treasury, including the Internal Revenue Service, to
issue, revise, or finalize any regulation, revenue ruling, or other
guidance not limited to a particular taxpayer relating to the standard
which is used to determine whether an organization is operated
exclusively for the promotion of social welfare for purposes of section
501(c)(4) of the Internal Revenue Code of 1986 (including the proposed
regulations published at 78 Fed. Reg. 71535 (November 29, 2013)).''
However, we can view circular transactions as a single transaction.
The courts have sanctioned a doctrine under which related yet distinct
steps in a transaction ``may not be considered independently of the
overall transaction.''\32\ As to attribution of funds between entities,
the court has said that the law ``requires only that the two groups be
separately incorporated and keep records adequate to show that tax
deductible contributions are not used to pay for lobbying.''\33\
---------------------------------------------------------------------------
\32\ Commissioner of Internal Revenue v. Clark, 489 U.S. 726, 738
(1989).
\33\ Regan v. Taxation With Representation, 461 U.S. 540, 545 note
6 (1983).
Question. You noted during the hearing that the IRS would ``have to
be able to identify'' that the type of abuse described above has
occurred in order to take enforcement action. In 2020, the Treasury
Department and the IRS finalized a rule that eliminated donor reporting
---------------------------------------------------------------------------
requirements for 501(c)(4) organizations.
Did this change make it harder for the IRS to identify the type of
abuse described in the question above?
Answer. No, the IRS does not need the names and addresses of
substantial donors on Schedule B of Form 990 or Form 990-EZ.\34\ In
general, the identity of substantial donors would not prove that the
organization's activities promote social welfare. Similarly, donor
identity would not affect a determination of the organization's primary
purpose.
---------------------------------------------------------------------------
\34\ See 85 Federal Register 31,963 (2020).
Other data on Form 990, Schedule I (grants to domestic
organizations) and Schedule R (information on related organizations and
certain transactions with related organizations) is potentially more
useful for this purpose. Schedule B of the Forms 990 and 990-EZ
requires all tax-exempt organizations to report the amounts of
contributions from each substantial contributor (but not the
contributor's name or address). It also requires them to maintain the
names and addresses of substantial contributors should the IRS need
this information on a case-by-case basis. This is sufficient for the
efficient administration of the Internal Revenue Code. The 2020
regulation didn't compromise the requirement to present the data on
---------------------------------------------------------------------------
exam.
______
Questions Submitted by Hon. Todd Young
Question. The IRS's processing backlog ballooned to over 20 million
unprocessed returns earlier this year.\35\ In response to the growing
backlog, I understand the IRS increased hiring levels and reassigned
some individuals to ``surge teams.'' While I laud these efforts to
reduce the backlog, my constituents continue to experience significant
delays in the processing of their returns and refunds.
---------------------------------------------------------------------------
\35\ https://www.cnbc.com/2022/03/11/-irs-plans-to-hire-10000-
workers-to-tackle-massive-backlog.html.
When can my constituents reasonably expect the IRS to have fully
---------------------------------------------------------------------------
cleared its backlog from the 2021 and prior tax filing seasons?
Answer. We redeployed and reallocated resources throughout the IRS
and have implemented innovative strategies in an ongoing effort to
provide a meaningful reduction in our inventories. These steps resulted
in the IRS completing the processing of all error free individual
income tax returns taxpayers filed in 2021 as of June 24, 2022. We must
continue pursuing innovative strategies to fulfill our commitment to
return inventories to a healthy level.
Question. What quantifiable impact have ``surge teams'' had on the
reduction of the backlog?
Answer. Quantifiable results are not yet available. We are working
to create a report to isolate surge employee efficiencies.
Question. During the hearing, some of my colleagues brought up the
IRS data leak of confidential taxpayer information to ProPublica. My
colleagues and I remain frustrated that neither Congress nor the public
has been informed on the cause of that massive data leak, which is
unacceptable given that it's been over 10 months.
One of the reasons I find this leak so concerning is that the IRS
has a documented history of political targeting. Taxpayers need to know
that the sensitive information they provide the IRS is not only kept
confidential, but is also only used for the fair and unbiased
administration of our tax laws.
The Washington Post reported on April 4th that as part of its
recruiting efforts in Ogden, UT, the IRS's ``marketing department'' had
``sent postcards to homes with incomes under $50,000.''\36\ This would
seem to indicate the IRS is still using taxpayer information for
purposes beyond just tax administration.
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\36\ https://www.washingtonpost.com/politics/2022/04/04/irs-tax-
backlog-hiring/.
Can you please confirm whether this reporting is true? In your
response, please provide specific details on how the IRS identified the
persons with household incomes below $50,000, what information it used
---------------------------------------------------------------------------
to do so, and the origin of that information.
Answer. Generally, the IRS will send postcards to individuals in
the ZIP codes of the local commuting area prior to our initial
recruitment efforts. We do not use any household income data.
Question. If the IRS's internal taxpayer data was utilized for this
targeted recruitment effort, do you believe this was an appropriate use
of taxpayer information?
Answer. We are not aware of any effort to use internal taxpayer
income data for targeted recruitment efforts.
Question. What additional safeguards does the IRS need to put in
place to ensure that taxpayer information is not used for any kind of
targeting--whether that be to achieve political goals, recruit new
employees, or for any other reason?
Answer. We are not aware of any effort to use internal taxpayer
income data for targeted recruitment efforts.
Question. Only 11 percent of calls to the IRS were answered by
customer service representatives in 2021.\37\ With that said, I
understand the IRS has rolled out new voice and chatbot services to
assist taxpayers with simple inquiries.\38\
---------------------------------------------------------------------------
\37\ https://www.taxpayeradvocate.irs.gov/news/nta-blog-hello-is-
anyone-there-taxpayers-and-practitioners-continue-to-experience-
frustration-over-lack-of-adequate-phone-service/#::text=
Taxpayers%20have%20difficulty%20reaching%20IRS,of%20calls%20reached%20a%
20CSR.
\38\ https://www.irs.gov/newsroom/irs-unveils-voice-and-chat-bots-
to-assist-taxpayers-with-simple-collection-questions-and-tasks-
provides-faster-service-reduced-wait-times.
What impact do you believe this new service offering will have on
---------------------------------------------------------------------------
overall call volumes to the IRS?
Answer. The new Collection voice and chatbots provide new self-
service options to taxpayers, allowing immediate service without
waiting. Both voice and chatbots are relatively new technologies at the
IRS. We launched the first Collection chatbot on December 10, 2021,
followed by the Collection voicebot on January 3, 2022. The IRS
previously used an Economic Impact Payment informational voicebot in
May 2021.
The IRS Collection voicebot has provided taxpayers assistance with
One-Time Payment information, Notice Clarification, and Frequently
Asked Questions. Taxpayers have used the Collection voicebots over 2
million times, with the taxpayer not escalating to a live assistor 40
percent of the time. Taxpayers have used the Collection chatbots over
250,000 times to date; these bots reduced live agent chat requests by
almost 80 percent, freeing agents to serve taxpayers with more complex
issues.
In June 2022, the IRS will also deploy an authenticated Collection
voicebot. This voicebot allows taxpayers who have verified their
identity to set up installment agreements and get account or return
transcripts and account history without waiting for live telephone
help.
In addition, FY 2021 and FY 2022, the IRS Wage and Investment
division deployed voicebot automated services on two toll-free product
lines, the Economic Impact Payments line, and the Advance Child Tax
Credit line. The voicebots provide unauthenticated responses to
general, procedural questions using information from the frequently
asked questions on IRS.gov. As of April 21, 2022, over 10.8 million
callers have interacted with these voicebots combined, and we resolved
over 4.8 million calls (45 percent) without transferring to a live
assistor.
Question. Are there other technologies the IRS is considering to
help reduce call volumes? If so, please provide details on those
technologies and anticipated timelines.
Answer. Yes, the IRS is continuously exploring opportunities for
online services and new technologies to meet taxpayer needs and reduce
call volumes. The IRS analyzes data on call volumes and drivers to
determine features to add to Online Account (for individual taxpayers)
and to build new online applications. Our goal is to allow taxpayers
with simple questions to use self-service tools. Live assistors can
then focus on more complex issues requiring a live interaction.
Examples include enabling taxpayers to update their address online (to
be launched in summer 2022), improving and expanding online payment
options, and integrating secure messaging into Online Account.
There are other technologies the IRS is using or investigating to
improve taxpayer service. These include:
1. Adding information about financial relief to both
Collection voicebots and chatbots;
2. Expanding voicebot functionality so taxpayers can verify
their identity to set up an installment agreement, order a
transcript, retrieve payment information, and receive a balance
due payoff figure;
3. Increase the use of Live Chat to provide taxpayers and tax
practitioners another channel for live assistor service;
4. Increase the use of Customer Callback to include the
ability to schedule a callback;
5. Modernize Online Payment Plan self-service options and
integrate them into the Online Account platform. This change
will improve user experience and our online taxpayer engagement
so taxpayers don't need to call or write the IRS. We plan to
deploy additional long term payment plan options and expanded
status information for taxpayers with existing plans in Fiscal
Year 2023.
The IRS Wage and Investment (W&I) division identified several other
uses for future voicebot and chatbot services. Currently, W&I and IRS
Information Technology (IT) are developing automated chatbot services
for Refund Status and Advanced Child Tax Credit topics. These chatbots
will provide unauthenticated general information in a guided help
format on IRS.gov. We aim to deploy these bots this summer.
The IRS has future plans to add other authenticated and
unauthenticated voicebot/chatbot uses on other topics. These bots will
reduce call demand for live assistance on many topics, including:
Change of Address, Amended Returns, Transmitter Control Codes, Identity
Theft/Victim Assistance, e-File application maintenance, walk-in
taxpayer appointments, Employer Identification Number frequently asked
questions, Extension to file guidance, e-File rejection error guidance,
and e-File Fingerprint instructions. The IRS is also exploring live
chat technology with customer service representatives as an alternative
to a call when escalating from a chatbot.
Question. When the National Taxpayer Advocate testified before the
Senate Finance Committee in February, the IRS had announced that it was
hiring 5,000 positions in preparation for the 2022 filing season, but
had only been able to fill 179 of those so far.\39\ Since that time,
the IRS has announced plans to hire an additional 5,000 positions.\40\
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\39\ https://www.finance.senate.gov/imo/media/doc/
National%20Taxpayer%20Advocate%20
Testimony%20-
%20Senate%20Finance%20Hearing%20on%20Cust%20Serv%20Challenges%20-%
202-17-2022%20-%20updated%20chart.pdf.
\40\ https://www.irs.gov/newsroom/irs-hiring-more-than-5000-
positions-in-austin-kansas-city-
ogden#::text=WASHINGTON%20%E2%80%94%20To%20help%20serve%20taxpayers,Mis
souri
%3B%20and%20Ogden%2C%20Utah.
As part of the Consolidated Appropriations Act, 2022 signed into
law in March, the IRS was granted hiring authorities to bring new
employees onboard within 40 to 45 days, rather than the usual several
months.\41\
---------------------------------------------------------------------------
\41\ https://www.congress.gov/bill/117th-congress/house-bill/2471/
text.
Can you provide me with an update on how many position have been
---------------------------------------------------------------------------
filled out of the initial 5,000 job listings?
Answer. As of August 31, 2022, Submission Processing has filled
2,987 Clerk/TE positions (i.e., applicants have accepted firm job
offers or have onboarded), and there are an additional 1,428 applicants
who have accepted tentative offers and are currently in the onboarding
process. Accounts Management has filled 3,503 CSR positions. In
addition, 4,129 applicants accepted tentative offers and are in the
onboarding process.
Question. How will these new hiring authorities enable the IRS to
hire more employees and onboard them more efficiently?
Answer. The direct hire authority (DHA) allows the IRS to conduct
on-the-spot hiring at recruitment events. At these events, IRS can make
qualification determinations; interview and make selections; determine
shift preferences based on availability; extend tentative job offers;
receive applicants' acceptance; complete the required forms to begin
the pre-employment process; and conduct fingerprints sessions on site,
reducing hiring time by eliminating the need a separate fingerprint
appointment. DHA reduces hiring time frames from 80-120 days to 45-60
days.
Question. The GAO Director of Strategic Issues, Jessica Lucas-Judy,
noted in her February testimony before the Senate Finance Committee
that attrition, particularly among returns processing staff, is a
challenge nearly equivalent to the IRS's hiring woes. In 2021, the IRS
had an attrition rate of 17 percent for this group of employees, more
than double the average for the total IRS workforce.\42\ In fact, for
every 10 new hired returns processing staff, four were needed just to
offset the rate of attrition.\43\
---------------------------------------------------------------------------
\42\ https://www.gao.gov/assets/gao-22-105802.pdf.
\43\ Id.
What is the IRS doing to lower the high attrition rate for returns
---------------------------------------------------------------------------
processing staff?
Answer. To assist with hiring and employee retention initiatives,
we are standing up a Reskilling Academy at our three Submission
Processing sites beginning in August 2022. The program provides
employees an intensive training program with the opportunity to develop
competencies necessary to qualify for a higher graded position. The
curriculum includes a mix of self-study, direct instruction, hands-on
learning and application, and assessments to track participant's
progress. The program offers an accelerated promotion opportunity where
participants successfully completing the program will be offered
placement in a higher graded position within Submission Processing
without competition. The rollout includes grade 3 and 4 clerical
employees being reskilled to entry level Grade 5 Tax Examiner
positions.
We have also used our internal employee viewpoint survey to address
issues that employees have identified as important, such as improving
training, communication, and opportunities for advancement. During new
hire orientations, managers are addressing career paths and future
available opportunities for advancement.
Question. How has high attrition rate significantly contributed to
the unprecedented backlog we saw build up last year?
Answer. The IRS experienced extraordinary challenges during the
COVID-19 pandemic. The return processing inventory backlog was the
result of a combination of factors including a temporary shutdown in
2020 of all IRS processing sites due to the COVID outbreak; an
increased number of e-file and paper returns filed to claim new COVID
tax credits; increased employee turnover rates due to the COVID
outbreak; and consolidation of our Fresno Submission Processing Center
in calendar year 2021.
Because of resource limitations, changes from new legislation and
the pandemic, we entered the 2021 and 2022 filing seasons with a
significant inventory of unprocessed returns and correspondence.
Additionally, we haven't yet met our hiring goals.
We continue to recruit and offer various Direct Hiring Authority
(DHA) events. The DHA granted to the IRS in February 2022 gives us
approval to hire 10,000 employees through the end of calendar year 2023
for Accounts Management and Submission Processing to support inventory
reduction efforts.
We continue pursuing innovative strategies to fulfill our
commitment to return inventories to a healthy level.
Question. In an April 1, 2022, Forbes article, former IRS
Commissioner Mark Everson--who praised the IRS's success in disbursing
COVID funds and has advocated for increased funding for the IRS--said
that the backlog of returns ``compromises the integrity'' of the tax
system.\44\ Mr. Everson suggested the IRS bring all employees back to
the office immediately and begin deploying everybody except criminal
investigators to clear the backlog. I understand you are working to
hire personnel, but that will certainly take some time. You have also
said that this is an ``all-hands-on-deck'' situation.
---------------------------------------------------------------------------
\44\ https://www.forbes.com/sites/ashleaebeling/2022/04/01/irs-we-
apologize-your-tax-refund-is-delayed/?sh=18e6bda87d62.
If this indeed is an ``all-hands-on-deck'' situation, why not have
the IRS bring back all employees now rather than phasing them in
through May and June, and assign them to temporary duty in the Ogden,
---------------------------------------------------------------------------
Austin, and Kansas City processing centers?
Answer. In April 2020, IRS ceased numerous on-campus operations due
to COVID-19. On June 1, 2020, employees with non-portable work began
returning to campuses, using a phase approach and in accordance with
current State and local guidelines. Following CDC guidelines, we
implemented social distancing requirements that reduced the staff
footprint by half in most areas. In January 2021, all employees had to
return to duty. Employees were no longer permitted to remain on paid
leave due to the pandemic.
In February 2022, the IRS quickly established an Inventory Surge
Team to improve the taxpayer experience and to address the
unprecedented inventory and higher call volumes. To staff the Inventory
Surge Team, the IRS identified employees with prior experience in this
area and temporarily assigned them to the team. Eligible employees
included those who were Accounts Management customer service
representatives, tax examiners, clerks or had Campus Support experience
within the last two fiscal years. We excluded positions that would not
directly impact case closures, such as managers and analysts.
In March 2022, the IRS further increased taxpayer assistance by
asking 700 Small Business/Self-Employed (SB/SE) employees to
temporarily work at our Wage and Investment Submission Processing
sites. These teams are made of SB/SE Campus Collection and Examination
employees at our Austin, Ogden, and Kansas City sites.
Question. There have been reports of individuals improperly
receiving Economic Impact Payments (EIP). In some cases, these are
individuals who did not qualify in the first place, or received more
than they should have, and in others, it is individuals who claimed the
Recovery Rebate on their 2020 tax return despite having already
received EIPs. I have also heard of similar issues relating to the
Advanced Child Tax credit payments.
What happens if a taxpayer who has received all three EIP checks
claims an EIP payment on his or her tax return?
Answer. The first and second rounds of Economic Impact Payments
(EIPs) were advance payments of the Tax Year 2020 Recovery Rebate
Credit (RRC). The third round of EIP was an advance payment of the Tax
Year 2021 Recovery Rebate Credit (RRC). Taxpayers who already received
the full amount of the EIP can't claim the RRC on the tax return. If a
taxpayer makes this error, we adjust the return to remove and or reduce
the credit, and the taxpayer receives a notice explaining the change
made to their tax return.
Question. What happens if two parents separately claim the Advance
Child Tax Credit for the same child?
Answer. Generally, a taxpayer cannot use a qualifying child's
Taxpayer Identification Number (TIN) to claim a credit on more than one
tax return per tax year. When a taxpayer reports a qualifying child on
more than one tax return, they may inappropriately receive tax
benefits.
The IRS has ways to identify when the same qualifying child appears
on multiple tax returns. For electronic returns, the IRS will reject
the return if the qualifying child's TIN has already been used on
another return. If we rejected the electronic return for a taxpayer but
the taxpayer has a legitimate claim for the child, the taxpayer will
need to file a paper return to claim the qualifying child.
We have multiple potential compliance approaches for taxpayers with
duplicate dependents. We can issue a notice about the duplication with
the opportunity for the taxpayer to self-correct by filing an amended
return removing the child and the related tax benefit. For some
returns, we may conduct an audit. If we determine the taxpayer was
ineligible to claim the child, they will have to repay any tax benefit
they received, plus interest.
Question. Does the IRS have an estimate of the total dollar amount
of EIPs, Recovery Rebates, and Advance Child Tax Credits that have been
improperly claimed?
Answer. Recovery Rebate Credits (RRC) and related versions of
Economic Impact Payments (EIP) are unprecedented in terms of magnitude
and response times. A recent Treasury Inspector General for Tax
Administration (TIGTA) audit report about the 175 million advance RRC
payments (EIP3) we issued to 167.4 million individuals found that the
IRS correctly computed the RRC amount for 166.6 million individuals
(99.48 percent). Another TIGTA audit report states that the IRS
correctly calculated the allowable RRC for 26.1 million (99.3 percent)
of the 26.3 million tax returns that claimed an RRC as of May 27, 2021.
We were able to achieve these results by developing programming for
stimulus payments, quickly modifying programming for subsequent
legislation, and enhancing internal controls. Comprehensive audits of
the expansion of the Child Tax Credit are currently under way.
The IRS assessed both the EIP and RRC in 2021 and will continue to
evaluate controls to reduce improper payments. The IRS follows the
Payment Integrity Information Act (PIIA) and Office of Management and
Budget (OMB) Requirements for Payment Integrity Improvement. The IRS
has reported the estimated improper payment rate for the Additional
Child Tax Credit (ACTC) in Treasury's Agency Financial Report since FY
2019. We will use the same methodologies to evaluate improper payment
compliance for the Advance CTC, similar to other refundable credits.
The IRS will perform a risk assessment to evaluate the program in FY
2022. However, there are limited benefits to devoting significant
resources to quantifying the amount and rate of improper payments for
short-term programs such as COVID-19 related refundable tax credit
(RTC) programs.
PIIA doesn't consider all aspects of tax administration in a system
that relies heavily on voluntary reporting. In keeping with PIIA
requirements, the IRS reports risk assessments for refundable tax
credits, as well as improper payments. The IRS's risk assessments on
refundable tax credits have consistently found that overclaims are not
due to internal control deficiencies. Instead, overclaims often result
from the difficulty of verifying eligibility, including our lack of
access to relevant third-party data, for refundable tax credits within
the applicable deadlines. The Tax gap methodology provides a better
framework for reporting refundable tax credit overclaims.
Question. What controls does the IRS have in place to ensure
taxpayers are not improperly claiming these tax credits or payments?
Answer. In administering refundable credits, the IRS has two
goals--to reduce errors leading to improper payments and to increase
eligible taxpayer participation so they receive the appropriate
credits. Credits that are refundable attract fraud and other
noncompliance, while the complexity of the eligibility criteria often
leads to unintentional errors, both of which may result in improper
payments. Addressing improper payments is an ongoing effort for us. We
do this with a balanced approach, delivering outreach and education and
conducting compliance activities for both taxpayers and preparers. The
IRS has enforcement tools to address noncompliance, including audits,
to prevent and recover improper refunds.
Although the payment integrity provisions of the Protecting
Americans from Tax Hikes (PATH) Act of 2015 and provisions in the Tax
Cuts and Jobs Act of 2017 have helped IRS combat noncompliance, we need
more assistance from Congress to significantly reduce overclaims.
Expanded correctable or math error authority to correct more errors on
tax returns, including errors claimed on Earned Income Tax Credit
(EITC) returns, would give IRS the additional enforcement options for
potential noncompliance. IRS legislative proposals in the President's
Fiscal Year 2023 budget would give IRS increased oversight authority
over paid tax return preparers, to help reduce preparers filing
erroneous and fraudulent returns. Strengthening relationships with paid
tax return preparers, educating them about eligibility requirement for
EITC and other refundable credits and enforcing due diligence
requirements are significant parts of IRS's strategy to prevent and
reduce improper payments.
Question. A consistent source of my office's constituent casework
stems from amended tax returns getting ``lost'' in the IRS's system. As
you know, historically amended returns were required to be submitted
via paper, so they are much more likely to get lost during processing.
The IRS is now allowing certain individual amended returns to be
submitted electronically ``using available tax software products.''\45\
---------------------------------------------------------------------------
\45\ https://www.irs.gov/filing/amended-return-frequently-asked-
questions.
---------------------------------------------------------------------------
What types of filings are still required to be done via paper?
Answer. There are certain documents taxpayers can only provide to
the IRS by paper. There are a range of reasons why, including the
following: the IRS does not have the resources to create and process
the electronic version of the document; we need to modernize existing
or create new systems to meet the document's requirements, such as
digital signatures; and legislation does not allow the document to be
submitted electronically, for example, requiring a wet ink signature.
Beginning in January 2022, filers needing to amend a 2020 Form
1040, U.S. Individual Income Tax Return, are able to do so
electronically. We added the ability to amend tax years 2019, 2020, and
2021 in June 2022 for Form 1040-NR, U.S. Nonresident Alien Income Tax
Return, Form 1040-SS, U.S. Self-Employment Tax Return (for Bona Fide
Residents of Puerto Rico), and Form 1040-PR, Federal Self-
Employment Contribution Statement for Residents of Puerto Rico.
Taxpayers will also be able to electronically amend returns they
originally submitted on paper.
Question. For each of the filings identified in part (a) above,
please explain why they cannot be submitted electronically.
Answer. There are over 3,900 forms taxpayers can't file
electronically. The complexity varies depending on the form's data,
whether it has child form attachments, the type of form (tax,
information, etc.), and many other factors. We have different intake
systems and are establishing new ones. We must match each form with the
best platform. Limited resources restrict the IRS's ability to analyze
the forms and implement information technology changes.
Question. In a 2018 settlement announced by the Department of
Justice and approved by then-Judge Ketanji Brown Jackson, the IRS
expressed its ``sincere apology'' for any delay involved with the
application of Z Street, a nonprofit corporation dedicated to educating
the public about issues related to Israel and the Middle East, for tax-
exempt status as a public charity under section 501(c)(3) of the tax
code.\46\ In that settlement, the IRS acknowledged that criteria for
tax-exempt status should not be based ``. . . on the applicants'
political viewpoints.''\47\ In her Declaratory Judgment in the
agreement, Judge Jackson concluded that it was ``wrong'' to use the tax
code against any group ``based solely on any lawful positions it
espouses on any issues'' or its ``associations or perceived
associations with a particular political movement, position, or
viewpoint.''\48\
---------------------------------------------------------------------------
\46\ https://www.justice.gov/opa/press-release/file/1030516/
download; https://www.wsj.com/articles/when-judge-jackson-ruled-
against-the-irs-abuse-of-power-first-amendment-supreme-court-
11649015861?mod=opinion_lead_pos10.
\47\ https://www.justice.gov/opa/press-release/file/1030516/
download.
\48\ Id.
Question. Do you agree with the position laid out by then-Judge
(now Justice) Jackson that tax law should not be used against any group
``based solely on any lawful positions it espouses on any issues'' or
its ``associations or perceived associations with a particular
---------------------------------------------------------------------------
political movement, position, or viewpoint''?
Answer. Yes, as indicated in the settlement, the IRS is fully
committed to the evenhanded application of the law, respecting the
viewpoints of all taxpayers. We charged the IRS Exempt Organizations
Division with the responsibility to administer the tax code provisions
related to tax-exempt organizations in a fair and impartial way. The
IRS agrees criteria for selecting tax-exempt applications or tax-exempt
entities for IRS review should focus on the activities of the
organizations and whether they fulfill the requirements of the law, and
not on the applicants' political viewpoints.
Question. Since assuming the role of IRS Commissioner, what steps
have you taken to ensure political ideology or positions on issues are
not taken into consideration when the IRS makes decisions on such
matters as tax-exempt status applications?
Answer. Since joining the IRS, I have focused on improving service
to the Nation's taxpayers, balancing appropriate enforcement of the
Nation's tax laws while respecting taxpayer rights. In 2017, the IRS
was a party to a consent order filed in the U.S. District Court for the
District of Columbia. In 2018, we informed all employees of the IRS
Exempt Organization Division of the terms of that agreement. These
terms include the District Court declaration in that case that it is
``wrong to apply the United States tax laws, including any and all tax
rules, regulations, policies, procedures, and standards of review, to
any tax-exempt applicant or entity based solely on such entity's name,
any lawful positions it espouses on any issues, or its associations or
perceived associations with a particular political movement, position,
or viewpoint.''
The training of IRS employees is ongoing, as we strive for
continuous improvement in applying the tax law with fairness and
integrity for all.
Question. As you know, the Office of Management and Budget (OMB)
issued a 2018 memorandum instructing all Federal agencies to transition
``to a fully electronic environment, and end the National Archives and
Records Administration's (NARA) acceptance of paper records by December
31, 2022.\49\ I understand the IRS has been working to adopt an
approach called Scanning-as-a-Service (SCaaS) to help the agency reduce
its reliance on paper, and in August 2021, awarded five $7.5 million
contracts to five different companies to help the IRS scan and digitize
its paper files. In your April 8, 2022, letter to several of my
Republican colleagues and me, you noted that ``although we are
cautiously optimistic of [the five SCaaS contractors'] progress to
date, it is important to note that a significant amount of work remains
to confirm the viability of these pilots, as well as their ability to
scale to other use cases.''
---------------------------------------------------------------------------
\49\ https://www.archives.gov/files/records-mgmt/policy/m-19-21-
transition-to-federal-records.pdf.
Question. What have been the biggest challenges the IRS has faced
---------------------------------------------------------------------------
in adopting SCaaS functionality?
Answer. The IRS is exploring Scanning as-a-Service (SCaaS) options
using
contractor-managed services to digitize or digitalize paper records.
This functionality will let the IRS transition from a paper record
environment to an electronic record environment, in accordance with
Office of Management and Budget (OMB) guidance.
In August 2021, the IRS awarded five contracts to test SCaaS-
managed service functionality and explore full-scale adoption if the
initial use case is successful. The SCaaS contractors completed Phase 1
of the contracts, and 3 contractors advanced to Phase 2 in anticipation
of a target-State IT solution scheduled for December 2022. The scanning
contractors are progressing through the onboarding process, completing
necessary security assessments, and preparing to scan the first SCaaS
use case.
By its very nature, SCaaS is a fundamentally different approach to
digitizing and digitalizing records that is sufficiently flexible to
scale to other use cases when and as it proves successful. Challenges
have included security clearance timelines, identifying prerequisites
to safely and appropriately disposing of documents that have been
digitized, and determining how to identify resources and prioritize
additional use cases based on enterprise-wide needs. Although
additional challenges undoubtedly remain, we are proud of our progress
in this space and our consistent engagement with industry partners who
are helping us examine the opportunities for tackling this complicated
problem in a different way.
Question. Do you believe the IRS will be able to meet the December
31, 2022 OMB deadline for Federal agencies to fully transition to an
electronic environment? If not, when do you expect the IRS will meet
this deadline?
Answer. No, the IRS will not be able to meet the December 31, 2022,
deadline.
The IRS processes nearly 169 million returns and other forms
annually and stores between 5.7--7 million cubic feet of paper records
(the bulk of which are tax returns) at Federal Records Centers (FRCs)
nationwide. Although more than 90 percent of individual returns are
electronically filed, IRS receives millions of returns and other
taxpayer documents on paper every year.
Given the paper-intensive nature of business operations, full
compliance with OMB/NARA M-19-21 is not feasible by December 31, 2022.
Therefore, IRS contacted the National Archives and Records
Administration and formally requested an exception from the requirement
and authorization to continue to transfer paper records to the FRCs
until January 2028, during which time we will continue our
digitalization efforts to further reduce reliance on and necessary
storage of paper records.
Question. As you know, audit logs can be an effective tool for
retroactively determining unauthorized access to confidential taxpayer
data sets. Additionally, user access reviews can help find individuals
who may have been assigned a level of access incommensurate with their
role and responsibilities. Audits logs and user access reviews are
particularly relevant considering the source of the June 2021 leak of
troves of private taxpayer information to ProPublica has apparently not
yet been identified. I understand other Federal agencies have
jurisdiction over this matter and are currently conducting
investigations.
How often does the IRS review audit logs for violations such as
unauthorized access to taxpayer data sets and perform user access
reviews for inappropriate privileges assigned to users?
Answer. The IRS has several different monitoring methods of audit
logs for multiple security threat and compliance purposes, including
Unauthorized Access, which we call UNAX, on a daily, weekly, and
monthly basis. The variation of frequency is driven by data
availability, analytic platform capabilities, and policy. As a result
of these efforts, the IRS has processed 462 violations resulting in
suspension, resignation, and removal over the past 10 years.
The IRS requires that individuals recertify their access to IRS
applications on a regular schedule. For ``non-privileged'' roles such
as an employee's access to the agency's official timekeeping system,
the recertification process occurs annually. For ``privileged'' roles,
the recertification process occurs every 6 months.
Question. The IRS frequently says it is near-current on ``opening
mail,'' and yet many of my constituents wait for months, sometimes
close to a year, for any indication from the IRS that it has received a
mailed return or other tax document. I understand there is a difference
between opening the mail and ``processing'' the mail, but it seems hard
to believe that should take upwards of a year.
Can you please outline the process of what happens when one of the
IRS's processing centers receives a mailed tax return from a taxpayer,
from start to finish? Please also include the current average timeline
for each step in the process.
Answer. Please see the following link, as it provides a visual,
simplified pipeline of one of our Submission Processing centers. This
video is accessible to the public: http://www.irsvideos.gov/
Professional/IRSWorkProcesses/SubmissionProcessing
Pipeline.
The primary purpose of the processing pipeline is to transfer
taxpayer information from a paper return to the computer in an
electronic version.
1. Incoming mail is automatically sorted and opened by a
machine called the Service Center Automated Mail Processing
System (SCAMPS) that reads the bar-coded envelopes that
identify the types of returns inside. The machine separates
returns with payments from those without payments by detecting
magnetic ink on enclosed checks.
2. Returns are extracted from their envelopes and further
sorted by type by employees using unique workstations called
sorting tables.
3. Before continuing their journey through the processing
pipeline, returns with payments are routed through a Remittance
Processing System to ensure deposit of revenue within 24 hours.
4. Returns are then batched into official units of work called
blocks, containing from 50 to 400 documents. Individual blocks
containing the same types of returns are combined, placed on
carts, and logged into a computer system which tracks their
movement through the pipeline.
5. Tax Examiners correct taxpayer errors, assign codes that
will facilitate data entry and, if necessary, correspond with
the taxpayer to request additional forms or information.
6. A Document Locator Number, used to identify and locate a
document anywhere within the IRS, is stamped on each return. It
indicates the processing center, type of return, Julian date,
block and sequence number and processing year.
7. Data Transcribers input tax return information into the
computer. Portions of returns are re-entered into the system by
a second transcriber to verify the original entry of the return
data.
8. The return data is then transmitted to the Martinsburg, WV
Computing Center, where it is subjected to math error and
validity checks before attempting to post to the IRS Master
File. If no errors or inconsistencies are found and all
requirements are met, refunds or balance due notices are issued
to the taxpayer.
9. Returns with errors or inconsistencies are transmitted back
to the processing centers where tax examiners make corrections
using an Error Resolution System (ERS). The corrected return is
transmitted back to the computing center for posting to the IRS
Master File.
10. The original paper returns are then stored in our
Submission Processing Center files until they are retired to a
Federal Record Center.
E-file, the IRS's electronic alternative to paper tax returns,
bypasses most of the processing pipeline process. Taxpayers can use a
tax preparation service or software on their personal computer to file
their taxes electronically. Since return information is already
computer formatted, the IRS can quickly and efficiently check for
errors and transmit the data to either the Martinsburg, WV Computing
Center for posting to the IRS Master File or to the preparer for
correction. E-file saves both the IRS and the taxpayer a lot of time
and effort.
Question. In the Treasury Inspector General for Tax
Administration's (TIGTA) report from February 7, 2022, the hiring
progress as of August 17, 2021, is reported for the four IRS tax
processing centers: Austin, Kansas City, Ogden, and Fresno.\50\ While
Austin, Kansas City, and Fresno have all struggled to meet their hiring
goals, Ogden far surpassed theirs by over 200 hires.
---------------------------------------------------------------------------
\50\ https://www.treasury.gov/tigta/auditreports/2022reports/
202240015fr.pdf.
What factors do you believe contributed to the Ogden processing
center over-
---------------------------------------------------------------------------
performing in hiring while the three other locations lagged?
Answer. In recent hiring efforts, our Ogden location did not over-
perform. The economic factors and availability of job opportunities
contributed to the overall results for hiring in each location.
Question. Are there any lessons that can be learned from Ogden?
Answer. The recruiting efforts and hiring processes were the same
at Ogden, Austin, Kansas City, and Fresno. Throughout our recent hiring
events at each campus, we have used a variety of platforms to share and
socialize job opportunities including social media, news outlets,
internal communications, job posting boards, and flyers. We also
broadly share job postings with local congressional offices, tax
professionals, and small business associations.
Question. That February TIGTA report also estimated that the IRS
lost out on $56.2 million in interest due to taxpayer checks that
failed to be deposited by the IRS in a timely manner.\51\ In 2020, that
amount was $367.7 million.\52\ From my understanding, these delays are
due to the fact that the IRS uses 12 Service Center Automated Mail
Processing System machines, or SCAMPS machines, to process paper mail
containing physical checks, which according to TIGTA, are unable to
``effectively identify'' checks included with taxpayer
correspondence.\53\ Apparently in some cases, these machines even cut
taxpayer correspondence and envelopes, forcing IRS employees to
manually reconstruct these items with tape.\54\
---------------------------------------------------------------------------
\51\ Id.
\52\ Id.
\53\ Id.
\54\ Id.
TIGTA has encouraged the IRS to either upgrade or completely
replace this outdated equipment. According to TIGTA, it would cost
around $360,000 to $650,000 to either upgrade or completely replace
each machine; just a fraction of the cost compared to the amount of
interest the IRS loses out on each year.\55\ In response to this
recommendation, the IRS said, ``. . . [b]ecause this procurement action
is dependent on funding and is subject to competing priorities, IRS
management will reevaluate continuing actions if implementation is not
successful within 3 years.''\56\
---------------------------------------------------------------------------
\55\ Id.
\56\ Id.
Lastly, I would like to note that based on the Treasury
Department's latest Quarterly Summary of Treasury COVID Response
Programs, dated March 28, 2022, the IRS had approximately $538.5
million and $382.3 million in unobligated funds in the IRS Operations
Support and the IRS Business Systems Modernization programs,
respectively. These figures represent supplemental COVID-related
---------------------------------------------------------------------------
funding that the IRS received in addition to its annual appropriations.
If funding is a concern, why does the IRS not use a tiny portion of
the unobligated supplemental COVID funding to resolve this issue? It
would cost only $7.8 million to completely replace every machine, and
only about $4.3 million to upgrade.
Answer. The Internal Revenue Service is taking a holistic approach
to identify a Submission Processing Modernization (SPM) solution,
before spending funds on a short-term fix. The effort is to ensure we
obtain equipment that improves upon the efficiency of processing
incoming mail while also being adaptable to future advancements in
technology related to digitalization and the elimination of paper-
based, manual processes.
Question. Why is the IRS giving itself 3 years to fix an issue
which, according to the vendor of SCAMPS machines, can be resolved in
about 6 weeks?
Answer. Wage and Investment is working with IRS Procurement to
solicit this solution through a competitive bidding process. IRS is
currently working through our procurement process to ensure all
equipment is obtained per government contract regulations
Question. How does the IRS plan on utilizing the remaining
unobligated IRS Operations Support and IRS Business Systems
Modernization funding?
Answer. The following is our current plan for the ARPA
modernization funding as of May 12, 2022. The costs reflected are total
costs, but the summary table breaks out the planned spending between
actuals and plan. Previously, the IRS had planned on allotting $1
billion of ARPA funds for the IT modernization portfolio. In order to
deploy additional resources to reduce the inventory backlog and pay for
IT requirements beyond what the FY 2022 appropriation provided, IRS
will spend $584 million of the ARPA funds on the IT modernization
portfolio, rather than $1 billion.
------------------------------------------------------------------------
Business
($ in millions) Taxpayer Operations Systems Total
Services Support Modernization
------------------------------------------------------------------------
Taxpayer Assistance $166 $166
------------------------------------------------------------------------
Total Modernization $286 $298 $584
Portfolio
------------------------------------------------------------------------
Information Technology $250 $250
Requirements
------------------------------------------------------------------------
Total Requirements $166 $536 $298 $1,000
------------------------------------------------------------------------
This change illustrates a perennial problem for IRS IT. In recent
years, the enacted budget typically has not covered all IT needs.
Spending to address new legislation, inflation, and cybersecurity risks
has left little room for other priorities and impaired our ability to
modernize. The IRS has been required to use its scarce IT resources to
meet current needs, such as filing season and correspondence inventory
challenges, first. This scarcity has affected IRS's ability to invest
in modern technology at the rate that we need and the taxpayer
community desires.
The ARPA funds were an opportunity to make such an investment, but
we were forced by necessity again to shift resources that were intended
for modernization to meet more immediate needs. The long-term effect of
this is the IRS today does not have the tools in place to best serve
the American people and enforce the tax laws.
ARPA Modernization Portfolio Spend Plan
ARPA-Modernization Spend Plan
(in millions of dollars)
------------------------------------------------------------------------
Total FY 2021-
FY 2021- FY FY 2023
Modernization Pillars 2022 Actual FY 2023 Plan (Actual Spend
Spend \1\ + Plan)
------------------------------------------------------------------------
Taxpayer Experience: $23.5 $2.5 $26.0
Deliver high-quality
service experience
while protecting
taxpayer information
and data
------------------------------------------------------------------------
Care Taxpayer Services $106.9 $59.8 $166.7
and Enforcement:
Streamline and
integrate IT programs
that enable top-quality
service
------------------------------------------------------------------------
Modernization IRS $ 108.1 $47.2 $155.2
Operations: Retire and
decommission legacy
systems, replace with
more sustainable
infrastructure
------------------------------------------------------------------------
Cybersecurity and Data $124.7 $75.3 $200.0
Protection: Continue to
protect taxpayer data
and address emerging
threats
------------------------------------------------------------------------
Technology Planning and $14.2 $21.9 $36.1
Program Oversight
------------------------------------------------------------------------
Total $377.4 $206.6 $584.0
------------------------------------------------------------------------
\1\ Spending for FY 2021-FY 2022 includes commitments, obligations,
expenses, and disbursements (COED).
The IRS started implementing the following capabilities within the
ARPA Modernization portfolio in FY 2021 and continues to deliver
through FY 2023. The following information is a high-level summary of
the capabilities and outcomes expected as a result of this funding.
Taxpayer Experience ($26 million total): IRS is delivering
technology that helps taxpayers, third parties and IRS employees to
respond proactively and efficiently. This enables a more human-
centered, digital experience that is easy-to-use, secure, and grants
access to the most relevant information so that taxpayers can resolve
issues quickly and efficiently, reducing burden. IRS will expand
customer callback to the remaining major phone applications, providing
taxpayers the option to keep their place in queue without staying on
hold. This feature empowers taxpayers with information about their
account by making services available to customers when they need them
while protecting taxpayer information and data and implements
technology enhancements that provide taxpayers with equal access to
information, services, and documents in their desired media format and
a choice of multiple languages. IRS will establish an enterprise
solution to offer consistent translation and will implement
accessibility solutions more rapidly to offer products in multiple
languages, assisting taxpayers to comprehend their tax account
information.
Core Taxpayer Services and Enforcement ($166.7 million total):
Modernize and integrate core tax processing systems to streamline
processes, enable cost-effective operations, improve operational
outcomes, and reduce taxpayer burden. The IRS will enable a modernized
solution for acceptance, validation, perfection, management, and use of
Information Returns data by delivering a user-friendly interface for
taxpayers to securely submit their tax forms via a portal. This portal
will improve filing experience and data access to the information
returns for both IRS staff and the taxpayers. This will advance the use
of data and analytics to combat noncompliance and improve taxpayer
service.
Modernized IRS Operations ($155.2 million total): The efforts in
this area focus on reducing complexity, standardizing underlying
technology infrastructure, and strengthening organizational agility
through automation and streamlining processes. The migration to cloud
will reduce cost on life cycle management of hardware and gain
application management and reliability efficiencies. This will deliver
more efficient, scalable, resilient, and secure infrastructure through
cloud services and will improve the Taxpayer experience. Another focus
is on expanding IRS network capacity. The IRS will expand current
network capacity because we expect to exhaust our existing capacity in
FY 2023. IRS will begin the activities to expand the bandwidth at the
IRS data centers, 500+ offices, and dedicated cloud circuits to support
the increased cloud usage, growing workforce, and rapidly accelerating
bandwidth demand as consumption grows for modernized capabilities. IRS
will also start to modernize asset management by ensuring that the
assets required to deliver services are properly controlled and that
accurate and reliable information about those assets is available when
and where it is needed throughout IRS business processes. This will be
achieved by migrating asset data from the legacy Asset Manager tool to
the new Asset Management capabilities on the ServiceNow platform.
Lastly, digitalization continues to convert large volumes of paper to
digital data formats to improve operational performance, making the IRS
more responsive and resilient.
Cybersecurity and Data Protection ($200 million total): Protecting
our systems and taxpayer information against cyber threats is a top
priority for the IRS. The cyber landscape is constantly evolving,
resulting in more sophisticated and frequent efforts by cybercriminals.
In response, IRS IT Cybersecurity will expand monitoring of IRS High
Value Assets (HVAs) from standard business hours to continuous
monitoring (24 hours per day, 7 days per week). The IRS has
transitioned most of its operations from a legacy system to a modern-
era big-data platform. The new platform with Next Generation Fraud
Analytics significantly improves the accessibility of the massive
cybersecurity data collection, fraud-detection research and
development, facilitated large-scale cases investigations, and shortens
the IRS response time to court orders and inquiries from the Congress
and other law enforcement agencies. IRS has leveraged the big-data
platform to develop and improve many data pipelines, fraud indicators,
dashboards, risk models and web-based automation utilities. These
developments reduced the complexity of data management and
investigation activities, thus reducing the operating cost while
increasing monitoring and analytics efficiency. This migration has
streamlined and automated many data analysis and reporting tasks to
replace many manual processes. IRS implemented the Privileged User
Management and Access System (PUMAS) to manage privileged access
accounts to servers, mainframes, and network devices and manage
software on IRS endpoints and provide white/blacklisting of software
applications to ensure the most secure technology products are used.
IRS continues to upgrade the physical access control equipment at IRS
facilities as well. Lastly, IRS will improve the user experience by
providing a simpler and more secure method for secure registration,
identity proofing, authentication and single sign on to its ever-
growing online applications and tools.
Technology Planning and Program Oversight ($36.1 million total):
Provides key technology planning, portfolio, and program management
support to ensure seamless integration and fulfill oversight and
reporting requirements of the American Rescue Plan modernization
programs. This includes technology architectural and engineering
requirements and impact analysis of additional opportunities to retire
legacy technology as capabilities are deployed by the modernization
programs.
------------------------------------------------------------------------
Business
($ in millions) Taxpayer Operations Systems Total
Services Support Modernization
------------------------------------------------------------------------
Taxpayer Assistance $166 $166
------------------------------------------------------------------------
Total Modernization $286 $298 $584
Portfolio
------------------------------------------------------------------------
Information Technology $250 $250
Requirements
------------------------------------------------------------------------
Total Requirements $166 $536 $298 $1,000
------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------
FY 2021- FY 2022
FY 2021 FY 2022 FY 2023 Actual Cumulative
Modernization Pillars Actual and FY Total Spend \1\ FY 2021- FY Remaining
Spend 2023 Plan Plan as of 05/ 2022 Spend Balance
12 as of 05/12
----------------------------------------------------------------------------------------------------------------
Taxpayer Experience: Deliver high-quality $15.2 $17.2 $32.4 $7.1 $22.3 $10.1
service experience while protecting
taxpayer information and data
----------------------------------------------------------------------------------------------------------------
Care Taxpayer Services and Enforcement: $0.1 $138.9 $139.0 $99.1 $99.2 $37.3
Streamline and integrate IT programs that
enable top-quality service
----------------------------------------------------------------------------------------------------------------
Modernized IRS Operations: Retire and $30.6 $105.1 $135.7 $8.9 $39.5 $92.4
decommission legacy systems in place of
more sustainable infrastructure
----------------------------------------------------------------------------------------------------------------
Cybersecurity and Data Protection: Continue $43.9 $156.1 $200.0 $61.8 $105.7 $94.3
to protect taxpayer data and address
emerging threats
----------------------------------------------------------------------------------------------------------------
Technology Planning and Program Oversight $0.5 $28.8 $29.3 $10.9 $11.4 $17.9
----------------------------------------------------------------------------------------------------------------
Subtotal $90.3 $446.1 $536.4 $187.8 $278.1 $252.0
----------------------------------------------------------------------------------------------------------------
Discontinued Programs $8.2 $39.1 $47.3 $45.4 $53.6 $0.0
----------------------------------------------------------------------------------------------------------------
Total $98.5 $485.2 $583.7 $233.2 $331.7 $252.0
----------------------------------------------------------------------------------------------------------------
\1\ Spending for FY 2022 includes commitments, obligations, expenses, and disbursements (COED).
Question. Will you commit to providing the Senate Finance Committee
membership with quarterly updates on the status of the IRS's
supplemental COVID funding?
Answer. IRS provides COVID obligation status updates in COVID Spend
Plan reports provided through Treasury. Treasury also provides
consolidated obligation updates on COVID funding spending for the
Department that includes input from IRS. These status updates are
either provided as a separate report or as a part of other consolidated
budget specific submissions or requests. IRS plans to continue to
provide the Hill with spend plan/obligation status updates for COVID
and the American Rescues Plan allocations.
Questions Submitted by Hon. Chuck Grassley
Question. Last year, ProPublica began publishing stories that
appear to be based on confidential taxpayer information leaked or
hacked from the IRS. In a December letter to you from myself and
several other members of this committee, you were asked if you were
aware of any data breach of IRS systems. In your March 8th response,
you suggested that this question would be better directed to the
Treasury Inspector General, the FBI, and the Department of Justice.
However, according to the Internal Revenue Manual ``[t]he IRS
Commissioner is responsible for overall planning, directing,
controlling and evaluating IRS policies, programs, and performance.''
In light of this and the fact we are in the middle of filing
season, do you evaluate IRS systems as safe and secure for the millions
of returns currently being filed?
Answer. Yes.
Question. Are you working to ensure that IRS systems are secure or
are you waiting for the results of a criminal investigation before you
take any action?
Answer. The IRS is continuously working to ensure that IRS systems
are and remain secure.
Question. On April 13, 2022, ProPublica published another story
based on a claimed ``trove of IRS data'' ``revealing the incomes and
tax rates of the 400 Americans with the highest incomes from 2013 to
2018.'' It is very frustrating that for nearly a year what appears to
be confidential taxpayer information has continued to be openly
published without any sign from the IRS that a leak or hack has been
identified much less addressed. While there are many entities such as
the FBI that are responsible for Federal law enforcement, the IRS is
responsible for protecting the taxpayer information that is entrusted
to it.
Since ProPublica first began publishing what appears to be
confidential taxpayer information last year, has the IRS undertaken any
effort to determine if there was a leak or hack of IRS systems? Please
detail those efforts if any were undertaken.
Answer. The Treasury Department has made clear that the matter was
immediately referred to the appropriate authorities, including the
Treasury Inspector General for Tax Administration, and that those
entities conduct independent investigations.
Question. In response to any of the information published by
ProPublica, has the IRS reached out or had contact with any of the
taxpayers who appear to have had their confidential taxpayer
information leaked or hacked from the IRS?
Answer. Particularly given statutory restrictions, I am constrained
in what I can say about this matter. But the matter was immediately
referred to the appropriate authorities, which conduct their
investigations independently.
Question. When what appears to be confidential taxpayer information
is published by ProPublica or in any other public forum, does the IRS
take note of it and investigate, or does the IRS need to receive a
complain first?
Answer. While the IRS certainly recognizes the significance of the
ProPublica article, the Office of the Treasury Inspector General for
Tax Administration (TIGTA) has ``jurisdiction and responsibility to
enforce criminal law as it pertains to IRS operations, including IRS
employee misconduct and external attempts to corrupt tax
administration.'' As part of this mandate, TIGTA is charged with
investigating ``unauthorized inspection and/or disclosure of tax
information.'' The IRS fully supports any TIGTA investigation into this
matter.
Question. Do you think the responses to previous questions from
Congress on this matter, which do not confirm that a leak or hack took
place, show good stewardships of existing IRS resources, which would
encourage Congress to entrust even more money to the IRS?
Answer. Yes. The Department of Justice (DOJ) has sole authority to
initiate any civil action (such as seeking an injunction) or criminal
prosecution pertaining to an unauthorized disclosure of tax
information. As stated above, TIGTA has ``jurisdiction and
responsibility to enforce criminal law as it pertains to IRS operations
including IRS employee misconduct and external attempts to corrupt tax
administration.'' As part of this mandate, TIGTA is charged with
investigating ``unauthorized inspection and/or disclosure of tax
information.'' The IRS's prior answers appropriately referred questions
to the agencies with jurisdiction and demonstrate its unwavering
commitment to follow the laws enacted by Congress.
Question. On March 8, 2022, you responded to a letter from Finance
Committee Republicans that asked several questions relating to the
possible leak or hack of confidential taxpayer information. In response
to a question asking you to identify the holders of all contracts and
sub-contracts over the past 10 years where 6103 information was
transmitted outside of the IRS, you stated: ``We have no ready way of
identifying the requested information for the last 10 years short of
going into each of the tens of thousands of contract and sub-contract
files, many of which exist only in paper form.''
This response suggests the IRS is not able to track the full extent
of its contracting activities. Does the IRS know how many contracts for
various services, including IT, it has engaged in?
Answer. The IRS uses several systems to track the number of
contracts it has awarded. As the IRS awards thousands of contracts per
year, we track and report on contract awards to prime contractors. The
IRS tracks IT and non-IT contracts through standard reporting practices
using North American Industry Classification System (NAICS) and Product
Service Codes (PSC). Contract awards are reported on publicly available
sites: Federal Procurement Data System (FPDS) and USASpending.gov. The
IRS is actively modernizing its capabilities to capture procurement
information at all levels.
The government does not have a contractual relationship with sub-
contractors. Privity of contract is only at the awardee level for the
government. Given that the IRS only has a contractual relationship with
prime contractors, we do not track the names of sub-contractors
affiliated on each contract awarded. The IRS does evaluate sub-
contracting plans when appropriate and required by Federal Acquisition
Regulations.
Question. How does the IRS track that contractor and sub-
contractors are in compliance with their contracts, including
provisions relating to IRC section 6103, if the IRS is not even able to
track the number of contracts it has engaged in?
Answer. Protecting taxpayer data is an IRS priority. The IRS
security process is thorough and in-depth for both contractors and IRS
employees who have access to return information protected by IRC
Sec. 6103. IRM section 10.5.1 describes the foundation for IRS's
protection of Sensitive But Unclassified information, including return
information.
In the event Contracting Officers have concerns regarding the level
of protection or the scope of work, they can contact the IRS Privacy,
Government Liaison, and Disclosure (PGLD) division, whose mission is to
preserve and enhance public confidence by advocating for the protection
and proper use of that critical and sensitive information.
Additionally, the Contracting Officer can contact Facilities Management
and Security Services and IRS Chief Counsel's General Legal Services
division to ensure that appropriate security controls for the
requirement are in place.
The IRS Contracting Officer (CO) appoints Contracting Officer
Representatives (COR) on all contracts that exceed $250,000. These
individuals work directly with the prime contractors to ensure contract
compliance. When issues arise, the COR works with the CO to bring
contracts back into compliance or move forward with alternative
actions. Additionally, either or both the CO and COR engages leadership
and appropriate stakeholders within the IRS to fully ensure that
taxpayer information is protected.
Question. How does the IRS ensure that confidential taxpayer
information is only shared outside the IRS as appropriate, particularly
in lights of the apparent inability to track which contracts allow for
the sharing of that information?
Answer. The IRS has very strict personnel security processes that
involve both IRS IT's Cybersecurity team and PGLD's Privacy Compliance
and Assurance division. The Internal Revenue Manual (IRM) lays the
foundation to implement and manage security for systems used or
operated by the IRS as well as systems operated by a contractor of the
IRS, establishes the processes for evaluating companies before granting
access to 6103 information, and notes other guidance such as Executive
Orders and policy memoranda.
In addition, we follow the standards published by the National
Institute of Standards and Technology regarding security requirements
and controls for contractors and adhere to the guidance set forth in
the Federal Information Security Modernization Act of 2014 (FISMA)
regarding periodic training to all contractors/subcontractors involved
in the management, use, or operation of Federal information and
information systems.
The COR is responsible for ensuring each vendor is assessed
appropriately based on the level of access to 6103 data required, how
the data will be used, and where and how the data will be stored and
accessed.
We ensure we apply security and privacy clauses--including those in
the National Institute of Standards and Technology (NIST) Special
Publication 800 series, IRS Publication 4812, and Federal Risk and
Authorization Management Program requirements--to all contracts where
contractors will handle sensitive information.
On an ongoing basis, contractors must follow the general guidance
and specific security control requirements in Publication 4812,
Contractor Security Controls; Internal Revenue Manual (IRM) 10.8.1,
Information Technology (IT) Security, Policy and Guidance; and IRM
10.23.2, Personnel Security, Contractor Investigations. Publication
4812 and IRMs 10.8.1 and 10.23.2 provide comprehensive lists of all
security controls and guidance.
To monitor compliance with Publication 4812, we conduct annual
onsite or virtual Contractor Security Assessments (CSAs) based on risk.
During the CSAs, we assess and validate the effectiveness of security
and privacy controls. Security control effectiveness addresses the
extent to which the controls are implemented correctly, operating as
intended, and producing the desired outcome with respect to protecting
information and individual privacy, or meeting the security
requirements for the information system in its operational environment.
These assessments help determine whether additional controls or
protections are necessary to protect returns, return information,
personal privacy, other SBU data, and organizational assets and
operations.
Question. Despite spending $5.4 billion over the past 20 years on
IT upgrades, the IRS still processes paper returns manually. In
contrast, over the past 2 decades State revenue departments have
automated the processing of paper returns. Recently, the National
Taxpayer Advocate, Erin Collins, called on the IRS to work with tax
software companies to voluntarily adopt features that allow IRS to use
machine reading technology to process paper returns prepared with their
software for the 2023 filing season. Moreover, by no later than the
2024 filing season, Ms. Collins has directed the IRS to adopt optical
character recognition software that can read any remaining paper
returns. Please provide an overview of what actions IRS has taken, or
is in the process of taking, in response to the NTA's directive.
Answer. The IRS has several ongoing pilot projects to improve the
efficiency and accuracy of processing paper tax returns with, optical
character recognition (OCR) or 2D barcoding. These projects are:
V-Coded Return Pilot. A V-coded return is when the taxpayer
used software to prepare the return, printed the return and
mailed it to the IRS. Using a vendor, this pilot was designed
to enable remote scanning and validation of Forms 1040 that are
V-coded to be submitted using Modernized e-File (MeF). The goal
is to accelerate this pilot so it will be scanning tax year
2022 Forms 1040 V-coded and Forms 940 and 941 in filing season
2023.
OCR Scanning Service Pilot. This pilot used a third-party
contractor's OCR capability to scan Form 940 business returns.
The contractor will scan and submit the returns using MeF.
2D Barcode Pilot. This pilot implemented 2D bar codes to
digitally intake data from Forms 8918 (Material Advisor
Disclosure Statement) and Forms 8886 (Reportable Transaction
Disclosure Statement). In December 2021 IRS released Form 8918
with 2D bar codes. Form 8886 was to follow with production of
the 2D bar code form in March 2022. The IRS has received
approximately 1,000 Forms 8918 to date, of which 253 were on
the old paper form and 837 on the new paper forms with 2D bar
codes. However, only 78 percent of the 2D bar-coded paper forms
received could be fully read into IRS systems, requiring close
scrutiny of the data. We are working to determine actions to
reduce the error rate. Before considering using 2D bar codes
for Form 1040, we need to engage with the software industry to
update industry standards to align them with how we intake and
process data. The industry would have to agree to provide such
code in forms printed after using their software to prepare the
tax return. We will start that engagement, develop a plan on
how it would work and report back to you with the results.
In addition to pursuing scanning, we also plan to make more forms
available to be e-filed. We are also reviewing administrative policies
to determine whether we can make changes so more people are eligible to
e-file.
We believe a multifaceted approach is necessary to address the
paper inventory the IRS receives yearly.
We caution that the expected benefit from bar codes and OCR would
diminish if Congress modifies provisions of the Internal Revenue Code s
shortly before the filing season or, as happened recently, during the
filing season, increasing the likelihood of errors. For example, IRS
and software vendors' ability to respond and produce accurate forms may
preclude timely inclusion of bar codes or QR codes, resulting in more
submissions with unreliable codes.
Question. The IRS recently experienced several legal defeats
involving taxpayers challenging IRS guidance for failing to adhere to
the Administrative Procedures Act (APA). In Mann Construction, the
Sixth Circuit invalidated a 2007 IRS notice establishing ``a listed
transaction'' for failing to follow the APA and similarly in Liberty
Global, a District Court invalidated temporary regulations issued under
section 245A of the Internal Revenue Code. These decisions potentially
have broad implications as to the validity of other guidance issued by
the IRS and raise a number of other questions pertinent to tax
administration.
With respect to the Mann Construction case, please provide an
overview of how the IRS views this recent decision and what it means
for the listed transaction regime going forward.
Answer. The Treasury Department and the IRS disagree with the Sixth
Circuit's decision in Mann Construction and continue to defend the
validity of existing listing notices in litigation. The Treasury
Department and the IRS recognize, however, that Mann Construction is
controlling law in the Sixth Circuit, and the IRS has ceased enforcing
disclosure and list maintenance requirements with respect to the
listing notice at issue in Mann Construction in the Sixth Circuit. The
IRS has also similarly ceased enforcing Notice 2017-10, relating to
syndicated conservation easements, in the Sixth Circuit. The Treasury
Department and the IRS recently issued proposed regulations identifying
certain syndicated conservation easement transactions as listed
transactions. The Treasury Department and the IRS intend to issue
proposed regulations identifying additional listed transactions in the
near future.
Question. Please identify other such notices or instances of
informal guidance that have been challenged, whether in administrative
proceedings or litigation.
Answer. While the IRS has seen more challenges to its non-
regulatory guidance in recent years, most challenges to IRS guidance
have been to regulations, except for notices issued under the
reportable transaction regime.
Regarding the reportable transaction program, Notice 2007-83
identifying certain abusive trust arrangements that purportedly provide
welfare benefits as a list transaction, Notice 2016-66 identifying
micro-captive insurance transactions as a transaction of interest, and
Notice 2017-10 identifying syndicated conservation easements as a
listed transaction have all been challenged. Notice 2017-10 has been
challenged in numerous cases and administrative proceedings.
Three documents published in the Internal Revenue Bulletin (IRB)
have been held to be procedurally or substantively deficient. Notice
2005-79 regarding refunds of illegally collected telephone excise taxes
was held invalid by the District Court for the District of Columbia and
Revenue Procedure 2018-38 regarding reporting of donors to certain
charitable organizations was held invalid by the District Court for the
District of Montana for failure to comply with the APA's notice and
comment requirement. In re Long-Distance Telephone Service Excise Tax
Refund Litigation, 853 F.Supp.2d 138 (D.C. Dist. 2012); Bullock v. IRS,
401 F.Supp.3d 1144 (D. Mont. 2019). Revenue Procedure 99-21 regarding
claiming financial disability was found to have not adequately
explained the agency's decision to not treat a psychologist as a
doctor. Stauffer v. IRS, 285 F.Supp. 3d 474 (D. Mass. 2017).
One document published in the IRB has been upheld. Revenue
Procedure 2014-42 establishing the Annual Filing Season Program was
upheld by the Court of Appeals for the District of Columbia in a
challenge that the revenue procedure should have complied with the
APA's notice and comment procedures and was arbitrary and capricious.
AICPA v. IRS, 746 Fed.Appx.1 (D.C. Cir. 2018).
Finally, a challenge to one document published in the IRB is
currently pending. A challenge to Notice 2017-5, which clarifies
definitions of a vehicle chassis for the purpose of applying a safe
harbor to excise taxes imposed under section 4051, is pending before
the Middle District of Tennessee for failing to comply with notice-and
comment.
These challenges were brought in litigation. We do not have data
about any challenges made during examinations or in Appeals although we
understand there are several. Unless there is controlling precedent
invalidating an IRS regulation or document published in the IRB these
documents will be treated as valid during examinations or in Appeals.
In some circumstances, Appeals may consider a final, unappealable
decision invalidating IRS guidance when weighing the hazards of
litigation and considering settlement of a Federal tax controversy.
Question. Please provide an overview of current litigation
challenging IRS guidance for failure to adhere to the APA process,
including the number of case filings and the amount of revenue in taxes
and penalties at issue.
Answer. The IRS currently has numerous cases pending before various
courts that challenge IRS guidance for failure to comply with APA
procedural requirements.
Several challenges to Notice 2007-83, which identifies certain
abusive trust arrangements that purportedly provide welfare benefits as
a list transaction, are pending. Govig v. United States is pending
before the District Court for the District of Arizona. Govig alleged
that Notice 2007-83 is invalid under the APA because it was issued
without using notice-and-comment. There are approximately $251,000 at
issue in this case. McGowan v. United States is pending in the Northern
District of Ohio. McGowan also alleges that that Notice 2007-83 is
invalid under the APA because it was issued without using notice and
comment procedures. There are approximately $116,000 in taxes,
penalties, and interest at issue in McGowan. Two cases have also been
filed requesting refunds in light of the Sixth Circuit's opinion in
Mann Construction. Coughlin v. Unites States was filed in the Eastern
District of Michigan and approximately $29,000 is at issue in this
case. Madison Avenue Pharmacy v. United States was filed in the
Southern District of Ohio and approximately $40,000 in penalties is at
issue in this case.
Notice 2016-66 was invalided by the Eastern District of Tennessee
in CIC Services, LLC v. IRS. Because this case was a pre-enforcement
challenge to Notice 2016-66 no tax or penalties are at issues in the
case. However, the court order vacating Notice 2016-66 will have
collateral consequences for a penalty determined under section 6662A,
6707, 6707A, or 6708 related to a micro-captive insurance transaction.
There are also numerous challenges to Notice 2017-10 identifying
syndicated conservation easements as a listed transaction pending the
United States Tax Court (Tax Court). There are currently over 40 Tax
Court cases with APA challenges to Notice 2017-10. In these cases,
petitioners allege that they are not liable for penalties under section
6662A, which imposed an accuracy-related penalty on understatement
related to reportable transactions. Petitioners allege that Notice
2010-17 was improperly issued without following notice and comment
procedures and that it is arbitrary and capricious to apply Notice
2017-10 to require disclosure of transactions reflected on returns
filed before the notice was issued even when the period to assess tax
with respect to those returns is open. Additionally, there is a pre-
enforcement challenge to Notice 2017-10 before the Northern District of
Alabama.
Numerous cases before the Tax Court have challenged regulations
under section 170A regarding conservation easements, two of which have
been appealed to circuit courts. The petitioner in Oakbrook Land
Holdings, LLC v. Commissioner, alleged that the IRS acted arbitrarily
and capaciously when it promulgated Treas. Reg. Sec. 1.170A-
14(g)(6)(ii), which addresses the contents of the proceeds clause in
the deeds of easement. The Tax Court issued an opinion upholding the
validity of the regulation. The Sixth Circuit affirmed, and the period
for petitioning for certiorari remains open. In Hewitt v. Commissioner,
the petitioner also challenged Treas. Reg. Sec. 1.170A-14(g)(6)(ii),
and the Tax Court again upheld the regulation. The Eleventh Circuit
reversed, holding that the IRS's interpretation of a provision in the
regulation is arbitrary and capricious. There are at least 29 other
deficiency cases pending before the Tax Court in which taxpayers have
raised similar challenges to this regulation, none of which has become
final yet.
The total tax liabilities at issue in the cases challenging Notice
2017-10 and regulations under section 170A are approximately
$1,108,650,00 and total penalties at issue are approximately
$521,400,000.
There are several other challenges to IRS regulations pending
before appellate or district courts. FedEx v. United States is a refund
suit pending before the Western District of Tennessee in which the
plaintiff alleges the regulations under section 965 are invalid under
the APA. There are approximately $89,100,000 in taxes and interest at
issue in FedEx. Liberty Global v. United States is a refund suit
pending before the District of Colorado. The plaintiff alleges that the
temporary regulations under section 245A are invalid under the APA
because they are arbitrary and capricious and should have been
submitted for notice and comment. The district court recently held that
the temporary regulations are invalid because the government failed to
comply with the notice and comment requirement and did not provide good
cause for forgoing notice and comment. There are approximately in
$104,500,000 in taxes and $4,800,000 in penalties at issue in Liberty
Global. This holding could have collateral consequences in cases of at
least eight other taxpayers who have raised questions regarding the
validity of the section 245A regulations. The tax amounts at issue
regarding these taxpayers exceeds $8,000,000,000.
In Silver v. Internal Revenue Service, plaintiffs allege that the
section 965 regulations were issued in violation of the APA, and in
Silver v. Internal Revenue Service II, plaintiffs allege that the
section 951A regulations were issued in violation of the APA, though
the primary argument alleges a failure to comply with the Regulatory
Flexibility Act. The IRS prevailed in Silver I, which plaintiffs have
appealed to the Court of Appeals for the District of Columbia.
Plaintiffs do not request monetary relief.
State of New Jersey v. Mnuchin is a pre-enforcement challenge to
regulations implementing the State and local tax cap alleging that the
regulations are contrary to the law and arbitrary and capricious in
violation of the APA. No monetary relief was requested.
There also several challenges under the APA to different IRS
regulations pending before the Tax Court. Bluescape v. Commissioner is
a deficiency case in which the petitioner is challenging the validity
of regulations issued under sections 61 and 461, which govern the
taxable year of when a deduction is available. There is an
approximately $226,050,000 tax liability at issue in Bluescape.
Perficient, Inc. v. Commissioner is a deficiency case challenging
Treas. Reg. Sec. 1.41-4A(d)(2), which provides standards for
determining whether a credit for increasing research under section 41
should be denied because the research is funded by clients. There is an
approximately $1,677,000 tax liability at issue in Perficient. 3M v.
Commissioner and The Coca-Cola Company and Subsidiaries v. Commissioner
are deficiency cases in which the petitioners argue that Treas. Reg.
Sec. 1.482-1(h)(2) was issued in violation of the APA. In 3M there is
an approximately $8,565,000 tax liability at issue, and in Coca-Cola
there is an approximately $3,436,6000,000 tax liability plus penalties
at issue.
Finally, in Fitzgerald Truck Parts v. United States, plaintiffs
challenged Notice 2017-5, which clarifies definitions of a vehicle
chassis for the purpose of applying a safe harbor to excise taxes
imposed under section 4051, as violating the APA because it did not go
through notice and comment. This case is pending before the Middle
District of Tennessee, and approximately $202,000 in taxes are at issue
in this case.
Question. Please describe how the notice and comment process may
affect timeliness of non-regulatory guidance.
Answer. Subjecting non-regulatory guidance to the notice and
comment process would significantly and detrimentally delay the
issuance of non-regulatory guidance. The notice and comment process has
many more steps than the current process for issuing guidance published
in the Internal Revenue Bulletin (IRB), which is where non-regulatory
published guidance is published. Documents submitted for notice and
comment must be published in the Federal Register as a notice of
proposed rulemaking, receive publics comments, and in some cases be the
subject of a public hearing before the final document may be published.
None of these steps is required for documents published in the IRB.
Additionally, notice and comment documents are subject to a more
complex approval process. This additional process can add years to the
time is takes to publish a final document.
This additional time may allow taxpayers to engage in abusive
transactions for many more years than if the transaction had been
identified without notice and comment. It also means that some
limitations periods for determining a tax deficiency and penalties will
expire before a final document can be published. Also, taxpayers may be
able to take advantage of the delay between a notice of proposed
rulemaking and a final rule. Combined, these factors could have a
significant effect of the fisc, increase the tax gap, and reduce the
taxpaying public's perception of the fairness of the tax system.
Question. What matters that are generally addressed by revenue non-
regulatory publications may now be required to be the subject of
regulations?
Answer. The IRS does not use non-regulatory guidance documents to
issue guidance that should go through the notice and comment process.
If other courts agree with the Sixth Circuit's decision in Mann
Construction, listed transactions will have to be identified in
regulations unless Congress acts to address the issue by legislation.
Question. Thank you for your response to questions from Finance
Committee Republicans regarding the IRS use of a service provider to
verify the identities of taxpayers accessing IRS services. You said
that taxpayers would not be required to provide a ``video selfie'' and
instead could conduct a live video chat.
Do you have information on how many taxpayers have opted for a live
video chat instead of providing a ``video selfie?''
Answer. Between February 21, 2022, and December 31, 2022, 1,351,119
taxpayers have opted for the video chat authentication option.
Question. Has ID.me, the credential service provider the IRS is
working with, identified any issues to the IRS in implementing this
change in authentication procedure?
Answer. No, ID.me has not reported any issues to the IRS in
implementing this change in authentication procedure.
Question. Does the IRS believe that providing this additional
option will reduce the quality of the identification process, even if
it complies with NIST and OMB rules and guidelines?
Answer. No, we do not believe the quality of the identification
process will be reduced with a live video option.
Question. In your written testimony, you describe how the IRS is
working with the General Services Administration to facilitate the use
of Login.gov to provide identity authentication of taxpayers who want
to access IRS services. What is the time frame for completing this
transition, and does the IRS expect to continue to use any third-party
credential service providers once the transition is complete?
Answer. We continue to engage with GSA to determine when Login.gov
will meet IRS requirements. Once the requirements are met, an
implementation time frame may be established. We foresee the need to
continue to use third-party CSPs to reduce risk by eliminating reliance
on a single CSP and to provide continuity and choice for taxpayers who
have already completed the credentialing process.
Question. In a response to questions from Finance Committee
Republicans regarding the IRS use of a service provider to verify the
identities of taxpayers accessing IRS services, you responded to a
question asking about actions taken in the event of a data breach
affecting a credential service provider. You wrote that the agreement
with ID.me ``requires contractors and subcontractors to report a
suspected or confirmed breach in any medium'' as soon as possible.
Are contractors and subcontractors required to undergo training on
taxpayer data protection and if so, is the training administered by the
IRS, the contractor, a subcontractor, or another third party?
Answer. Yes, all contractors and subcontractor employees who
require staff-like access to IRS information or information systems
(regardless of their physical location) must complete Security
Awareness Training (SAT) prior to being granted access to Sensitive But
Unclassified (SBU) data. This training includes mandatory briefing on
Annual Cybersecurity Awareness, Privacy, Information Protection and
Disclosure, Records Management, Insider Threat Awareness, and
Unauthorized Access (UNAX) training. The training is developed by the
IRS and administered virtually.
Question. How does the IRS verify and maintain records that service
providers such as ID.me are aware of and follow the requirements for
data security that are part of their contracts with the IRS?
Answer. IRS Contracting Officers ensure contractors are aware of
their contractual requirements, and contractors must maintain and
furnish, as requested, records of initial and annual training and
certifications. Contractors may also establish additional internal
training, as needed (or as required under the terms of the contract),
for personnel in the organization who require access to IRS information
or information systems. System access may not be granted until required
training is completed.
______
Prepared Statement of Hon. Ron Wyden,
a U.S. Senator From Oregon
This morning the Finance Committee meets to discuss the IRS budget
for the year ahead and the filing season that's winding down later this
month. Around the country are millions and millions of families who are
feeling the pressure of rising prices. This year in particular, people
are counting on getting their tax refunds to help cover the bills.
I'll cut right to the heart of the matter for those families whose
refunds might be delayed due to IRS backlogs. If you're frustrated by
poor customer service from the IRS, you've got years and years of
Republican cuts to blame for gutting the agency's ability to meet your
expectations. For all the talk about running government more like a
business, Republicans seem to want to turn government into the kind of
dysfunctional business that never has a repeat customer.
They had an opportunity, when they passed their tax law in 2017, to
fix the IRS comprehensively, reduce backlogs, and improve service. They
did not do it. In fact, they added more complexity to the tax code and
made the tax system more difficult to manage. This came after
Republicans had been squeezing the IRS budget steadily for years. It
was clear at the time, Republicans were steering into a train wreck,
and you're seeing the effects today.
The number of revenue agents at the IRS, the people who audit tax
returns, is currently a third of what it was a decade ago. The officers
who collect unpaid taxes are down by nearly half. The agency has the
same number of employees it did in 1970 when the country's population
and economy were a fraction of the size they are today.
As of late March, the IRS was facing a backlog of 12 million tax
returns. Service agents are struggling to keep up with phone calls. So
far this year they've been able to answer only 11 percent of them.
The IRS has recently been on a hiring mission, thanks to funding
and hiring authority passed by Democrats. The agency is making progress
on the backlog and targeting resources at customer service and phone
lines. But in the meantime, law-abiding taxpayers dealing with the
aftereffects of these Republican budget cuts are left with the
impression that the government couldn't manage a two-car parade.
With that said, not everybody is pained by what's happening at the
IRS. Customer service has fallen off, but tax enforcement is in even
worse shape, which means these are high times for wealthy tax cheats.
The IRS is totally outmanned against tax cheats who use those
complexity-driven loopholes to cheat out of paying their fair share.
There are fewer revenue agents working today than at any point since
World War II, but the challenge they're up against is a whole lot
bigger.
Some of the murkiest, most loophole-ridden parts of America's
broken tax code deal with partnership income. It is a thicket of super-
complicated rules that are supposed to apply to a third of all business
income in the United States--a large and growing percentage.
In Fiscal Year 2020, the IRS examined barely more than one-tenth of
1 percent of partnership tax returns--the tiniest sliver. Meanwhile,
new research from U.C. Berkley found that the working poor are 12 times
more likely to face an audit.
Look at the big picture. As a result of years of Republican budget
cuts, IRS customer service is struggling at best, wealthy tax cheats
are getting away with breaking the law, and the burden of tax
enforcement has been shifted onto working people who spend every day
walking a tightrope.
Democrats in Congress have begun to reinvest in taxpayer service
and enforcement to crack down on the cheats and to make tax filing
season less of a headache for everybody else. Part of that ongoing
process, in my view, must be making it easier for Americans to file
their taxes directly online, for free. Taxpayers are paying huge sums
to file their taxes through private companies, and some of those
companies use deeply deceptive practices to steer them away from free
options they have a legal right to use.
I've been a longtime supporter of the right to file directly with
the IRS online, as well as a ``simple return'' system in which your
forms show up completed, and all you have to do is check the numbers.
The bottom line is that it's past time for Congress to tell these tax
prep companies that they no longer have a free pass to turn rip-offs
and deception into profits.
Wrapping up, I want to thank Commissioner Rettig and particularly
the front-line staff at IRS for putting in long hours this filing
season to get refunds out in a timely way. That job's been made a lot
harder, but the staff are working hard--and that effort is much
appreciated. I'm looking forward to our discussion with Commissioner
Rettig today.
______
United States Government Accountability Office
_______________________________________________________________________
Report to Congressional Committees
October 2021
Information Technology: Cost and Schedule Performance of Selected IRS
Investments
GAO-22-104387
Why GAO Did This Study
IRS relies extensively on IT investments to annually collect more than
$3.5 trillion in taxes, distribute more than $450 billion in refunds,
and carry out its mission of providing service to America's taxpayers
in meeting their tax obligations. For Fiscal Year 2020, the agency
reported spending approximately $2.8 billion for these investments.
The Joint Explanatory Statement accompanying the Financial Services and
General Government Appropriations Act, 2020 included a provision for
GAO to annually review the status of IRS's IT investments. GAO's
specific objectives were to (1) summarize IRS's reported performance
for selected IT investments, including CADE 2; (2) identify IRS's
reported progress in implementing its 2019 IT modernization plan; and
(3) identify the IT-related actions IRS has taken to maximize telework
and operate during the COVID-19 pandemic, and any impacts of those
actions.
GAO obtained IRS's reported performance information for a
nonprobability sample of five investments, and compared performance to
agency targets. GAO also compared modernization activities that IRS
reported completing to those identified in the agency's 2019 IT
modernization plan. Further, GAO reviewed agency documentation to
identify reported IT actions taken to continue to operate during the
pandemic and reported associated impacts. GAO also interviewed
cognizant IRS officials.
What GAO Found
The Internal Revenue Service (IRS) reported that the five investments
GAO reviewed met most of the performance goals set by the agency for
Fiscal Years 2019 and 2020. Specifically, IRS reported that most of the
three investments in development were within 10 percent of performance
goals, a variance the Office of Management and Budget considers not to
be significant. An exception was the Customer Account Data Engine
(CADE) 2, a program intended to modernize tax processing, that
reportedly spent about 15 percent less than budgeted for 2020. For the
two investments in operations and maintenance, IRS reported that for
Fiscal Years 2019 and 2020 one investment met all five operational
performance goals established by the agency, while the other met three
of five goals in Fiscal Year 2019 and four of five in Fiscal Year 2020.
While CADE 2 had lower reported costs than expected for 2020 and was
within 10 percent of schedule goals for 2019 and 2020, its longer term
performance and outlook are troubling. IRS began developing CADE 2 in
2009 to replace its 60-year-old Individual Master File (IMF)--IRS's
authoritative data source for individual tax account data. Since 2009,
IRS has revised the program's cost, schedule, and scope goals on
numerous occasions, including seven times between 2016 and 2019.
Accordingly, a key major program milestone for replacing selected IMF
functions, known as transition state 2, has slipped 9 years--from 2014
to 2023. Further, CADE 2 is now expected to replace core functions of
IMF, rather than the entire system. The CADE 2 delays and IRS's
continued use of IMF are troubling given, that IMF (1) is one of the
oldest systems in the Federal Government; (2) has software written in
an archaic language that IRS stated is no longer taught in school; and
(3) is supported by a workforce with specialized skills that are
increasingly harder to find. In June 2021, IRS reported that it planned
to replace and fully retire IMF by 2030. Accordingly, IRS will continue
to face IMF challenges for several more years.
For its agency-wide modernization plan, IRS reported completing most of
its activities intended for Fiscal Years 2019 and 2020 within cost and
on or ahead of schedule. The updated plan identified 59 activities for
completion in Fiscal Years 2019 and 2020. IRS reported that, by the end
of Fiscal Year 2020, it had completed 54 of the 59 activities early or
on schedule and the remaining five activities 3 to 7 months later than
initially planned. Regarding cost, IRS reported that it spent $9
million less than the $300 million planned for Fiscal Year 2019 and
$19.9 million less than the $271 million planned for Fiscal Year 2020.
To respond to the pandemic, IRS took a number of information technology
(IT)-
related actions to maximize telework capabilities for its employees,
including deploying IT equipment, such as laptops, and upgrading its
network infrastructure bandwidth. For Fiscal Year 2020, IRS spent $104
million for these actions from emergency appropriations included in
pandemic-related legislation. According to IRS officials, the long-term
impact of sustaining an increased level of telework on the budget had
not been determined. In contrast, IRS said the actions to maximize
telework capabilities delayed plans for IT modernization and
operations. For example, IRS reported that staffing resources initially
allocated for CADE 2 had been reassigned to support COVID-19
responsibilities, resulting in a 7-month delay in the scheduled
completion of key development activities.
_______________________________________________________________________
October 19, 2021
The Honorable Chris Van Hollen
Chairman
The Honorable Cindy Hyde-Smith
Ranking Member
Subcommittee on Financial Services and General Government
Committee on Appropriations
U.S. Senate
The Honorable Michael B. Quigley
Chairman
The Honorable Steve Womack
Ranking Member
Subcommittee on Financial Services and General Government
Committee on Appropriations
U.S. House of Representatives
The Internal Revenue Service (IRS) relies extensively on information
technology (IT) systems to annually collect more than $3.5 trillion in
taxes, distribute more than $450 billion in refunds, and carry out its
mission of providing service to America's taxpayers in meeting their
tax obligations. For Fiscal Year 2020, the agency reported spending
approximately $2.8 billion for its IT investments.\1\
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\1\ This amount does not include the $104 million from COVID-19-
related appropriations that IRS reported spending on IT-related actions
it took to continue to operate during the pandemic. This spending is
detailed later in this report.
In April 2019, IRS issued a plan to guide its IT modernization efforts
through Fiscal Year 2024.\2\ This plan defined four major categories of
work that IRS considered necessary to transform the agency's technology
and deliver a modernized taxpayer experience in support of its mission:
(1) taxpayer experience, (2) core taxpayer services and enforcement,
(3) modernized IRS operations, and (4) cybersecurity and data
protection.
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\2\ Internal Revenue Service, IRS Integrated Modernization Plan
Business Plan (Washington, DC: April 2019).
Further, in response to the Coronavirus Disease 2019 (COVID-19)
pandemic, starting in March 2020, IRS, like other Federal agencies,
took actions to ensure its employees' safety while continuing to meet
its mission. In March 2021, we issued our annual report on IRS's filing
season performance. In the report, we identified steps the agency took
to manage disruptions to the 2020 filing season due to COVID-19.\3\
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\3\ GAO, Tax Filing: Actions Needed to Address Processing Delays
and Risks to the 2021 Filing Season, GAO-21-251 (Washington, DC: March
1, 2021). We also regularly issue government-wide reports on the
Federal response to COVID-19, including IRS's response. For the latest
report, see GAO, 9 GAO-21-551 (Washington, DC: July 19, 2021).
The Joint Explanatory Statement accompanying the Financial Services and
General Government Appropriations Act, 2020 \4\ includes a provision
for us to annually review the status of IRS's IT investments. Our
objectives for this review were to (1) summarize the agency's reported
performance for selected IT investments, including the Customer Account
Data Engine (CADE) 2; (2) determine IRS's progress in implementing its
2019 IT modernization plan; and (3) identify the IT-related actions the
agency has taken to maximize telework during the COVID-19 pandemic, and
the reported impacts of the actions on the agency's IT budget and
plans.
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\4\ Joint Explanatory Statement accompanying the Consolidated
Appropriations Act, 2020, Pub. L. No. 116-93, 133 Stat. 2317 (December
20, 2019). In communication with committee staff, we agreed to focus on
the three objectives detailed in this report.
For the first objective, we identified a nonprobability sample of five
out of IRS's 133 IT investments. We selected the sample from among
those investments that IRS identified as mission-critical and with the
highest levels of funding for Fiscal Years 2019 and 2020. Specifically,
we selected three investments in development--Enterprise Case
Management (ECM), CADE 2, and Web Applications (WebApps)--and two
investments in operations and maintenance--Individual Master File (IMF)
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and End User Systems and Services (EUSS).
For the investments in development, we compared planned cost, schedule,
and scope data to actual cost, schedule, and scope data for Fiscal
Years 2019 and 2020, using performance data from the Investment
Performance Tool--IRS's system for tracking investment performance--and
supporting documentation. The Office of Management and Budget's (OMB)
and IRS's standards for reporting on investment performance consider
variances within 10 percent of goals not to be significant.
To assess the reliability of the Investment Performance Tool data for
the selected investments in development, we, among other things,
interviewed IRS IT organization officials responsible for overseeing
the use of the tool to confirm our understanding of the data. We also
reviewed the data to verify that it included all the projects
supporting the investments for the 8 quarters in the scope of our
review. We followed up with IT program officials to discuss detected
anomalies. We determined that the data were sufficiently reliable for
our purposes.
For the CADE 2 investment, we also reviewed prior GAO reports; IRS's
quarterly IT reports to Congress on the agency's IT modernization
progress; and relevant documents, including the modernization plan for
IMF for which CADE 2 is a key component.
For the selected investments in operations and maintenance, we compared
operational performance measures found in the agency's monthly
investment performance reports to agency operational performance
metrics for Fiscal Years 2019 and 2020. We also reviewed IRS's
operational analyses--internal qualitative assessments of performance
required by OMB--for the two selected investments to determine whether
they addressed key factors specified in OMB's capital programming
guidance. These factors included, for example, analyzing how well the
investments contribute to achieving the organization's strategic goals
and determining the extent to which the investments support customer
processes, as designed. We rated each factor as addressed if the
operational analysis fully addressed the factor; or partially addressed
if the operational analysis addressed some, but not all, of the factor.
For the second objective, we compared IRS's reported actual costs and
schedules for the IT modernization activities completed in Fiscal Years
2019 and 2020 to the planned costs and schedules for these activities.
We also reviewed documentation, such as IRS's quarterly IT reports to
Congress, and interviewed IT organization \5\ officials, to understand
variances between actual and planned performance.
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\5\ IRS's IT organization is led by the Chief Information Officer
and includes several subordinate offices.
In addition, we selected a nongeneralizable random sample of
modernization activities to verify that they were completed.
Specifically, we randomly selected one activity from each of the four
modernization categories outlined in the agency's plan for Fiscal Years
2019 and 2020. This resulted in our selection of eight of 59
activities. To verify completion of the selected activities, we
reviewed supporting documentation and interviewed IRS IT organization
---------------------------------------------------------------------------
officials.
To address the third objective, we obtained, analyzed, and summarized
relevant documentation, including weekly impact summary reports
prepared by Associate Chief Information Officers in IRS's Information
Technology organization; IRS's COVID-19 spending plan; and the
inventory of IT equipment and services that the agency purchased to
transition its workforce to maximum telework. We also interviewed
officials from IRS's Information Technology organization who are
responsible for purchasing and deploying the equipment.
We also reviewed instructions for reporting information in the COVID-19
weekly impact summary reports. Further, we corroborated the accuracy of
the information in the COVID-19 spending plan with IRS budget
officials. We determined that the data were sufficiently reliable for
purposes of summarizing what IRS reported. A detailed discussion of our
objectives, scope, and methodology can be found in appendix I.
We conducted this performance audit from June 2020 to October 2021 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Background
The mission of IRS, a bureau within the Department of the Treasury, is
to provide America's taxpayers top quality service by helping them
understand and meet their tax responsibilities and enforce the law with
integrity and fairness to all. In carrying out its mission, IRS
annually collects more than $3.5 trillion in taxes from millions of
individual taxpayers and numerous other types of taxpayers. It also
manages the distribution of more than $450 billion in refunds.
In response to the COVID-19 pandemic, IRS, like many other agencies,
had to take actions to ensure its employees' safety and health, while
also ensuring the continuity of its mission-essential functions. In
March 2020, Congress and the President enacted the Coronavirus Aid,
Relief, and Economic Security (CARES) Act, which directed IRS to assist
individuals, families, and households in alleviating the financial
hardships they were facing through the disbursement of economic impact
payments.\6\ In addition, the CARES Act provided the agency with the
funding needed to take actions to continue to operate during the
pandemic and perform its new responsibilities.
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\6\ Pub. L. No. 116-136, Sec. 2201(a), 134 Stat. 281,336-37
(codified at 26 U.S.C. Sec. 6428) (March 27, 2020).
In March 2020, Congress and the President also enacted the Families
First Coronavirus Response Act, which provided additional funding to
IRS to continue to operate during the pandemic.\7\ Further, in December
2020, Congress and the President enacted the Consolidated
Appropriations Act, 2021, which authorized IRS to issue a second round
of direct payments to individuals to help address financial stress due
to the pandemic.\8\ Finally, in March 2021, Congress and the President
enacted the American Rescue Plan Act, which provided $1.5 billion to
the agency to continue to develop ``integrated, modernized, and secure
systems.''\9\
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\7\ Pub. L. No. 116-127, title III, 134 Stat. 178, 181 (March 18,
2020).
\8\ Pub. L. No. 116-260, div. N, Sec. 272(a), 134 Stat. 1182, 1965-
1971 (2020), classified at 26 U.S.C. Sec. 6428A. These payments are an
advance refund for a tax year 2020 tax credit.
\9\ American Rescue Plan Act of 2021, Pub. L. No. 117-2, Title IX,
Subtitle G, Sec. 9601, 135 Stat. 4, 144 (March 11, 2021).
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IRS Relies on IT to Carry Out Its Mission and Responsibilities
As previously mentioned, IT plays a critical role in enabling IRS to
carry out its mission and responsibilities. According to the agency, it
expended approximately $2.8 billion on IT investments during Fiscal
Year 2020: $605 million for development, modernization, and
enhancement, and $2.2 billion for operations and maintenance.
Included in these expenditures are the five investments selected for
our review--all of which IRS describes as critical to the agency's
mission.
Three of the five investments were primarily in the development phase
during Fiscal Years 2019 and 2020:
CADE 2, which IRS began developing in 2009, is intended to
replace core functions of IMF--IRS's authoritative data source for
individual tax account data--which accounts for a large portion of the
tax processing activities. CADE 2 data are also expected to be made
available for access by downstream systems, such as the Integrated Data
Retrieval System, for online transaction processing by IRS customer
service representatives. We provide more details on this investment
later in the report.
ECM, which IRS began developing in 2015, is intended to provide
an enterprise solution for performing case management across the
agency's business units. According to the agency, its current case
management systems provide limited visibility into case management
practices among programs, and cause process redundancies as well as
multiple handoffs that can lead to, among other things, increased
risks. ECM is expected to address these limitations.
In June 2018, we reported that, after 18 months of working with
a contractor, IRS had paused all development activities for the
investment because the product that was being delivered did not meet
the agency's needs.\10\ Specifically, the contractor's solution was not
sufficiently automated to be scalable across the agency.
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\10\ GAO, Information Technology, IRS Needs to Take Additional
Actions to Address Significant Risks to Tax Processing, GAO-18-298
(Washington, DC: June 28, 2018).
IRS subsequently established a new effort to acquire a product
that would be aligned with its business needs. In April 2020, it
acquired the product and began an incremental implementation.\11\ The
agency reported completing the first release of the implementation--the
delivery of the case management solution to one business organization--
in December 2020.
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\11\ IRS uses an agile approach to implement modernization
activities.
IRS reported completing the second release--the delivery of the
solution to one other business organization and the initiation of work
with three additional business organizations--in May 2021. The agency
expects the third release--the delivery of data services to allow users
to access individual taxpayer data, and additional case management
functionality to enable further business migration to ECM--to be
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completed in December 2021.
IRS reported spending $66 million on the investment in Fiscal
Year 2020. As of July 2021, the agency had spent $229 million on the
lifecycle of this investment and had rebaselined it--meaning that it
had revised cost, schedule, or scope goals--three times.
WebApps, which the agency began developing in 2015, is intended
to establish an online account for individual taxpayers that links the
taxpayer to various IRS services. For example, WebApps is intended to
allow taxpayers to check their account balances and payment histories,
and resolve a variety of tax issues using IRS's website or mobile
application. The agency reported that it expects to complete the online
installment agreements--which would allow users to create a short-term
payment plan--in WebApps by September 2021. The agency reported
spending $32 million on the investment in Fiscal Year 2020. As of
December 2020, IRS had spent $181 million on the lifecycle of the
investment.
The two other investments selected for our review were in the
operations and maintenance phase during Fiscal Years 2019 and 2020:\12\
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\12\ IRS allocated funding to both development and operations and
maintenance activities for EUSS and for IMF in Fiscal Years 2019 and
2020. However, over 50 percent of the funding was allocated to
operation and maintenance activities for both investments during this
time period.
EUSS, which IRS began operating in 2002, provides desktops,
laptops, mobile devices, software, incident management services, and
asset management services to end users in the agency. IRS reported
spending $268 million on development and operations and maintenance for
this investment in Fiscal Year 2020; it reported spending $2 billion on
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the lifecycle of the investment through September 2020.
IMF, which began operating in 1970, is IRS's system for
processing individual taxpayer account data. The agency uses this
system to update accounts, assess taxes, and generate refunds, as
required, during each tax filing period. Virtually all of IRS's
information system applications and processes depend on output,
directly or indirectly, from this data source; and IMF was used as a
key system for determining eligibility for making the economic impact
payments to individuals. IRS uses assembly language code \13\ and
Common Business Oriented Language (COBOL) \14\--languages that were
developed in the late 1950s and early 1960s--to program this system,
which it began developing in the late 1960s. The agency reported
spending $14 million on operations and maintenance for IMF in Fiscal
Year 2020 and a total of $189 million on the investment through August
2020.
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\13\ Assembly language code is a low-level computer language
initially used in the 1950s. Programs written in assembly language are
conservative of machine resources and quite fast; however, they are
much more difficult to write and maintain than other languages.
Programs written in assembly language may only run on the type of
computer for which they were originally developed.
\14\ COBOL, which was introduced in 1959, became the first widely
used, high-level programming language for business applications. The
Gartner Group, a leading IT research and advisory company, has reported
that organizations using COBOL should consider replacing the language,
as procurement and operating costs are expected to steadily rise, and
because there is a decrease in people available with the proper skill
sets to support the language.
To guide its future direction, in April 2019, IRS issued a plan for its
IT modernization efforts through Fiscal Year 2024.\15\ This plan
defined four major categories \16\ of work, which IRS considered
necessary to transform the agency's technology and deliver a modernized
taxpayer experience in support of its mission. The categories were
taxpayer experience, core taxpayer services and enforcement, modernized
IRS operations, and cybersecurity and data protection.
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\15\ Internal Revenue Service, IRS Integrated Modernization Plan
Business Plan (Washington, DC. April 2019).
\16\ IRS refers to these major categories of work as pillars.
In addition, the plan defined two phases for completing the work: the
first phase was scheduled to occur between Fiscal Years 2019 and 2021,
and the second phase was scheduled to occur between Fiscal Years 2022
and 2024. The agency noted that successful implementation of the plan
depended on obtaining certain hiring flexibilities and required
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multiyear funding at predictable levels.
IRS reports quarterly to the Congress and other stakeholders on its
progress in implementing the modernization plan, as mandated in the
Joint Explanatory Statement. These quarterly reports summarize
accomplishments for the past quarter and identify plans, including
associated costs and schedules for the upcoming quarter. Further, the
agency issues a publicly available annual status report and, in
February 2021, issued its second such report.
GAO Has Reported on Opportunities for IRS to Improve the Management of
Its IT Investments
For several years, we have reported on the performance of IRS's IT
investments and identified opportunities for improving the management
of these investments. For example,
In May 2016, we reported on legacy IT systems across the Federal
Government. We noted that these systems were becoming increasingly
obsolete and that many of them used outdated software languages and
hardware parts that were unsupported by the vendor.\17\ We stressed the
need for agencies to move to more modern, maintainable languages, as
appropriate and feasible. As part of that work, we highlighted the
Department of the Treasury's use of assembly language code and COBOL to
program its legacy systems.\18\ We also reported that IMF was over 50
years old and that, although IRS was working to modernize it, the
agency did not have a time frame for completing the modernization or
replacement. Thus, we recommended that the Secretary of the Treasury
direct the Chief Information Officer to identify and plan to modernize
or replace IRS's legacy systems. In June 2021, IRS issued a high-level
IMF retirement plan that included the scope of the work, the approach,
dependencies and risks, and cost and timeline estimates.\19\ According
to the plan, IRS estimates that it will retire IMF in 2030.
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\17\ GAO, Information Technology: Federal Agencies Need to Address
Aging Legacy Systems, GAO-16-468 (Washington, DC: May 25, 2016).
\18\ While COBOL was developed in the late 50s and early 60s, IRS
has been regularly updating the version it uses. Nevertheless,
according to IRS, modernizing its systems would assist with providing
the instant data access and real-time updates to the systems that are
needed to provide better across-the-board service in a cost-effective
manner.
\19\ IRS, Information Technology, Individual Master File
Modernization (June 2021).
In June 2016, we reported that IRS had developed IT investment
priorities which supported two types of activities--operations and
maintenance and modernization.\20\ We noted that the agency had not
fully documented the process for allocating funding to its operations
activities or developed a structured process for allocating funding to
its modernization activities. We recommended that IRS develop and
document these processes.
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\20\ GAO, Information Technology: IRS Needs to Improve Its
Processes for Prioritizing and Reporting Performance of Investments,
GAO-16-545 (Washington, DC: June 29, 2016).
In response to our recommendation, IRS documented its process
for prioritizing its operations activities in March 2017. Further, in
October 2020, the agency provided documentation of a process for
prioritizing its modernization activities that it had developed and
begun implementing. According to IRS IT organization officials, this
process for prioritizing modernization efforts is expected to be fully
implemented for the Fiscal Year 2022 budget cycle, to coincide with the
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start of a new phase of modernization efforts.
In June 2018, we reviewed the performance of selected IRS
investments, the extent to which IRS had identified and taken steps to
address the risks associated with three mission critical legacy
systems--IMF, Integrated Data Retrieval System, and Mainframes and
Servers Services and Support--and the agency's implementation of key IT
workforce planning practices.\21\ We reported, among other things, that
these legacy systems were facing significant risks due to their
reliance on legacy programming languages, outdated hardware, and a
shortage of human resources with critical skills needed to maintain the
systems. In addition, the agency had not fully implemented key risk
management practices to effectively mitigate those risks.
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\21\ GAO, Information Technology: IRS Needs to Take Additional
Actions to Address Significant Risks to Tax Processing, GAO-18-298
(Washington, DC: June 28, 2018).
As a result of these and other findings in our report, we made
21 recommendations to IRS. The agency did not agree or disagree with
the recommendations, but said it would provide a plan for addressing
each recommendation. As of May 2021, IRS had updated its risk
management process to include preparing, analyzing, and controlling
risk. Further, the agency had implemented 18 recommendations, including
updating its risk management plan for the Mainframe Servers and Support
System to account for identifying risk, and had taken steps to address
the others. A detailed summary on the status of IRS's efforts to
address the recommendations is included in appendix II.
IRS Reported That Selected Investments Met Most Performance Goals but
Key Effort Had Significant Delays and Cost
Increases
IRS reported that the five investments we reviewed had met most of the
performance goals set by the agency and the performance reporting
requirements established by OMB for Fiscal Years 2019 and 2020.
Specifically, the agency reported that the three selected investments
in development were mostly within 10 percent, of performance goals for
Fiscal Years 2019 and 2020, a variance OMB and IRS consider not to be
significant.\22\ An exception was CADE 2 that reportedly spent about 15
percent less than budgeted for 2020. In addition, for the two
investments in operations and maintenance, the agency performed
operational analyses that addressed nearly all OMB requirements for
Fiscal Years 2019 and 2020. Further, the agency reported that, in
Fiscal Years 2019 and 2020, one of the investments met all five
operational performance targets established by the agency; the other
investment met three out of five targets in Fiscal Year 2019 and four
out of six targets in Fiscal Year 2020.
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\22\ For purposes of this reporting, variances within 10 percent
were considered not to be significant. Consistent with OMB guidance,
IRS considers cost and schedule variances within this threshold not to
be significant.
While CADE 2 had lower expected costs for 2020 and was within schedule
parameters for 2019 and 2020, IRS had changed its plans for the
investment several times. This has led to a key schedule milestone for
replacing selected IMF functions, known as transition state 2, being
delayed 9 years--from 2014 to 2023. Overall, IRS now reports that CADE
2 development will not be completed until 2030. In addition,
development costs to date are about four times higher than originally
planned.
IRS Reported That Selected Investments in Development Were Mostly
Within 10 Percent of Performance Goals
For the selected investments in development (ECM, CADE 2, and WebApps),
IRS reported cost, schedule, and scope performance information on a
quarterly basis for Fiscal Years 2019 and 2020.\23\ According to the
agency, with the exception of CADE 2, which experienced a significant
budget underrun in Fiscal Year 2020, the three investments were within
10 percent of cost, schedule and scope goals for these years. Table 1
summarizes the performance of the ECM, CADE 2, and WebApps investments
for Fiscal Years 2019 and 2020.
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\23\ While IRS uses earned value management type information from
its Investment Performance Tool to track the performance of its
investments in development, it does not consider the tool containing
this information to be a formal earned value management system. As a
result, we did not evaluate the extent to which the tool was compliant
with the American National Standards Institute's guidelines for an
Earned Value Management System.
Table 1: Reported Performance of Enterprise Case Management (ECM), Customer Account Data Engine 2 (CADE 2), and
Web Applications (WebApps) Investments During Fiscal Year 2019 and 2020
----------------------------------------------------------------------------------------------------------------
Total budgeted Total actual Percent of
Fiscal cost of work cost of work Cost Schedule planned
Investment name year performed (in performed (in variance variance a scope
millions) millions) delivered a
----------------------------------------------------------------------------------------------------------------
ECM 2019 $19.26 $19.26 0% -1.8% 98%
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2020 $30.44 $30.44 0% -2.2% 97.8%
----------------------------------------------------------------------------------------------------------------
CADE 2 2019 $51.87 $51.84 -0.1% 2.1% 102.1%
-----------------------------------------------------------------------------
2020 $82.26 $70.22 -14.6% -0.1% 99.9%
----------------------------------------------------------------------------------------------------------------
WebApps 2019 $28.38 $26.48 -6.7% 0% 100.0%
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2020 $23.73 $21.81 -8.1% 0% 100.0%
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104387.
Note: For purposes of this reporting, variances within 10 percent were not considered significant. In addition,
positive variances represent overruns and negative variances represent underruns.
a Based on the ratio of earned value to planned value at the investment level.
Regarding ECM, IRS reported that it was on budget, had a 1.8-percent
schedule overrun, and delivered 98 percent of planned scope for Fiscal
Year 2019. For Fiscal Year 2020, the agency reported results similar to
those for Fiscal Year 2019. Specifically, IRS reported that ECM was on
budget, had a 2.2 percent schedule overrun, and delivered 97.8 percent
of planned scope.
For CADE 2, IRS reported that it spent about 0.1 percent less than
budgeted for the amount of work performed (about $32,000 less), was 2.1
percent ahead of schedule, and delivered about 102 percent of planned
scope in Fiscal Year 2019. For Fiscal Year 2020, the agency reported
that CADE 2 was under budget by about 15 percent (about $12 million),
was 0.1 percent behind schedule, and delivered 99.9 percent of the
planned scope. CADE 2 program officials reported that the significant
budget underrun in Fiscal Year 2020 was due to requiring fewer people
than initially planned for the Individual Tax Processing Engine
project.
In addition, in its fourth quarter Fiscal Year 2020 IT quarterly report
to Congress, IRS reported that staffing resources were pulled from CADE
2 to support the 2020 filing season, COVID-19 responsibilities, and
maintenance activities to ensure readiness for the 2021 tax filing
season. The agency further reported that this reallocation of resources
led to a slight underspend for the fourth quarter and is expected to
result in a 7-month delay in the completion of Transition State 2
development activities--from September 2022 to April 2023.
However, while IRS reported the reallocation of resources and the
resulting schedule impact in the fourth quarter Fiscal Year 2020 report
to Congress, it did not include a history of baseline changes or other
information that would provide a long-term view of CADE 2's
performance.
We shared this observation with IRS, and, in response, the agency began
including a history of program baseline changes in its quarterly
reports, beginning with the second quarter Fiscal Year 2021 report. In
July 2021, IRS IT officials stated they plan to continue to include
this history in future reports. By including this transparency in its
quarterly reports, IRS is providing greater assurance that Congress and
stakeholders have more complete information to support their oversight
of the agency's investments.
Regarding WebApps, the agency reported that it was under budget by
about 7 percent (about $1.9 million) with no variances in schedule or
planned scope in Fiscal Year 2019. WebApps program officials attributed
the cost variance to spending less money than planned because their
appropriation was delayed and lower than anticipated.
In Fiscal Year 2020, IRS reported similar results, with the WebApps
investment spending about 8 percent (about $1.9 million) less than
budgeted, and with no variances in schedule or scope. Similar to Fiscal
Year 2020, WebApps program officials attributed the budget variance to
having less to spend because the agency's appropriation was delayed and
lower than anticipated. Nevertheless, in Fiscal Year 2020, IRS reported
that it completed additional activities as part of this investment that
related to COVID-19, including the development of a ``Where's My
Stimulus Check?'' application.
IRS Reported That the Selected Investments in Operations and
Maintenance Met Most OMB Performance Requirements
OMB's Fiscal Year 2020 Capital Programming guidance states that
agencies should conduct an operational analysis for each investment in
operations and maintenance that addresses six factors.\24\ These
factors are (1) the extent to which the investment supports customer
processes as designed; (2) how well the investment contributes to
achieving the organization's strategic goals; (3) a comparison of
current performance with a pre-established cost baseline; (4)
alternative methods for achieving the same mission needs and strategic
goals; (5) greater (i.e., increased) utilization of technology or
consolidation of investments to better meet organizational goals; and
(6) annual performance of operational analyses.
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\24\ Office of Management and Budget, Capital Programming Guide V
3.1: Supplement to Office of Management and Budget Circular A-11,
Planning, Budgeting, and Acquisition of Capital Assets (Washington, DC:
2020).
Further, OMB's Fiscal Year 2020 Capital Planning guidance states that
the ongoing performance of operational investments should be monitored
to demonstrate that the investments are meeting the needs of the agency
and delivering expected value, and/or that the modernized and replaced
systems are consistent with the agency's enterprise architecture.\25\
To achieve these goals, OMB requires agencies to define and publicly
report on five operational performance metrics specific to each major
IT investment, as well as planned and actual performance against these
metrics. According to OMB, these metrics should address three broad
areas: customer satisfaction, financial performance, and strategic and
business results.
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\25\ Office of Management and Budget, FY 2020 IT Budget--Capital
Planning Guidance (Washington, DC: June 2018).
IRS conducted operational analyses for the two investments in
operations and maintenance, EUSS and IMF, for Fiscal Years 2019 and
2020. The operational analyses for EUSS fully addressed all six OMB
factors for Fiscal Years 2019 and 2020. For example, the operational
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analyses addressed the factors associated with:
Utilizing technology or consolidation of the investment to
better meet organizational goals. For example, the Fiscal Year 2019
operational analysis stated that IRS implemented a capability to deploy
Windows and perform system upgrades remotely. In addition, the Fiscal
Year 2020 operational analysis stated that IRS developed a robotics
process automation tool to facilitate the interaction between service
desk specialists and employees with account lockout issues--the most
common issue requiring service desk assistance. According to the
operational analysis, the tool reduced the amount of time it takes
specialists to unlock accounts from 22 minutes to under 7 minutes.
Providing a comparison between planned and actual costs for both
Fiscal Years 2019 and 2020 by addressing planned and actual costs in
the operational analysis.
The operational analyses for IMF, in both Fiscal Years 2019 and 2020,
fully addressed five of the six factors and partially addressed the one
other factor. For example, the operational analyses addressed the
factors associated with:
Supporting customer processes, as designed, by including
performance goals related to customer satisfaction, specifically
identifying a target goal of zero errors that cause the program to
crash per month, and achieving the goal for Fiscal Years 2019 and 2020.
Researching alternative methods of achieving the same mission
needs and strategic goals and aligning available resources with the
investment annually.
The operational analyses partially addressed the factor associated with
greater utilization of technology or consolidation of investments to
better meet organizational goals. The analyses stated that IRS used new
technology to implement processing improvements via a more robust
testing approach in order to reduce coding defects.
However, while the analyses noted that IMF is being replaced with a
more modern system, the analyses did not reflect IRS's modernization
progress to date and the associated challenges--a shortcoming we
identified in our review of the agency's 2016 operational analysis for
IMF and reported on in June 2018.\26\ We stressed that this omission
was concerning given the risk exposure created by the agency's
continued use of the legacy assembly language code. Consequently, we
recommended that IRS ensure the operational analysis for IMF fully
addresses greater utilization of technology or consolidation of
investments to better meet organizational goals.
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\26\ GAO-18-298.
IRS provided its Fiscal Year 2020 operational analysis for CADE 2,
which addressed the agency's progress in modernizing components of IMF
and associated challenges. However, given that this information was not
included in the IMF operational analysis, the agency may not have had
the critical information it needed to inform the decisions about IMF.
We plan to continue monitoring the agency's efforts to update its
operational analysis to include progress on modernizing IMF and the
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associated challenges.
Further, as mentioned earlier, OMB requires agencies to define and
publicly report on five operational performance metrics specific to
each major IT investment, as well as planned and actual performance
against these metrics. The metrics are to focus on the three broad
areas of customer satisfaction, financial performance, and strategic
and business results.
IRS defined operational performance metrics for EUSS and IMF, as
required by OMB. For EUSS in both Fiscal Years 2019 and 2020, the
metrics were:
Timeliness of service call resolution;
Percentage of IT interactions closed at the first level of
support;
Percentage of properly configured workstations passing baseline
security scans;
Amount of time it takes a customer service representative to
complete a service call; and
Amount of time IRS employees wait before reaching telephone
support.
For IMF, in Fiscal Year 2019, one of the metrics was interest paid on
taxpayer refunds per million. However, in May 2019, IRS changed this
metric to the amount of application changes made to address coding
errors. The four other metrics that were used in both Fiscal Years 2019
and 2020 were:
Amount of errors causing the application to stop running;
Percent of scheduled system availability;
Amount of issues that cannot be resolved during a Service Desk
call excluding outages; and
Percent of completed planned processing schedule to meet refund,
notice, and online access deadlines.
The agency reported that the operational performance of EUSS improved
from Fiscal Year 2019 to Fiscal Year 2020. Specifically, in Fiscal Year
2019, EUSS did not meet its performance target for percentage of
properly configured workstations passing baseline security scans;
however, in Fiscal Year 2020, EUSS met this performance target. For the
other targets, EUSS met three of the five operational performance
targets in Fiscal Year 2019 and met four of the five targets in Fiscal
Year 2020. IMF met all of its operational performance targets for both
Fiscal Years 2019 and 2020.\27\
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\27\ For Fiscal Year 2019, IRS had six operational performance
metrics for IMF. It used one operational performance metric for part of
the year and another metric for the rest of the year.
Table 2 identifies the two investments' operational performance
metrics, and whether or not each performance target was met during
Fiscal Years 2019 and 2020. The table is followed by a discussion of
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the performance target shortfalls for these investments.
Table 2: End User Systems and Services (EUSS) and Individual Master File
(IMF) Performance Metrics, Their Descriptions, and Whether Operational
Performance Metrics Were Met for Fiscal Years 2019 and 2020a
------------------------------------------------------------------------
Whether Whether
performance performance
Operational Focus of target was target was
Investment performance metric met for met for
metric Fiscal Year Fiscal Year
2019 2020
------------------------------------------------------------------------
EUSS Timeliness of Customer
service call satisfacti
resolution on
----------------------------------------------------------
Percentage of Financial
information performanc
technology e
interactions
closed at the
first level
of support
----------------------------------------------------------
Percentage of Strategic
properly and
configured business
workstations results
passing
baseline
security
scans
----------------------------------------------------------
Amount of time Strategic
it takes a and
customer business
service results
representativ
e to complete
a service
call
----------------------------------------------------------
Amount of time Strategic
IRS employees and
wait before business
reaching results
telephone
support
------------------------------------------------------------------------
IMF Interest paid Customer b N/A
on taxpayer satisfacti
refunds per on
million
----------------------------------------------------------
Amount of Strategic c
application and
changes made business
to address results
coding errors
----------------------------------------------------------
Amount of Customer
errors satisfacti
causing the on
application
to stop
running
----------------------------------------------------------
Percent of Financial
scheduled performanc
system e
availability
----------------------------------------------------------
Amount of Strategic
issues that and
cannot be business
resolved results
during a
Service Desk
call
excluding
outages
----------------------------------------------------------
Percent of Strategic
completed and
planned business
processing results
schedule to
meet refund,
notice, and
online access
deadlines
------------------------------------------------------------------------
Legend: performance target met; performance target not met; N/A: not
applicable because metric changed in 2019.
Source: GAO analysis of IRS data. | GAO-22-104387.
a The EUSS and IMF metrics are for IRS employees.
b IRS only used this metric for part of Fiscal Year 2019.
c IRS used this metric from May 2019 to September 2020.
The EUSS investment did not meet its target for the percentage of
properly configured workstations passing baseline security scans for
Fiscal Year 2019. The agency reported that this was due to switching
from Windows 7 to Windows 10 and a problem with IRS's compliance tool.
Specifically, the agency said the compliance tool was not configured
for Windows 10. According to User and Network Services officials, the
issue was resolved when the agency configured its compliance tool to
Windows 10.
In addition, in Fiscal Years 2019 and 2020, IRS did not meet the target
for the amount of time its employees waited before reaching telephone
support for EUSS. The agency reported that this was due to problems
with its network and servers, ongoing software upgrades, a lack of
resources due to attrition, and an increased number of teleworkers as a
result of COVID-19.
User and Network Services officials said the agency's IT team
consistently works on network, server, and software upgrade issues as
they arise. In response to not meeting the target for EUSS telephone
support, these officials stated that they had developed a process in
which software releases were deployed to a pilot portion of
workstations and then monitored to determine their impact before
releasing new software to the rest of the agency's workstations.
We also asked IRS about actions the agency had taken to address the
attrition of telephone support staff since this factor had contributed
to the agency not meeting its target in prior years.\28\ In response,
the User and Network Services officials stated that IRS had received
funding and authority to hire additional staff and additional
contractor support in Fiscal Years 2019 and 2020; however, funding was
not sufficient to get ahead of losses due to attrition, including
retirements, and promotions to other parts of the agency. The officials
added that they were continuing to elevate the understaffing issue to
IRS's hiring authority while also pursuing options for assistance that
do not require live telephone support. These options include
encouraging users to use IT self-service options and an automated
assistance function that the agency deployed in July 2019.\29\
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\28\ In June 2018, we reported that IRS did not meet its target for
the amount of time the agencies' employees wait to receive telephone
support for 6 out of the 18 months we reviewed due to the attrition of
telephone support staff and the agency's inability to hire additional
support staff. See GAO-18-298.
\29\ IRS's automated assistance is a chatbot that is designed to
answer questions and help IRS employees resolve technical difficulties.
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CADE 2 Development Has Taken Much Longer and Cost Significantly More
Than Originally Planned
IRS began developing CADE 2 in 2009 to replace IMF. To limit risk and
demonstrate incremental progress toward modernization, the agency
planned to deliver the investment in three phases, called transition
states. Table 3 shows the initial target completion dates and key
characteristics for transition state 1, transition state 2, and the
target state that we reported on in March 2011.\30\
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\30\ GAO, Taxpayer Account Strategy: IRS Should Finish Defining
Benefits and Improve Cost Estimates, GAO-11-168 (Washington, DC: March
24, 2011).
Table 3: Initial Planned Completion Dates and Key Characteristics of the
Customer Account Data Engine (CADE) 2 Transition States
------------------------------------------------------------------------
Transition states and Key characteristics of CADE 2 transition
completion dates states
------------------------------------------------------------------------
Transition state 1 Dual systems--Individual Master File (IMF)
and CADE
January 2012 1. Daily batch processing of individual
taxpayer returns provided by modifying IMF
to run on a daily, rather than weekly,
basis
2. Comprehensive database established for
housing all individual taxpayer accounts
and loaded with data from CADE and IMF
3. Database provides timelier updates of
taxpayer information for use by IRS
employees for compliance and customer
service
------------------------------------------------------------------------
Transition state 2 Single system--CADE
January 2014 1. Target technology (single processing
system; IMF retired)
2. High-priority downstream service and
compliance applications modified to take
advantage of the new database
3. Key financial material weaknesses and
applications addressed
------------------------------------------------------------------------
Target state Single system--CADE
TBD 1. Complete the transition of applications
that use the target database so downstream
systems fully leverage the database
2. Address all financial and security
material weaknesses identified at the
inception of the program
3. Eliminate transitional components that
were required during the transition states
------------------------------------------------------------------------
Source: GAO analysis of IRS data. | GAO-22-104387.
IRS also initially reported preliminary estimated life cycle cost
estimates for transition state 1 and transition state 2 of about $1.3
billion through 2024, including about $377 million for development and
$922 million for operations and maintenance.
We previously reported that IRS completed all the work it had
originally planned for transition state 1 in July 2014, 2 years later
than originally planned.\31\ Through this phase, the agency modified
the IMF processing cycle to allow for daily (rather than weekly)
processing and posting of taxpayer returns. According to IRS, this
enabled faster refunds to taxpayers, among other things. In addition,
IRS established the database intended to serve as the authoritative
source for all individual taxpayer data. IRS officials recently told us
that they had used the CADE 2 database to meet their responsibilities
for making advanced child tax credit payments to eligible taxpayers.
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\31\ GAO, Information Technology: Management Needs to Address
Reporting of IRS Investments' Cost, Schedule, and Scope Information,
GAO-15-297 (Washington, DC: February 25, 2015). We reported that while
IRS reported the completion of transition state 1 in November 2012,
this transition state was completed ``conditionally,'' meaning that the
investment was approved to proceed to the next phase with outstanding
issues remaining to be addressed. These outstanding issues were
addressed by July 2014.
IRS has taken much longer than originally planned to develop transition
state 2. It now expects that it will complete development activities in
April 2023, 9 years later than originally planned. We previously
reported that due to significant budget cuts and a shortage of skilled
staff, the transition state's release plan was revised three times
between 2016 and 2017.\32\ In addition, in May 2019, IRS's Chief
Information Officer stated that the agency recognized that the scope
for CADE 2 was too broad and complex. As a result, IRS decided to de-
scope several of CADE 2's projects to focus solely on modernizing parts
of IMF--which accounts for a large portion of tax processing
activities--rather than retire IMF.\33\ As of July 2021, the agency was
focused on re-engineering the core components of the IMF using a hybrid
of Agile and waterfall software development approaches.
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\32\ GAO, Information Technology: Key Attributes of Essential
Federal Mission-Critical Acquisitions, GAO-20-249SP (Washington, DC:
September 8, 2020).
\33\ GAO-20-249SP.
IRS initiated planning efforts for the target state in the second
quarter of Fiscal Year 2021. As of July 2021, IRS estimated that it
would complete it in 2030.\34\
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\34\ IRS, Information Technology, Individual Master File
Modernization (June 2021).
Figure 1 shows the current and initial planned schedule for the three
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transition states.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
.epsRegarding costs, IRS reported that it had spent $1.47 billion on
the development for CADE 2 through September 2020, nearly four times
the amount it had estimated it would spend to develop transition states
1 and 2. In addition, the agency reported that it had spent
approximately $72 million for operations and maintenance though
September 2020.
We reported that overall IRS had revised or rebaselined its cost,
schedule, and scope goals on numerous occasions, including seven times
between 2016 and 2019.\35\
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\35\ We have previously reported that agencies may modify a
project's cost, schedule, or performance goals ( baseline) to reflect
changing development circumstances. We have also reported that these
changes--called a rebaselining--can be done for valid reasons, but can
also be used to mask cost overruns and schedule delays. See GAO,
Information Technology: Agencies Need to Establish Comprehensive
Policies to Address Changes to Projects' Cost, Schedule, and
Performance Goals, GAO-08-925 (Washington, DC: July 31, 2008).
The CADE 2 delays and IRS's continued use of IMF are troubling given
that IMF (1) is one of the oldest systems in the Federal Government,
(2) has software written in an archaic language that IRS stated is no
longer taught in school, and (3) is supported by a workforce with
specialized skills that are increasingly harder to find. In addition,
IRS has reported that a more modern system would provide the foundation
for real-time digital taxpayer interactions, agile responses to
legislative changes, and rapid access to data for enhanced customer
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service, compliance, and fraud detection services.
As mentioned earlier in this report, in May 2016,\36\ we reported on
legacy IT systems across the Federal Government, including IMF. As part
of that work, we highlighted the Department of the Treasury's use of
assembly language code and COBOL to program its legacy systems.\37\ We
also reported that IMF was over 50 years old and that, although IRS was
working to modernize it, the agency did not have a time frame for
completing the modernization or replacement. Thus, we recommended that
the Secretary of the Treasury direct the Chief Information Officer to
identify and plan to modernize or replace IRS's legacy systems such as
IMF.
---------------------------------------------------------------------------
\36\ GAO-16-468.
\37\ While COBOL was developed in the late 50s and early 60s, IRS
has been regularly updating the version it uses. Nevertheless,
according to IRS, modernizing its systems would assist with providing
the instant data access and real-time updates to the systems that are
needed to provide better across-the-board service in a cost-effective
manner.
In June 2021, IRS reported that it planned to replace and fully retire
IMF by 2030 through a combination of CADE 2 and other modern
components. Specifically, the agency issued a high-level IMF retirement
plan that included the scope of the work; the approach, dependencies,
and risks; and cost and timeline estimates.\38\ In addition, IRS IT
officials, including the Chief Information Officer, recently reported
that they plan to use part of the $1.4 billion appropriated for their
IT budget through the American Rescue Plan Act to accelerate several
programs, including CADE 2 and IMF retirement plans. They added that
they were in the process of developing more detailed plans associated
with the replacement and retirement of IMF.
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\38\ IRS, Information Technology, Individual Master File
Modernization (June 2021).
While IRS now has a high-level plan for retiring IMF, a 2030 milestone
for full replacement means that for many years it will still have to
contend with the numerous challenges associated with the system's age
and reliance on an old programming language. Further, given the past
significant delays and other challenges in developing CADE 2 and the
substantial work ahead, consistent high-level management attention is
warranted.
IRS Reported Completing Most of Its 2019 IT Modernization Plan
Activities Within Schedule and Cost Estimates
In the IRS Integrated Business Modernization Plan, referred to as the
IT modernization plan that IRS issued in April 2019, the agency
identified 65 activities supporting 13 programs and initiatives and
four categories of work that it planned to complete in Fiscal Years
2019 and 2020. These activities included developing online installment
agreements to allow taxpayers to view the status of their payment plans
within their IRS online accounts. The activities also included
completing a major acquisition for the technical solution to enable the
agency to consolidate its many case management systems. IRS estimated
that completing these activities would cost approximately $300 million
and $271 million, respectively, for Fiscal Years 2019 and 2020.
IRS subsequently made changes to its modernization plan, which it noted
in its Fiscal Years 2019 and 2020 quarterly reports to Congress.
Specifically, the agency added eight planned activities, including
providing a callback option to taxpayers calling the toll-free
assistance line by the second quarter of Fiscal Year 2020, developing a
3-year plan for moving applications to the cloud by the fourth quarter
of Fiscal Year 2020, and achieving several milestones for converting
code to a modern programming language as part of the CADE 2 Individual
Tax Processing Engine project. According to the agency's annual Fiscal
Year 2020 Key Insights report,\39\ the activities were added mostly due
to technology advances and evolving customer expectations and needs.
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\39\ IRS's 2020 Key Insights report, issued in February 2021,
provides a status of modernization activities completed in Fiscal Year
2020 and those planned for Fiscal Year 2021.
In addition, IRS removed four activities and paused 10 other
activities, resulting in an updated list of 59 activities planned for
completion in Fiscal Years 2019 and 2020. For example, IRS eliminated
the modernization activities it had planned for Fiscal Year 2020 for
the Return Review Program.\40\
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\40\ IRS IT officials told us that they subsequently decided to use
operations and maintenance funding for these Return Review Program
activities.
Further, the agency paused seven out of 12 of the activities associated
with the Next Generation Infrastructure modernization initiatives that
it had planned for the same year. According to the agency's IT
officials, including the Chief Information Officer, and as noted in the
agency's quarterly reports to Congress, IRS removed or paused these
activities due to funding constraints. In April 2021, the officials
stated that the agency's decision to resume the activities in Fiscal
---------------------------------------------------------------------------
Year 2021 would depend on whether it received additional funding.
Table 4 provides a breakdown of the number of initial and revised
planned modernization activities by category and program/initiative.
Table 4: The Internal Revenue Service's (IRS) Planned and Revised
Modernization Activities by Program/Initiative and Work Category for
Fiscal Years 2019 and 2020
------------------------------------------------------------------------
Number of
planned Revised number
Work category Program/initiative activities in of planned
modernization activities
plan
------------------------------------------------------------------------
1. Taxpayer WebApps 3 4
Pexperience
-------------------------------------------------------
Taxpayer Digital 1 0
Communications
Outbound
Notifications
-------------------------------------------------------
Live Assistance 3 4
------------------------------------------------------------------------
2. Core taxpayer Customer Account 3 7
services and Data Engine 2
Penforcement transition state
2
-------------------------------------------------------
Enterprise Case 3 3
Management
-------------------------------------------------------
Return Review 4 1
Program
------------------------------------------------------------------------
3. Modernized Robotics Process 4 4
IRS operations Automation
-------------------------------------------------------
API Implementation 3 2
-------------------------------------------------------
Cloud Execution 5 5
-------------------------------------------------------
Next Generation 16 9
Infrastructure
------------------------------------------------------------------------
4. Cybersecurity Vulnerability and 8 8
and data Threat Management
protection
-------------------------------------------------------
Identity and 3 3
Access Management
-------------------------------------------------------
Security 9 9
Operations and
Management
-------------------------------------------------------
65 59
------------------------------------------------------------------------
Source: GAO analysis of IRS's Integrated Modernization Business Plan and
progress reports. | GAO-22-104387.
IRS reported that, by the end of Fiscal Year 2020, it had completed
most of the 59 IT modernization activities associated with its revised
plans for Fiscal Years 2019 and 2020 early or on schedule and within
cost. Specifically, the agency reported that it had completed 54 of 59
activities early or on schedule.
Of eight modernization activities that we selected for review (from
IRS's revised list of 59 activities), we verified that the agency had
completed all of them.\41\ Table 5 lists these eight activities and the
programs or initiatives they support.
---------------------------------------------------------------------------
\41\ For our sample, we selected one activity from each of the four
categories of work for both Fiscal Years 2019 and 2020, resulting in
eight activities.
Table 5: Activities That the Internal Revenue Service (IRS) Completed in
Fiscal Years 2019 and 2020 That GAO Verified
------------------------------------------------------------------------
Program or initiative Activity
------------------------------------------------------------------------
Live Assistance Customer Added four additional taxpayer applications
Callback
----------------------------------------------
Expanded toll-free capacity
------------------------------------------------------------------------
Customer Account Data Deployed modern code for the internal
Engine 2 balancing and control component for
Individual Master File testing
------------------------------------------------------------------------
Enterprise Case Delivered sequencing strategy and release
Management (ECM) plan to support the delivery of future ECM
releases for Fiscal Year 2021 and beyond
------------------------------------------------------------------------
Next Generation Deployed continuous integration/continuous
Infrastructure delivery to software upgrades and code
changes rapidly and reliably
----------------------------------------------
Deployed additional standard stack components
a
------------------------------------------------------------------------
Security Operations and Deployed cyber architecture and cyber cloud
Management strategy, and migration plan
------------------------------------------------------------------------
Vulnerability and Threat Enhanced security testing and process
Management automation to fully integrate security in
system deliver as early as possible
------------------------------------------------------------------------
Source: GAO analysis of IRS's modernization activities. | GAO-22-104387.
a A technology stack is a set of software components that compose a
platform for running an application.
Regarding the activities completed late, IRS reported that it completed
the remaining five of 59 activities 3 to 7 months later than initially
planned. Table 6 provides the planned and actual completion dates for
the activities that the agency completed late.
Table 6: The Internal Revenue Service's (IRS) Planned Modernization Activities for Fiscal Years 2019 and 2020
That Were Completed Late
----------------------------------------------------------------------------------------------------------------
Planned completion Actual completion Number of
Activity Initiative date date months late
----------------------------------------------------------------------------------------------------------------
Procure Enterprise Case Management ECM September 2019 April 2020 7
(ECM) solution
----------------------------------------------------------------------------------------------------------------
Deploy initial network monitoring-- Identity and Access December 2019 April 2020 4
Continuous Diagnostics and Management
Mitigation Phase 1
----------------------------------------------------------------------------------------------------------------
View scheduled and pending payments WebApps June 2020 September 2020 3
----------------------------------------------------------------------------------------------------------------
Procure and deliver cloud computing Cloud Execution June 2020 September 2020 3
services required to deploy ECM
----------------------------------------------------------------------------------------------------------------
Measurable progress toward Customer Account December 2019 March 2020 3
converting code with a target of Data Engine 2
31 percent transition state 2
----------------------------------------------------------------------------------------------------------------
Source: GAO analysis of IRS's Integrated Modernization Business Plan and progress reports. | GAO-22-104387.
According to IRS's quarterly IT reports to Congress, the late
completion of the majority of these activities was primarily due to
delays in the agency obtaining the necessary funding. For the Procure
Enterprise Case Management Solution capability, the agency reported
that the delay was due to taking corrective action in response to a
vendor's bid protest of IRS's contract award determination at the end
of Fiscal Year 2019.
Regarding the cost to complete the 59 modernization activities, IRS
reported that, for Fiscal Years 2019 and 2020, respectively, it had
spent less than the $300 million and the $271 million that it projected
to spend in its modernization plan. Specifically, for Fiscal Year 2019,
the agency reported that it spent $291 million on modernization, or $9
million less than the $300 million it had planned. For Fiscal Year
2020, the agency reported that it spent $251.3 million on
modernization, or $19.9 million less than its planned budget of $271.2
million. According to the agency, this was due to IRS receiving less
funding than requested, the lapse in appropriations in Fiscal Year
2019, and the late passage of the Fiscal Year 2020 budget.
Looking to the future, as of April 2021, IRS had 31 modernization
activities planned for completion through the remainder of Fiscal Year
2021. These included several activities supporting the WebApps, CADE 2,
ECM, and cloud execution initiatives. According to the IT modernization
officials, the activities associated with the Next Generation
Infrastructure program that the agency paused, as well as the Robotics
Process Automation and the Live Assistance programs were removed
altogether from the modernization plan, as part of the replanning
undertaken to align with the appropriation received. However, in June
2021, the IT modernization officials added that they planned to use
part of the $1.4 billion that was appropriated for IT through the
American Rescue Plan Act to accelerate several programs. The officials
stated that they had developed high-level plans to use the funds and
were working on developing more detailed plans.
IRS Took Actions to Maintain Operations During the COVID-19 Pandemic
IRS took several IT-related actions to maximize telework capabilities
for its employees and continue to operate during the COVID-19 pandemic.
These actions included procuring IT equipment to continue to support
agency operations and upgrading its infrastructure bandwidth. According
to the responsible officials in the agency's IT organization, the
actions taken were not funded from IRS's IT budget for Fiscal Year
2020; however, the actions contributed to delays in the agency's plans
for IT modernization and operations.\42\
---------------------------------------------------------------------------
\42\ In March 2021, we issued a report on IRS's performance during
the 2020 filing season which described changes IRS made to its
operations and services due to the pandemic. See GAO, Tax Filing:
Actions Needed to Address Processing Delays and Risks to the 2021
Filing Season, GAO-21-251 (Washington, DC: March 1, 2021). We also
regularly issue government-wide reports on the Federal response to
COVID-19, including IRS's response. For the latest report, see GAO,
COVID-19: Continued Attention Needed to Enhance Federal Preparedness,
Response, Service Delivery, and Program Integrity, GAO-21-551
(Washington, DC: July 19, 2021). Our
government-wide reports issued quarterly and are available on our
website at https://www.gao.gov/coronavirus.
---------------------------------------------------------------------------
IRS Procured Equipment and Upgraded Its IT Infrastructure to Maintain
Operations
To maximize telework and operate during the COVID-19 pandemic, IRS
accelerated its plans to procure IT equipment and upgraded its IT
infrastructure. The agency estimated that, of the $104 million it
received from the CARES Act and Families First Coronavirus Response
Act,\43\ it spent approximately $53 million to cover the costs
associated with procuring the equipment and making the infrastructure
upgrades needed to transition the agency to maximum telework. Of the
$53 million, the agency estimated that it spent approximately $23
million on procuring IT equipment and approximately $30 million on
upgrading its infrastructure.
---------------------------------------------------------------------------
\43\ IRS received $89 million in funding from the CARES Act and $15
million from the Families First Coronavirus Response Act to continue to
operate during the pandemic.
Procuring IT equipment. IRS took steps to accelerate the procurement
and distribution of necessary equipment, such as laptops and headsets,
to transition employees to maximum telework and continue to operate
during the pandemic. Prior to the pandemic, the agency had developed a
3-year plan to replace its desktop computers with laptops in order to
support business operations and prepare its employees to work in a
telework environment. IRS's Enterprise Customer Service Representative
Telework Phased Implementation Plan stated that the agency had expected
to replace over 16,000 of its existing desktops with a new inventory of
laptops by February 2021.\44\
---------------------------------------------------------------------------
\44\ IRS, Information Technology, Contact Center Support Division,
Enterprise Customer Service Representative Telework Phased
Implementation Plan (September 5, 2019).
In response to the pandemic, the agency accelerated its plans and
redirected its new laptop inventory intended for general replacements
to employees who were not originally set up for telework. These
employees included the agency's customer service representatives.\45\
User and Network Services officials stated that these employees were
mission critical personnel who needed to immediately begin teleworking
in order to continue providing services to taxpayers.
---------------------------------------------------------------------------
\45\ Customer service representatives provide administrative and
technical assistance to individual taxpayers and businesses primarily
over the phone.
By redirecting its inventory, the User and Network Services officials
said IRS was able to distribute laptops to about 14,000 of the agency's
customer service representatives between March 2020 and May 2020. Table
7 provides details on the approximately $23 million that IRS spent in
Fiscal Year 2020 on procuring IT equipment that was used to maximize
---------------------------------------------------------------------------
telework and operate during the COVID-19 pandemic.
Table 7: Information Technology Equipment and Costs That the Internal
Revenue Service Spent to Operate During the COVID-19 Pandemic in Fiscal
Year 2020
Dollars in thousands
------------------------------------------------------------------------
Cost
------------------------------------------------------------------------
Headsets and adapters $962
------------------------------------------------------------------------
Shoulder/rolling bags 898
------------------------------------------------------------------------
Monitors 2,300
------------------------------------------------------------------------
Printers 1,614
------------------------------------------------------------------------
Laptop bundles 17,249
------------------------------------------------------------------------
Shipping and delivery 250
------------------------------------------------------------------------
Total $23,273
------------------------------------------------------------------------
Source: Internal Revenue Service reported data. | GAO-22-104387.
Upgrading IT infrastructure. In addition to equipment, in order to work
remotely, employees needed to be able to access IRS's network from
their approved telework locations and request access through the
agency's Enterprise Remote Access Program. Due to the pandemic, User
and Network Services officials expected the number of employees
accessing the network to increase significantly, as the majority of the
workforce was given telework flexibilities.
To support the significant increase in employees connecting and
accessing its systems remotely, the agency added additional capacity to
its Common Communications Gateway infrastructure and purchased
additional Enterprise Remote Access Program provisioning licenses. In
doing so, IRS upgraded the bandwidth capacity of its network
infrastructure from 2 gigabytes \46\ to 10 gigabytes in two planned
phases. In the first phase, the agency increased the bandwidth from 2
gigabytes to 4 gigabytes. In the second phase, it increased the
bandwidth to 10 gigabytes.
---------------------------------------------------------------------------
\46\ A gigabyte is a measurement of data storage capacity that
represents the total volume of data sent and/or received by the end
user over a period of time.
According to User and Network Services officials, they gradually
increased the infrastructure bandwidth over time as a means to avoid
overloading the network, as well as to monitor the performance of the
upgrade. In addition to increasing bandwidth, the officials stated that
they made the decision to build the network infrastructure across three
site locations to ensure the continuation of essential services in the
---------------------------------------------------------------------------
event of an emergency or disruption.
IRS also increased its toll-free call service by adding callback lines
and additional functionality for taxpayers needing to obtain tax
information related to economic impact payment checks or the status of
their filing requirements. Additionally, to ensure business continuity,
the agency coupled its IT field support technicians with its service
desk operations to provide technical assistance and support to
employees who were new to the telework environment.
Table 8 provides further information on the approximately $30 million
IRS spent on upgrading its infrastructure for COVID-19 between March
and May 2020.
Table 8: Infrastructure Upgrades and Costs That Internal Revenue Service
Incurred During COVID-19 Between March and May 2020
Dollars in thousands
------------------------------------------------------------------------
Cost
------------------------------------------------------------------------
Network/remote access $13,583
------------------------------------------------------------------------
Video/audio conferencing and webcast services 10,989
------------------------------------------------------------------------
Contract recording centralization 2,600
------------------------------------------------------------------------
Infrastructure/telecommunication 2,939
------------------------------------------------------------------------
Total $30,111
------------------------------------------------------------------------
Source: Internal Revenue Service reported data. | GAO-22-104387.
IRS Reported That Actions Taken Delayed Modernization Plans
According to IRS, as of April 2021, the transition to maximum telework
had not impacted the agency's IT budget for Fiscal Year 2020. Officials
in the agency's IT organization stated that the actions IRS took to
transition to maximum telework in Fiscal Year 2020 were all funded by
appropriations from the Families First Coronavirus Response Act and the
CARES Act. However, the officials added that the agency had not yet
determined the long-term impact of sustaining an increased level of
telework on the IT budget.
On the other hand, the IT organization reported that the transition to
maximum telework had impacted the agency's plans for IT operations and
modernization activities. Specifically, between May and July 2020, the
Chief Information Officer established a mechanism for the deputy and
associate chief information officers to report impacts on ongoing and
planned work due to the COVID-19 pandemic on a weekly basis.\47\ The
weekly reports identified issues, such as delays and risks to programs
and initiatives, and their effects on the agency's IT programs and
initiatives for the Fiscal Year 2021 filing season and nonfiling season
activities. Among the issues identified in the reports were a delayed
infrastructure refresh due to hardware supply chain back orders and
delays of procurement activities because staff were reassigned to
accelerate the move to maximum telework.
---------------------------------------------------------------------------
\47\ The documented weekly impact reports were discontinued after
July 2020, though Associate Chief Information Officers and Deputies
were instructed to report issues in their meetings with the Chief
Information Officer.
In addition, as mentioned earlier in this report, in its quarterly
status IT investment reports to Congress, IRS reported that resources
initially allocated to the CADE 2 modernization program for the fourth
quarter of Fiscal Year 2020 had been reassigned to support COVID-19
responsibilities. This resulted in a 7-month schedule delay in the
completion of development activities for CADE 2's transition state 2,
which, as previously mentioned, has been delayed several times since
IRS initiated the program in 2009.
Agency Comments and Our Evaluation
IRS provided comments on a draft of this report. In its comments, which
are reproduced in appendix III, IRS offered its views on IMF, CADE 2,
and the agency's progress in implementing the 2019 modernization plan.
IRS also discussed actions it took to maximize telework capabilities
and provide the agency's workforce with the equipment needed to
telework at the onset of the COVID-19 pandemic. Further, the agency
commented on its progress in implementing our 2018 recommendations
related to selected IT investments.
Regarding IMF, IRS called it one of the most critical systems in the
Federal Government and stated that, despite the system's limitations,
IMF continues to perform and enable the agency to implement statutory
mandates. However, as we note in our report, IRS has acknowledged that
a more modern system would provide the foundation for real-time digital
taxpayer interactions; agile responses to legislative changes; and
rapid access to data for enhanced customer service and compliance,
among other things.
IRS also noted that IMF's modernization plan involves systems and
functions beyond CADE 2, and that the plan positions the agency to
incrementally deliver benefits for the next 10 years. Nevertheless, as
we state in this report, a 2030 milestone for the full retirement of
IMF means that, for many years, the agency will have to contend with
the numerous challenges associated with this system's age and reliance
on an old programming language.
Commenting on CADE 2, IRS stated that the program had made good
progress in modernizing some of the most complicated portions of IMF
and remained within acceptable schedule parameters for Fiscal Years
2019 and 2020. As we discuss in our report, despite this progress, CADE
2's delays and continued use of IMF are troubling. The agency has
previously reported that IMF: (1) is one of the oldest systems in the
Federal Government, (2) has software written in an archaic language
that is no longer taught in school; and (3) is supported by a workforce
with specialized skills that are increasingly harder to find.
Further, since 2009, IRS has revised the CADE 2 program's cost,
schedule, and scope goals on numerous occasions, including seven times
between 2016 and 2019. Accordingly, a key major program milestone for
replacing selected IMF functions, known as transition state 2, has
slipped 9 years--from 2014 to 2023. In addition, CADE 2 is now expected
to only replace core functions of IMF, rather than the entire system,
as was originally planned. While we acknowledge IRS's progress on CADE
2 in the years we reviewed, given the past significant delays and other
challenges in developing CADE 2, as well as the substantial work ahead,
consistent high-level management attention is warranted.
IRS also highlighted several modernization activities it had completed
in Fiscal Years 2019 and 2020. These activities included expanding the
availability of the customer callback feature, digital services for
taxpayers, and activities to reduce cybersecurity vulnerabilities and
manage potential threats.
IRS further noted the IT-related actions it took to provide the
equipment and infrastructure upgrades needed to transition the agency
to maximum telework at the onset of the COVID-19 pandemic. These are
consistent with the actions we identified in our report.
Finally, IRS stated that it had addressed 17 of 21 recommendations
included in our 2018 report on selected agency investments. At the end
of our review, IRS also provided evidence of actions it had taken to
address two of the remaining four recommendations. We reviewed the
evidence and determined that the agency had implemented one of the
recommendations, bringing the total number of implemented
recommendations to 18 of the 21. We adjusted our summary of actions
taken in appendix II of this report accordingly.
We are sending copies of this report to interested congressional
committees, the Commissioner of IRS, and other interested parties. In
addition, this report will be available at no charge on the GAO website
at http://www.gao.gov.
Should you or your staffs have any questions on information discussed
in this report, please contact me at (214) 777-5719 or
[email protected]. Contact points for our Offices of Congressional
Relations and Public Affairs may be found on the last page of this
report. GAO staff who made major contributions to this report are
listed in appendix IV.
David B. Hinchman
Director, Information Technology and Cybersecurity
Appendix I: Objectives, Scope, and Methodology
Our objectives were to (1) summarize the Internal Revenue Service's
(IRS) reported performance for selected information technology (IT)
investments, including the Customer Account Data Engine (CADE) 2; (2)
determine IRS's progress in implementing its 2019 IT modernization
plan; and (3) identify the actions IRS has taken to maximize telework
during the COVID-19 pandemic, and the reported impacts of the actions
on the agency's IT budget and plans.
To select investments for our first objective, we identified a
nonprobability sample of five investments out of 133 based on the
following factors: (1) investments that IRS rated as being mission
critical; and (2) investments with the highest levels of funding for
Fiscal Years 2019, 2020, and 2021, as reported on the Federal IT
Dashboard.\1\ We selected five investments in different life cycle
phases--three investments in the development phase and two investments
in the operations and maintenance phase. The investments that were
primarily in development were CADE 2, Enterprise Case Management (ECM),
and Web Applications. The investments primarily in the operations and
maintenance phase were the End User Systems and Services and Individual
Master File (IMF).
---------------------------------------------------------------------------
\1\ The Federal IT Dashboard is a public website deployed by the
Office of Management and Budget with information on the performance of
Federal agencies' IT investments.
For the investments in development, we compiled and analyzed quarterly
reports from the Investment Performance Tool--IRS's internal system for
tracking investment performance--showing planned versus actual cost,
schedule, and scope for work the agency was performing on these
investments during Fiscal Years 2019 and 2020. We also interviewed IRS
IT program officials to understand variances between planned and actual
---------------------------------------------------------------------------
performance.
To assess the reliability of the performance data for the investments
in development, we confirmed our understanding of the processes used to
generate the data by reviewing the processes defined in IRS's August
2020 Investment Performance Tool User Guide and confirmed their use
with project management officials. We also reviewed the data to verify
that it included all the projects supporting the investments for the
eight quarters in the scope of our review. Further, we followed up with
these officials to discuss detected anomalies we found in the
performance data. Finally, IRS's Integrated Financial System is the
source of the financial data in the Investment Performance Tool, and
our prior audits of the agency's internal controls over financial
reporting found that there were no internal control issues that would
prevent us from relying on the data in the system. We determined these
data were sufficiently reliable for purposes of summarizing what IRS
reported.
For the CADE 2 program, we also reviewed prior GAO reports, IRS's
quarterly IT reports to Congress on the agency's IT modernization
progress, and relevant documents, including the modernization plan for
IMF for which CADE 2 is a key component. From this documentation, we
determined any revisions to these plans, and the functionality
delivered.
For the investments in operations and maintenance, to determine if the
operational performance metrics were met for Fiscal Years 2019 and
2020, we compared the average of the actual monthly operational
performance measures found in the agency's monthly investment
performance reports for each year to the performance target for the
year. Further, we determined the extent to which an operational
analysis was performed in accordance with relevant Office of Management
and Budget (OMB) guidance.\2\ To do so, we obtained operational
analyses for Fiscal Years 2019 and 2020 and compared the analyses to
requirements specified in OMB's Fiscal Year 2020 capital programming
guidance. We rated each requirement as addressed if the operational
analysis fully addressed the requirement; or partially addressed if the
operational analysis addressed some, but not all, of the requirement.
---------------------------------------------------------------------------
\2\ Office of Management and Budget, Capital Programming Guide V
3.1: Supplement to Circular A-11, Planning, Budgeting, and Acquisition
of Capital Assets (Washington, DC: December 2020).
For the second objective, we compared the activities IRS reported that
it completed for Fiscal Years 2019 and 2020 in quarterly IT summary
reports to Congress and an annual status report to the Department of
the Treasury, along with their associated schedule and costs, to the
activities identified in the 2019 modernization plan. For additional
cost analysis, we compared actual costs and schedules for the IT
modernization activities completed in Fiscal Years 2019 and 2020 to the
planned costs and schedules for these activities found in the agency's
quarterly IT summary reports to Congress and an annual status report.
We also reviewed documentation and interviewed IRS IT organization
officials to understand variances between planned and actual
---------------------------------------------------------------------------
performance.
To supplement our analysis of the agency's reported data, we verified
the completion of a nongeneralizable random sample of modernization
activities. To do so, we randomly selected one activity from each of
the four modernization categories outlined in the agency's plan for
Fiscal Years 2019 and 2020. This resulted in our selection of 8 of 59
activities. We confirmed that the eight selected activities were
completed by reviewing supporting documentation and interviewing IRS IT
program officials. The activities we selected were:
Live Assistance Customer Callback: four additional taxpayer
applications.
Live Assistance Customer Callback: expanded toll-free capacity.
CADE 2: deployed modern code for the internal balancing and
control component for IMF testing.
ECM: delivered sequencing strategy and release plan to support
the delivery of future ECM releases for Fiscal Year 2021 and beyond.
Next Generation Infrastructure: deployed continuous integration/
continuous delivery to software upgrades and code changes rapidly and
reliably.
Next Generation Infrastructure: deployed additional standard
stack components.\3\
---------------------------------------------------------------------------
\3\ A technology stack is a set of software components that compose
a platform for running an application.
Security Operations and Management: deployed cyber architecture
---------------------------------------------------------------------------
and cyber cloud strategy, and migration plan.
Vulnerability and Threat Management: Enhanced security testing
and process automation to fully integrate security in system delivery
as early as possible.
For these eight activities, we reviewed project documentation that IRS
provided, including a solutions concept of operations document for the
live assistance customer callback feature, systems testing documents, a
Cybersecurity Modernization Plan status report, and various other
status reports.
For the third objective, we obtained, analyzed, and summarized relevant
documentation, including weekly impact summary reports, a COVID-19
spending plan, and an inventory of IT equipment and services the agency
reported that it purchased to transition its workforce to maximum
telework. We supplemented our document reviews with interviews of
cognizant IRS officials from the IT organization's User and Network
Services group.
We also reviewed instructions for Associate Chief Information Officers
reporting information in the COVID-19 weekly impact summary reports. We
corroborated the accuracy of the information in the COVID-19 spending
plan with IRS budget officials. We determined that the data were
sufficiently reliable for purposes of summarizing what IRS reported.
As part of our work, we also determined the status of actions taken to
address each of 21 prior recommendations we made in our 2018 review of
IRS's IT investments to improve operational analyses and fully
implement risk management practices for selected investments, and
implement IT workforce planning practices. To do so, we asked relevant
agency IT organization officials about actions taken or planned to
address each recommendation, and obtained and analyzed evidence to
substantiate their claims. We assessed a recommendation as being fully
addressed if IRS provided evidence that it completely addressed all
elements of our recommendation; partially addressed if IRS provided
evidence that it addressed some, but not all, of our recommendation;
and not addressed if IRS did not provide any evidence that it addressed
our recommendation.
We conducted this performance audit from June 2020 to October 2021 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
Appendix II: Status of IRS's Efforts to Implement 2018 GAO
Recommendations on Selected IT Investments
In June 2018, we reported on the performance of selected IRS IT
investments; the risks that selected legacy investments faced; and the
need for the agency to implement key IT workforce planning
practices.\1\ We made 21 recommendations in that report and, as of
September 2021, IRS has fully implemented 18 of these recommendations.
Table 9 summarizes our assessment of IRS's efforts to implement the
recommendations included in the report.
---------------------------------------------------------------------------
\1\ GAO, Information Technology: IRS Needs to Take Additional
Actions to Address Significant Risks to Tax Processing, GAO-18-298
(Washington, DC: June 28, 2018).
Table 9: Status of the Internal Revenue Service's (IRS) Efforts to
Implement Recommendations on Operational Analyses and Risk Management,
as of September 2021
------------------------------------------------------------------------
Recommendation Status Summary
------------------------------------------------------------------------
1. The Commissioner of the IRS w IRS provided its Fiscal Year
should ensure the operational 2019 and 2020 operational
analysis for Individual analyses; however, it did not
Master File (IMF) fully reflect the agency's progress
addresses greater utilization in modernizing IMF and
of technology or associated challenges.
consolidation of investments Instead, IRS provided its
to better meet organizational Customer Account Data Engine
goals. 2 Fiscal Year 2020
operational analysis which
addressed IMF's progress in
modernization and associated
challenges. However, given
that the information on
modernization and challenges
was not in the IMF
operational analyses,
decision-makers may not have
the critical information they
need to inform their
decisions about IMF.
------------------------------------------------------------------------
2. The Commissioner of the IRS In June 2020, IRS provided its
should ensure the operational Fiscal Year 2019 operational
analysis for the Integrated analysis which addressed the
Data Retrieval System (IDRS) extent to which investments
addresses the extent to which support customer processes as
the investments support designed and how well the
customer processes as investment was delivering the
designed, and how well the goods or services it was
investments are delivering designed to deliver.
the goods or services they
were designed to deliver.
------------------------------------------------------------------------
3. The Commissioner of the IRS w IRS provided its Fiscal Year
should ensure the operational 2020 operational analysis
analysis for the that addressed how the
Telecommunications Systems investment supports services
and Support (TSS) addresses such as video conferencing,
the extent to which the enterprise voice, and fax
investments support customer services. However, the
processes as designed, and information was not included
how well the investments are as part of the specific
delivering the goods or metric. We will therefore
services they were designed continue to monitor the
to deliver. operational analysis on how
the investment supports
services.
------------------------------------------------------------------------
4. The Commissioner of the IRS In February 2021, IRS provided
should ensure the operational its Fiscal Year 2020
analysis for TSS includes a operational analysis report
comparison of current which demonstrated that IRS
performance with a pre- had compared current
established cost baseline. performance with a pre-
established cost baseline,
and accounted for user fees
and multiyear costs.
------------------------------------------------------------------------
5. The Commissioner of the IRS In December 2020, IRS provided
should ensure the operational its Fiscal Year 2020
analysis for End User Systems operational analysis, which
and Services includes a addressed the comparison of
comparison of current current performance with a
performance with a pre- pre-established cost
established cost baseline. baseline.
------------------------------------------------------------------------
6. The Commissioner of the IRS In August 2019, IRS provided
should ensure the operational its Fiscal Year 2018
analysis for the Mainframes operational analysis that
and Servers Services and addressed alternative methods
Support addresses alternative of achieving the same mission
methods of achieving the same needs and strategic goals.
mission needs and strategic
goals.
------------------------------------------------------------------------
7. The Commissioner of the IRS In December 2019, IRS provided
should fully implement the its updated IT Risk
risk management key practice Management Program plan which
associated with preparing for addressed key practices
risk management for the IMF associated with preparing for
investment. risk management for the IMF
investment.
------------------------------------------------------------------------
8. The Commissioner of the IRS In December 2019, IRS provided
should fully implement the updated policy documentation
risk management key practice that addressed its risk
associated with analyzing management policy associated
risk for the IMF investment. with analyzing risk. In
addition, in May 2021, IRS
provided evidence that it
analyzes risk for the IMF
investment. Specifically, the
agency provided examples of
the risk statement and
analysis that are included in
its Item Tracking Reporting
and Control tool.
------------------------------------------------------------------------
9. The Commissioner of the IRS In December 2019, IRS provided
should fully implement the its risk profile which
risk management key practice addressed key practices
for prioritizing risk for the associated with prioritizing
IMF investment. risk for the IMF investment.
Specifically, IRS provided,
among other things, risk
registry reports. These
reports identified IRS's
implementation of the risk
management practice for
prioritizing risk for IMF.
------------------------------------------------------------------------
10. The Commissioner of the In December 2019, IRS provided
IRS should fully implement updated policy documentation
the risk management key that addressed the agency's
practice associated with risk management policy
mitigating risk for the IMF associated with mitigating
investment. risk. Further, in May 2021,
IRS provided its risk review
registry that identified risk
for IMF and alternative
courses of action to take
(mitigation plans) if risks
statements are impacted.
------------------------------------------------------------------------
11. The Commissioner of the In December 2019, IRS provided
IRS should fully implement updated policy documentation
the risk management key that addressed the agency's
practice associated with risk management policy
monitoring, reporting, and associated with monitoring,
controlling risk for the IMF reporting, and controlling
investment. risk. In addition, in
February 2021, IRS provided,
among other things,
governance board meeting
minutes and its annual
operational analyses review
of risk management to
demonstrate that it has
implemented its policy for
risk management.
------------------------------------------------------------------------
12. The Commissioner of the In December 2019, IRS provided
IRS should fully implement its updated IT Risk
the risk management key Management Program plan,
practice associated with which addressed key practices
preparing for risk management associated with preparing for
for the IDRS investment. risk management for the IDRS
investment. In addition, in
February 2021, IRS provided
its Risk Issue and Action
Item Management Process
transmittal, which described
the risk management
requirements for all IRS IT
investments, including IDRS.
------------------------------------------------------------------------
13. The Commissioner of the In December 2019, IRS provided
IRS should fully implement its updated IT Risk
the risk management key Management plan that
practice associated with addressed the agency's risk
analyzing risk for the IDRS management policy associated
investment. with analyzing risk for the
IDRS investment. IRS also
provided a risk register for
IDRS showing that it analyzed
both inherent and residual
risks for the investment.
------------------------------------------------------------------------
14. The Commissioner of the In December 2019, IRS provided
IRS should fully implement its Risk and Issue Management
the risk management key plan which identified the key
practice associated with practices associated with
mitigating risk for the IDRS mitigating risk. Further, in
investment. May 2021, IRS provided its
risk review registry that
identified risk for IDRS and
alternative courses of action
to take (mitigation plans) if
risks statements are
impacted.
------------------------------------------------------------------------
15. The Commissioner of the IRS provided its Risk
IRS should fully implement Management Program plan which
the risk management key identified the key practices
practice associated with associated with monitoring,
monitoring, reporting, and reporting, and controlling
controlling risk for the IDRS risk. In addition, in
investment. February 2021, IRS provided,
among other things,
governance board meeting
minutes and annual
operational analysis reviews
of risk management to
identify that it has
implemented its policy for
risk management.
------------------------------------------------------------------------
16. The Commissioner of the In February 2021, IRS provided
IRS should fully implement its updated IT Risk
the risk management key Management Program plan which
practice associated with addressed key practices
preparing for risk management associated with preparing for
for the Mainframes and risk management for the MSSS
Servers Services and Support investment.
(MSSS) investment.
------------------------------------------------------------------------
17. The Commissioner of the In January 2020, IRS provided
IRS should fully implement an updated MSSS risk log
the risk management key which identified risks for
practice associated with the investment, including
identifying risk for the MSSS human resource risks and
investment. staff shortages.
------------------------------------------------------------------------
18. The Commissioner of the In December 2019, IRS provided
IRS should fully implement updated policy documentation
the risk management key that addressed the agency's
practice associated with risk management policy
analyzing risk for the MSSS associated with analyzing
investment. risk. In addition, in May
2021, IRS provided evidence
that it analyzes residual
risk for the IMF investment.
Specifically, the agency
provided examples of the risk
statement and analysis that
are included in its Item
Tracking Reporting and
Control tool.
------------------------------------------------------------------------
19. The Commissioner of the In December 2019, IRS provided
IRS should fully implement updated policy documentation
the risk management key that addresses the agency's
practice associated with risk management policy
mitigating risk for the MSSS associated with mitigating
investment. risk. In addition, in January
2020, the agency began
identifying a period of
performance for its risks by
providing Risk Reports which
identified that each risk has
a ``submit date,'' a
``probable impact date,'' and
a ``projected completion
date.''
------------------------------------------------------------------------
20. The Commissioner of the In December 2019, IRS provided
IRS should fully implement updated policy documentation
the risk management key that addresses the agency's
practice associated with risk management policy
monitoring, reporting, and associated with monitoring,
controlling risk for the MSSS reporting, and controlling
investment. risk. In addition, in
February 2021, IRS provided
among other things,
governance board meeting
minutes and its annual
operational analyses review
of risk management to
identify that it has
implemented its policy for
risk management.
------------------------------------------------------------------------
21. The Commissioner of the w In March 2021, IRS provided
IRS should fully implement IT its draft IT Workforce
workforce planning practices, Strategy, which identifies
including the following objectives that the agency
actions: (1) setting the plans to achieve, such as, a
strategic direction for diverse, flexible and engaged
workforce planning; (2) workforce. IRS also developed
analyzing the workforce to an implementation plan to
identify skill gaps; (3) operationalize the IT
developing strategies and Workforce Strategy, which
implementing activities to described key efforts
address skill gaps; and (4) supporting each objective,
monitoring and reporting on along with benefits and
progress in addressing skill measurable outcomes. However,
gaps. IRS did not provide a date
for when it plans to finalize
the strategy. In addition,
IRS did not provide evidence
that it had implemented the
key efforts identified in the
implementation plan
------------------------------------------------------------------------
Legend: -- recommendation fully implemented, w -- recommendation
partially implemented, -- recommendation not implemented.
Source: GAO analysis of Internal Revenue Service data. | GAO-22-104387.
Note: Recommendations from GAO-18-298.
Appendix III: Comments From the Department of the Treasury Internal
Revenue Service
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Communications
----------
American Citizens Abroad
American Citizens Abroad, Inc, and its sister organization, American
Citizens Abroad Global Foundation hereby submit our Statement for the
record.
American Citizens Abroad, Inc. (ACA) is a leading advocacy organization
representing Americans living and working overseas. Headquartered in
Washington, DC, ACA is nonpartisan, non-profit (section 501 (c)(4)),
with a 40-plus-year history of advocating on behalf of the community of
Americans living and working overseas. Alongside ACA is its sister
charitable (section 501(c)(3)) research and educational organization,
American Citizens Abroad Global Foundation (ACAGF).
In testimony presented to the Senate Finance Committee hearing of April
7, 2022, on the IRS, the President's 2023 Budget and the 2022 tax
season, IRS Commissioner Rettig discussed the customer service
challenges posed by resource constraints and paper filing. An
overwhelming proportion of non-resident taxpayers file paper tax
returns due to the inaccessibility of IRS online accounts and free
filing, $2.2 billion in new funding for the IRS and focused efforts by
staff to eliminate the backlog of paper filings have helped to reduce
the to-be-processed 2021 paper tax returns to 2.7 million. Those will
need to be processed before the IRS can turn its attention to 2022
paper filings, which currently number 2.3 million. It is astonishing
that in 2022, processing of paper returns still requires manual
transcription. Indications by Commissioner Rettig that the IRS received
funding in the March spending package for scanning technology using a
2D barcode were undermined by his non-specific comments that challenges
to the implementation of that technology remain.
Commissioner Rettig acknowledged that it is unacceptable for the IRS to
remain paper-based in a digital world. However, until online accounts
are available to U.S. citizens abroad, those without the resources to
hire professional tax return preparers will be forced to file the paper
returns that accumulate in those backlogs. Identity verification using
the ID.me website and data security concerns remain obstacles for
creating an IRS online account forU.S. citizens abroad.
Perhaps the most astonishing IRS customer service failure is the 11%
response rate to taxpayer calls to the IRS help line, which
Commissioner Rettig testified reached 1,500 calls per second in the
2021 tax filing season. IRS help line inaccessibility is compounded for
non-resident filers: the help line cannot be dialed from some foreign
countries; the calls are not toll-free; lengthy wait times are
frustrating as well as expensive; and customer service representatives
frequently lack the technical expertise to address problems common to
non-resident filers.
During the hearing Senator Thune made this comment regarding the
challenges the IRS has in meeting the customer service needs of all
U.S. citizen taxpayers:
The timely processing of returns and the ability to speak to an
IRS representative are cornerstones to good tax administration.
Many taxpayers are trying in good faith to comply with tax
laws, and they deserve a responsive IRS. It is critical . . .
to establish the trust of the American people and having a
responsive tax collection service is key to that.
Of course, non-resident taxpayers, who present special complications
for the IRS, deserve no less. The U.S. can continue to struggle to meet
the needs of the Americans abroad community or consider a change to the
treatment of this taxpayer cohort.
TAXATION AND AMERICANS ABROAD
The Taxpayer First Act has identified U.S. citizens living and working
overseas as an underserved community and the IRS is working to create
systems and provide support to these taxpayers. This cannot come fast
enough for the estimated 3.9 million U.S. citizens living and working
abroad.\1\ Tax filing for U.S. citizens living and working outside the
U.S. is complex, costly and confusing, results in onerous taxation of
foreign investments considered Passive Foreign Investment Company
(PFICs), involves duplicate reporting regimes like the Foreign Account
Tax Compliance Act (FATCA) Form 8938 and the Financial Bank Account
Report (FBAR) (FinCEN Form 114), is unfair with regard to the
application of certain tax credits for non-residents (Child Tax Credit
and Earned Income Credit), exposes filers to double taxation with the
Net Investment Income Tax (NIIT), and involves wading through many
regulations that overlap with U.S. corporate international tax.
---------------------------------------------------------------------------
\1\ ACA and District Economics Group estimate that the total number
of Americans abroad at present, excluding members of the military and
other government employees and contractors, is approximately 3.9
million individuals.
This is just a sampling of the problems on the individual side of
reporting, not taking into consideration the filing requirements for
small business operations run by U.S. citizens overseas that need to
deal with the Transition Tax and Global Intangible Low-Taxed Income
(GILTI) regimes (and are denied access to programs available for small
businesses through the U.S. tax code such as the Employee Retention Tax
Credit and Paycheck Protection Program which were discussed by Senator
Cardin).
RESIDENCE-BASED TAXATION
ACA has throughout its 40-plus year history advocated for the adoption
of
residence-based taxation (RBT) and has produced key documents and
research that support the move to RBT, which can be made revenue
neutral and tight against abuse. ACA was the first organization to
develop a side-by-side analysis that indicates where in the current tax
code changes could be made in a move to a system of taxation based on
residence (excludes from U.S. taxation foreign earned income). ACA has
fielded two research projects on the subject with District Economics
Group (DEG), a Washington, DC-based economic consulting firm--one in
2017 and one in 2022 that provide valuable information on the income,
assets and taxation of U.S. citizens living and working overseas. This
data, one of a kind, supports our position that RBT can be adopted, and
no one will be any worse off, the U.S. Treasury would not lose revenue
and the provisions would be protected against tax abuse.
CONGRESSIONAL HEARINGS ON TAXATION AND AMERICANS ABROAD
It is time for this research work, along with documents and testimony
from ACA and other stakeholders, to be put on record with the Senate
Finance Committee with hearings. There are currently three pieces of
legislation introduced in Congress that address some of the tax
compliance problems of U.S. citizens overseas; H.R. 5800 (The
Commission on Americans Living Abroad Act) and H.R. 5799 (The Overseas
Americans Financial Access Act) both introduced by Congresswoman
Carolyn Maloney, and H.R. 6057 (The Tax Simplification for Americans
Abroad Act), introduced by Congressman Donald Beyer. These legislators
have asked Chairman Neal to address the tax and compliance issues of
U.S. citizens living and working overseas, and ACA echoes this call to
action for the Senate Finance Committee.
Never in the history of the U.S. Congress have hearings been held to
address the specific issues facing U.S. citizens living and working
abroad, not only tax issues but other concerns related to Social
Security, Medicare, voting and representation. The Americans Abroad
Caucus with Co-Chairs Carolyn Maloney, Dina Titus, and Maria Elvira
Salazar are hearing from constituents in their districts about the
growing concerns of citizens who chose to live and work overseas. If
U.S. citizens are to engage in a global economic marketplace, they need
the tools to help them compete for jobs and have full access to
financial and banking services. Some U.S. laws, such as FATCA, are
hampering this and the Committee needs to hear and understand these
issues and problems, in order that proposals, such as the adoption of
residence-based taxation, can be carefully examined.
The concerns over how paper return backlogs, taxpayer help line
accessibility, under-resourcing at the IRS, and the technological
issues with IRS systems affect U.S. citizens living and working
overseas, as well as how the current citizenship-based tax regime
affects these citizens, are all reasons why the Senate Finance
Committee needs to hold hearings on the tax and compliance issues of
U.S. citizens overseas and consider legislation such as residence-based
taxation to alleviate the problems.
ACA would like to thank the Senate Finance Committee for the
opportunity to submit this testimony and commentary. For more
information, please visit the ACA website www.americansabroad.org or
telephone +1 202-322-8441 and/or email
[email protected].
______
Letter Submitted by Amy Balcerak
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I am an American who spent the first 30+ years of my life living in the
U.S., primarily in Indiana, where I am still registered to vote. For
the past 10 years, I've been living in Switzerland. My husband's job,
as well as a sense of adventure brought us here.
My financial life is entirely in Switzerland, and my income is subject
to full taxation under the laws of Switzerland. I try very hard to
fulfill the requirements of the U.S. tax system in addition to the tax
requirements in Switzerland. The reality, though, is that the U.S.
requirements (especially the myriad of required informational filings)
get increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious. My federal U.S. tax return
for tax year 2021 was 88 pages long, and we have no income or property
in the U.S.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson explain that the failure of
the IRS to provide access to the following services, individually and
collectively, constitute violations of the Taxpayer Bill of Rights:
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report (released in July of 2015), it was
stated that:
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
Double taxation--due to misalignment of tax systems--that cannot
be mitigated using the Foreign Earned Income Exclusion, Foreign Tax
Credit, or existing Tax Treaties.
Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Amy Balcerak
______
Letter Submitted by Reginald Callaway
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I am from the state of Hawai'i and have not lived there for many years
and I have always paid my state taxes. I also vote there. I presently
live in New Zealand where I have lived for many years. New Zealand is
home for me.
My financial life is entirely in New Zealand, and my income is subject
to full taxation under the laws of New Zealand. I try very hard to
fulfill the requirements of the U.S. tax system in addition to the tax
requirements in New Zealand. The reality, though, is that the U.S.
requirements (especially the myriad of required informational filings)
get increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious.
The extraterritorial application of the U.S. Federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This reflects the burden non-residents face due to complex information
reporting requirements related to ordinary banking, investment and
pension products which are ``foreign'' to the United States but just a
part of living an ordinary financial life in one's country of
---------------------------------------------------------------------------
residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed, the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low-income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
Despite numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Reginald Callaway
______
Center for Fiscal Equity
14448 Parkvale Road, Suite 6
Rockville, MD 20853
[email protected]
Statement of Michael Bindner
Chairman Wyden and Ranking Crapo, thank you for the opportunity to
address this issue. My comments are in the form of questions, which I
previously submitted to the House Ways and Means Subcommittee on
Oversight on two occasions, including one with Mr. Rettig and one with
Erin Collins, the new Taxpayer Advocate. Feel free to pass along our
Tax Reform plan to the witness so that you may ask him for comments
(especially regarding using a subtraction VAT to distribute the Child
Tax Credit to workers and their families).
I urge you to submit a written question (or one during the hearing)
about the advisability of using support contractors--both for the
hotline and for audit services. There are many qualified revenue agents
working in the private sector who are up to this task, as well as top
flight federal customer service providers to handle simple questions
and arrange follow-up calls with revenue agents.
We are sure you already have questions on how Build Back Better can
help the IRS meet these challenges as well. This is especially true
regarding the suspension of payments refundable child tax credits to
parents. Hopefully she will not have to handle inquiries for long from
distressed families.
The Child Tax Credit should be the focus of BBB, as well as childcare
and sick leave. While other matters are certainly important, they
realistically will have to wait for a larger Senate majority. In the
interim, it should be shouted from the housetops that the CTC is anti-
abortion legislation. The Catholic Bishops must be urged in the
strongest possible language to assure that increasing the CTC be scored
as a must-pass pro-life vote.
As we have said before, to end the ``stink of welfare'' that Senator
Manchin so objects to, CTC payments should be included with wages for
all employees--not just those with three or more children. They should
also be distributed through other federal and state assistance
programs--some of which can be reduced to do so.
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.
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 pay out. 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.
Please ask, either orally or in written form, how such a CTC proposal
might work and how it would make things easier for taxpayers whose
returns would be simpler--with fewer having to file at all.
We have attached the latest version of our tax reform plan, with a
separate attachment on how implementation of this plan would affect IRS
manpower. The answer is that the change would be drastic. It would also
allow the Committee to focus more on how social welfare is being
delivered in general, as well as eliminating current roadblocks to
promptly filing for Social Security Disability Income.
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 One--Tax Reform, Center for Fiscal Equity, December 7, 2021
Individual payroll taxes. Employee payroll tax of 7.2% for Old-Age and
Survivors Insurance. Funds now collected as a matching premium to a
consumption tax based contribution credited at an equal dollar rate for
all workers qualified within a quarter. An employer-paid subtraction
value-added tax would be used if offsets to private accounts are
included. Without such accounts, the invoice value-added tax would
collect these funds. No payroll tax would be collected from employees
if all contributions are credited on an equal dollar basis. If employee
taxes are retained, the ceiling would be lowered to $100,000 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. If a $10 minimum wage is passed, the employee
contribution floor would increase to $20,000.
Wage Surtaxes. Individual income taxes on salaries, which exclude
business taxes, above an individual standard deduction of $100,000 per
year, will range from 7.2% to 57.6%. 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.
Our proposed brackets have been increased from $85,000 to $100,000
because this is the income level at the top of the 80% of tax paying
households who earn the bottom third of adjusted gross income. Earners
above this level are considered middle class. Likewise, the top 1% of
income earners are at the $500,000 level, which will be used as the
start of the highest rate.
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, IPOs, inherited, gifted and donated assets will be marked to
market, 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 23.8% rate (including ACA-SM surtax) and the
Democratic 28.8% rate as proposed in the Build Back Better Act. 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. For
now, however, a 28.8% rate is assumed if reform is enacted by a
Democratic majority in both Houses.
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 Added Tax (C-AT). 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-AT 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 unless it is in other nations,
however in this case the imposition of this tax at the border will be
noted, with the U.S. tax applied to the overseas base.
Tax Reform Summary
This plan can be summarized as a list of specific actions:
1. Increase the standard deduction to workers making salaried income
of $35,000 and over, shifting business filing to a separate tax on
employers and eliminating all credits and deductions--starting at 7.2%,
going up to 28.8%, in $50,000 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. Employers distribute the child tax credit with wages as an offset
to their quarterly tax filing (ending annual filings).
4. Employers collect and pay lower tier income taxes, starting at
$100,000 at 7.2%, with an increase to 14.4% for all salary payments
over $150,000 going up 7.2% for every $50,000--up to $250,000.
5. Shift payment of HI, DI, SM (ACA) payroll taxes to employers,
remove caps on employer payroll taxes and credit them to workers on an
equal dollar basis.
6. Employer paid taxes could as easily be called a subtraction VAT,
abolishing corporate income taxes. These should not be zero rated at
the border.
7. 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.
8. Change employee OASI of 7.2% from $18,000 ($20,000 for $10 minimum
wage) to $100,000 income are optional taxes for Old-Age and Survivors
Insurance.
Attachment Two--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 Carbon Added Tax (C-AT)
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-AT, 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-
AT 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.
______
Letter Submitted by James Webster Coates
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I am a United States citizen, registered to vote in the 3rd
Congressional District of Pennsylvania. I moved to Japan in 2001
immediately after graduating from college, and have been living and
working here ever since. My financial life is entirely in Japan since
I've never worked in the U.S. or lived there as an adult. I am a tax
resident of Japan, and my worldwide income is subject to full taxation
under the laws of Japan.
I am employed as a compliance officer for a financial institution, so I
have a high attention to detail around my own personal tax compliance
matters and try very hard to fulfill the requirements of the U.S. tax
system in addition to the tax requirements in my country of residence.
The reality, though, is that the U.S. requirements (especially the
myriad of required informational filings) get increasingly burdensome
every year, and the compliance costs for knowledgeable tax preparers
are egregious. I rarely actually owe much tax to the United States, but
my annual accounting fees have frequently been higher than the ultimate
amount of my U.S. Federal tax liability.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. The definition of
``individual'' in Treasury Regulation, 26 Section 1.1-1 should be
modified to include only ``residents.'' U.S. citizens who are tax
residents of other countries would continue to be liable to pay U.S.
Federal income tax on any income which is effectively connected with
the United States, as all non-resident aliens do, by using Form 1040-NR
instead of Form 1040.
The tax compliance industry of lawyers and accountants will hate my
suggestions because they would remove red tape which drives inordinate
amounts of revenue to their industry. But the reality is that by
solving these issues for ordinary U.S. citizens who live in other
countries, the United States would sacrifice a relatively small amount
of tax revenue, while freeing up IRS resources to focus on other larger
priorities.
Thank you for your attention to this matter.
James Webster Coates
Tokyo, Japan
______
Letter Submitted by Geoffrey Connor
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I am an American citizen registered to vote in the state of Wisconsin
and am a permanent resident of Australia and have been living here
continuously since August of 2019. My wife, Joanne, is a dual
Australian/American citizen. We have been married since 1996 and moved
to Australia when I retired in order to be closer to Joanne's family,
especially her elderly parents.
My financial life is entirely in Australia, and my income is subject to
full taxation under the laws of Australia. I try very hard to fulfill
the requirements of the U.S. tax system in addition to the tax
requirements in Australia. The reality, though, is that the U.S.
requirements (especially the myriad of required informational filings)
get increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
the right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Sincerely,
Geoffrey Connor
______
Democrats Abroad
P.O. Box 15130
Washington, DC 20003
(202) 733-6790
April 6, 2022
The Honorable Ron Wyden The Honorable Mike Crapo
Chairman Ranking Member
U.S. Senate United States Senate
Committee on Finance Committee on Finance
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington, DC 20510 Washington, DC 20510
Re: Hearing with IRS Commissioner Rettig on the IRS, the President's
Fiscal Year 2023 Budget, and the 2022 Filing Season
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
In light of the enormous challenges facing the Internal Revenue Service
(IRS), we greatly appreciate you holding this important hearing. There
are an estimated nine million American citizens residing outside the
United States,\1\ the overwhelming majority of whom are working or
middle class.\2\
---------------------------------------------------------------------------
\1\ The U.S. Department of State's Bureau of Consular Affairs.
(2020, January). Consular Affairs By The Numbers. Retrieved April 5,
2022, from https://travel.state.gov/content/dam/travel/CA-By-the-
Number-2020.pdf.
\2\ Democrats Abroad. (2019, March 1). Tax filing from abroad--2019
Research on Non-
Residents and U.S. Taxation. Page 4. Retrieved April 5, 2022, from
https://democratsabroad.
atlassian.net/wiki/download/attachments/4257416635/
Tax%20filing%20from%20abroad%20-%202019%20Research%20on%20Non-
Residents%20and%20US%20Taxation.pdf?api=v2.
In the context of the 2023 Budget ``Green Book'', our comment makes a
number of recommendations that would alleviate unintended tax-filing
and financial-access problems that Americans abroad face as a result of
the current system of extraterritorial taxation (i.e., Citizenship-
Based Taxation). The U.S., Eritrea, and North Korea are the only
---------------------------------------------------------------------------
countries using such a system.
Going beyond the Green Book, we urge the Senate Finance Committee to
hold a hearing specifically to examine the unintended consequences of
the current tax code on non-resident citizens and consider changing
this system. We would welcome engagement with individual Committee
Members to discuss opportunities to introduce reforms.
Green Book Recommendations
The Department of the Treasury's Fiscal Year 2023 proposals make a
number of recommendations that are likely to impact Americans Abroad.
In particular, they are:
Raising the Corporate Tax Rate to 28 Percent, Page 2.
Address Compliance in Connection with Tax Responsibilities of
Expatriates, Page 87.
Simplify Foreign Exchange Gain or Loss Rules and Exchange Rate
Rules for Individuals, Page 90.
Provide for Information Reporting by Certain Financial
Institutions and Digital Asset Brokers for Purposes of Exchange of
Information, Page 97.
Our commentary and recommendations on each proposal are as follows:
Raising the Corporate Tax Rate to 28 Percent
Commentary: How Americans Abroad are impacted by the change:
Non-resident U.S. citizens who operate small businesses in their
country of residence are subject to the GILTI tax on undistributed
earnings unless they qualify for a high-tax exemption depending on tax
rates in their country of residence. At the current 21% rate, income
taxed at 18.9% or more is excluded from U.S. taxation. At a corporate
rate of 28% the foreign tax rate would need to be as high as 25.2% to
qualify for the exclusion.
Our Recommendation:
GILTI was designed to encourage large multinational corporations
to move their operations back to the U.S., but this is not an option
for small-business owners who reside outside the U.S., and they can
seldom afford the accounting support which is required for compliance.
U.S. citizens not residing in the United States should be exempted from
GILTI.
Addressing Compliance in Connection with Tax Responsibilities of
Expatriates
Major Changes:
Adjustments to the statute of limitations ensure compliance and
administrability.
The Secretary of the Treasury will be granted limited authority
to relieve certain dual citizens from Covered Expatriate tax
obligations.
Commentary:
We encourage lawmakers to read the motivation for this proposal
that the Treasury provides on Page 88; it identifies the excessive
compliance burden that the U.S. extraterritorial tax regime places on
lower- and middle-income individuals, the pervasive financial-access
issues, and the limited value to the IRS.
We note that denial of financial services and excessive
compliance burdens are problems that broadly affect all Americans
residing abroad, not just those with minimal U.S. ties.
We note that bank account closures and refusals are not limited
to only those without SSNs/TINs. In some cases, foreign financial
institutions demand to see a ``Certificate of Loss of Nationality'' for
any U.S.-born individual, available only after someone expatriates.
Such financial institutions deny or close accounts based solely on U.S.
Tax Residency.
While we are supportive of relief for those with minimal U.S.
ties, we are dismayed to see that there appears to be greater support
for facilitating renunciation of American citizenship than there is for
addressing the problems that force individuals into such an action.
Our Recommendations:
We support the enactment of H.R. 5799 The Overseas Americans
Financial Access Act as a way to address the denial of service faced by
non-resident citizens.
To address financial access issues, we would encourage the
adoption of a strengthened ``Non-Discrimination Clause''.
Simplify Foreign Exchange Gain or Loss Rules and Exchange Rate Rules
for Individuals
Major Changes:
Annual average exchange rates, rather than spot exchange rates,
become an option for tax calculations.
Exemption from foreign currency gain is increased from $200 to
$500.
Foreign currency losses become deductible against any gain on
the sale of the residence.
Commentary:
Tracking and reporting of foreign currency gain is unworkable
for individuals whose entire financial life revolves around a foreign
currency; a meager and non-indexed increase in the personal exemption
limit is insufficient in this regard.
Making foreign-currency losses deductible against capital gains
on a house appears more beneficial to property investors rather than to
middle-class citizens living abroad. It does little to address problems
related to ``phantom currency savings'' on mortgages that occur when a
currency decreases in value (simultaneously reducing any capital gain).
There is significant double taxation that occurs in cases of
misalignment between countries with a ``stamp duty'' (tax paid by the
buyer at purchase) and the United States, where tax is paid by the
seller at time of sale. Relief is also desperately needed in this area.
Our Recommendations:
Individuals residing outside the United States should be
exempted from taxation of foreign-currency gains related to the
currency of the country in which they reside.
Exemption of primary residence and mortgage on primary residence
from Foreign Exchange Gain/Loss: Capital-gain calculations should
permit the use of an exchange rate based on the day the house was
purchased, eliminating phantom currency gains & losses.
Provide for Information Reporting by Certain Financial Institutions
and Digital Asset Brokers for Purposes of Exchange
of Information
Major Changes:
U.S. financial institutions would require FATCA account
reporting at U.S. financial institutions for any ``foreign persons.''
Commentary:
We urge caution when implementing this proposal, noting the
severe financial-access issues caused by FATCA and the reliance of
overseas Americans on U.S. financial institutions (due to FATCA and
anti-offshoring provisions of the Internal Revenue Code).
If FATCA's scope of reporting is expanded to U.S. banks, it is
both timely and necessary to address financial-access issues stemming
from this reporting requirement.
When FATCA was implemented in Europe, Americans abroad were
locked out from banking--unable to open or maintain a bank account in
their country of residence and faced with difficulty opening or
maintaining a bank account in the U.S. Without financial access
protections, our concern is that a similar wave of account closures and
refusals could occur in the U.S.
Our Recommendations:
To protect U.S. Citizens' access to U.S. services, all U.S. Tax
Residents must have equal access to financial services and products; a
foreign address cannot be valid grounds for refusal or reduction in
services.
To protect U.S. Citizens' access to financial services in the
countries in which they live; being a U.S. Citizen or U.S. Tax Resident
cannot be valid grounds for refusal or reduction in services.
Conclusion
Our recommendations are in response to the changes proposed by the
Treasury in the 2023 ``Green Book'' and would be aligned with any
legislative changes made in response to those proposals.
We strongly believe that more fundamental reforms are also necessary to
address the underlying issues facing Americans abroad, namely:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion (FEIE),
Foreign Tax Credit (FTC), or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
Americans residing abroad have been effectively barred from saving for
retirement, starting a small business, taking title to real estate, or
sharing finances with their spouse. The devastating consequences result
in inability to retire, forced closure of small businesses, divorce
from non-American spouses, and even suicide. This is on top of the
inordinate stress, cost, and time involved just in understanding and
meeting the complex reporting requirements of the U.S. tax code.
The current IRS definition of ``tax residency'' includes the obligation
to report worldwide income (including non-U.S. source income), even of
Americans who are tax residents of other countries. This requires the
IRS to do the impossible: to administer both a domestic tax system for
U.S. residents (including source taxation for non-resident aliens) and
also an extraterritorial system interacting uniquely with the tax codes
of other countries.
Administering this extraterritorial tax system has become an
overwhelming task, both procedurally and substantively. The IRS cannot
remotely serve Americans in the more than 100 foreign countries where
they live, let alone in the languages they speak. Nor can the IRS know
how U.S. laws apply to the local financial services, small business
structures, and retirement savings plans that are common in those
countries.
The IRS itself has identified ``international taxpayers'' as an
underserved community.\3\ The level of service currently provided by
the IRS to Americans inside and outside the country is highly unequal.
For those abroad, IRS agents are insufficiently trained to respond to
the common issues faced.
---------------------------------------------------------------------------
\3\ IRS. (2021, January). Taxpayer First Act Report to Congress.
Retrieved April 5, 2022, from https://www.irs.gov/pub/irs-pdf/
p5426.pdf?mc--cid=95523e3176&mc--eid=[942e2d2064].
Americans abroad have pleaded for relief for over a decade, with no
meaningful response from Congress or the Treasury Department. It is
time for Congress to cease the imposition of filing requirements for
---------------------------------------------------------------------------
the non-U.S. source income of non-residents.
Cost/benefit analysis of such a transition from citizenship-based to
residence-based taxation should include consideration of what would be
required for the IRS to provide fair and equitable support to non-
resident filers under the current system. We believe that transitioning
to residence-based taxation would:
Substantially improve the well-being of Americans abroad;
Improve the administrability of the Internal Revenue Code and
facilitate greater tax compliance; and
Reduce strain on an Internal Revenue Service that has expressed
that the burden associated with servicing Americans abroad is
disproportionate to the minuscule tax revenue raised.
We plan to release updated research on Americans abroad and their tax
situations this summer. We will share our results and analysis with the
Committee and encourage you to review it then.
Thank you for the opportunity to provide this testimony.
Please do not hesitate to contact Rebecca Lammers of our Taxation Task
Force on [email protected] with any questions about the
information and recommendations provided.
Sincerely,
Candice Kerestan Rebecca Lammers
International Chair Chair, Taxation Task Force
[email protected] [email protected]
______
Letter Submitted by Brent Foster
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I am a U.S. citizen who grew up in southern California. When I was 18
years old in 1998, I moved to Germany to study and when studying I
founded a family here in Germany. Since then I have been living here.
My financial life is entirely in Germany, and my income is subject to
full taxation under the laws of Germany. I try very hard to fulfill the
requirements of the U.S. tax system in addition to the tax requirements
in Germany. The reality, though, is that the U.S. requirements
(especially the myriad of required informational filings) get
increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know howU.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson explain that the failure of
the IRS to provide access to the following services, individually and
collectively, constitute violations of the Taxpayer Bill of Rights:
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report (released in July of 2015), it was
stated that:
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co- chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty
inmeeting filing obligations due to the lack of a Social Security
Number for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
ownedby Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
7. the inability to do normal business proceedings with foreign
banks and financial institutions due to the strict and unprecedented
reporting requirements imposed on U.S. citizens living abroad.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed and undeveloped nation on the
planet and move to a residence-based taxation system for individuals.
U.S. citizens who are tax residents of other countries would continue
to be liable to pay U.S. Federal income tax on any income which is
effectively connected with the United States, as all non-resident
aliens do, by using Form 1040-NR instead of Form 1040.
Thank you for your attention to this matter.
______
Letter Submitted by Robert M. Gerretsen
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I was born in New York in 1957. My Dutch parents (who worked in the
U.S. temporarily) went back to the Netherlands when I was 20 months
old. My only English words were ``Daddy'' and ``Mammy'' when I left the
U.S. I never studied or worked in the U.S. I do not have any family,
friends or assets in the U.S.
Only 5 years ago I found out about CBT, caused by FATCA. My bank asked
me for a SSN or CLN. I never had a U.S. passport, never had a SSN and
do not have the money for a CLN procedure. My Dutch bank will close my
bank account in September this year because of the FATCA ruling. From
that moment I will not be able to receive any income or pay any
account. Without a bank account I will not be able to take care of my
dear family anymore. . . .
My financial life is entirely in the Netherlands for more than 63 years
and my income and assets are subject to full taxation under the TAX
laws of the Netherlands. I do not understand at all why I should also
pay TAX to the U.S. a country I have no ties with and have never got
any services from.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Kind regards,
Rob Gerretsen
The Netherlands
______
Letter Submitted by Melvyn and Judith Goldberg
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
We are registered in the State of Pennsylvania. We reside in Canada
because of the proximity of our children and grandchildren. We have
resided in Canada for 14 years.
My financial life is entirely in Canada, and my income is subject to
full taxation under the laws of Canada. I try very hard to fulfill the
requirements of the U.S. tax system in addition to the tax requirements
in Canada. The reality, though, is that the U.S. requirements
(especially the myriad of required informational filings) get
increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson explain that the failure of
the IRS to provide access to the following services, individually and
collectively, constitute violations of the Taxpayer Bill of Rights:
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from citizenship-based taxation to a
residence-based system of taxation should include an assessment of the
investments which would be required to enhance the capabilities of the
IRS to provide fair and equitable support to non-resident taxpayers
under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report (released in July of2015), it was
stated that:
F Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of nun1erous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness. The
combination of U.S. citizenship-based taxation and FATCA is destroying
the lives of U.S. citizens living outside the United States who are
bona fide residents (and tax residents) of other countries. Issues
causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a bearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
______
Letter Submitted by Paula Hemdal, Ph.D.
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I am an American who has lived abroad, in Belgium, for over 25 years
and conscientiously file my U.S. Income tax forms every year, in
addition to my Belgium tax forms. The reality is, that the U.S.
requirements for citizens living outside of the U.S. get increasingly
burdensome every year, and the compliance costs for knowledgeable tax
preparers are egregious. Due to the high taxes in Belgium, the highest
amount I ever owed the U.S. Government in my 25 years of living in
Belgium has been $5,422 and that was only because I had worked more for
several weeks in the United States that year and, as I was told by
Deloitte, who was preparing my taxes, that I was also being taxed on my
company car as a ``perk'' (which wasn't even used in the U.S.). Whether
that was the true reason or not, my more usual amount owed to the U.S.
is zero. Zero taxes to pay each year (because of the Belgium-U.S. tax
treaty and because I pay a lot of tax in Belgium) yet I must pay a
professional tax preparer each year and cannot file, like other U.S.
citizens, using e-filing myself (my 4 digit zip code prevents me from
doing this--believe me, I tried).
I am living proof that the extraterritorial application of the U.S.
federal income tax system is a painful issue for me and for the 9
million U.S. citizens who reside outside the United States. In a survey
\1\ of 1,564 overseas resident citizens conducted by Stop
Extraterritorial American Taxation (``SEAT''), an independent, non-
partisan not-for-profit association, 46% of participants agreed with
the statement ``I pay significant fees for preparation of U.S. tax
return but owe nothing in U.S. taxes,'' with 41% of those who engaged a
professional preparer paying more than $1,000 in fees. That is me!
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
But it isn't simply the tax filing that is burdensome. More and more
complications arise for U.S. citizens living in Europe every day. The
combination of U.S. citizenship taxation and FATCA (as well as the EU
MiFID) is destroying my ability to save for my retirement using the
tools typical for U.S. citizens living in the United States: 401K, IRA
and even Mutual Funds. And the Banks in Europe are refusing to allow
U.S. citizens to use their retirement tools because of the long arms
---------------------------------------------------------------------------
requirements of FATCA reporting.
I have always been a proud American, which is why, without even
thinking, I passed on my U.S. citizenship to my children while living
in Belgium. In hindsight, I believe this was a mistake. As Belgium is
the country they were raised, they have chosen to stay there. Little
did I realize that I by giving them American citizenship, I was in
fact, gifting them a whole slew of financial difficulties.
Here is what I have gifted my children:
Onerous tax reporting requirements: Filing to 2 tax authorities
every year despite never working in the United States and even though
the EU income tax is higher, meaning none or very minimal tax is ever
owed to the United States (but only if you understand how to complete
the Foreign Earned Income Exclusion (FEIE) and Foreign Tax Credits and
to do this, you have to hire a professional help from tax experts).
This means between 300 and upwards of 6,000 euros to pay every year for
specialist tax advisors that understand both the U.S. tax laws and the
European country tax laws. Additionally, the usual time to receive all
the tax statements in many European countries (such as Belgium) is
often more than a year after the tax year (whereas in the U.S., it is
4.5 months), making it quite stressful to comply with even the
extension of the U.S. tax filing timelines (October).
No opportunity to save for their own retirement: Since they are
not in the U.S., they are unable to take advantage of any pre-tax
Individual Retirement Account or 401K. Furthermore, many of the
European company-sponsored pension plans are only minimal: In Europe
they use a 3-pillar system for retirement: Social Security, company
pension, but the biggest pillar is often private investment. However,
the EU banks will not allow U.S. citizens, even if they are also an EU
citizen, to participate in any retirement scheme (for example, branch
21 pension savings insurance, in Belgium). Thus, the only way they can
save for their third pillar is through bank savings accounts (which is
a 0% interest) and which is not the way to save for the future, keeping
them at a distinct disadvantage compared to U.S. or EU counterparts
that do not have dual citizenship.
No opportunity to invest in European ETFs since they are
punitively taxed by the U.S. authorities. The favored long-term
investment strategies and pensions in the EU are often Passive Foreign
Investment Companies (PFICs), which are taxed more severely by the U.S.
tax authorities than other assets and more difficult to report to the
IRS. This also means that unless they lie about their U.S. citizenship,
they are not able to use online trading systems (Schwab, Vanguard,
International Brokers, to name a few) to purchase safe mutual funds or
ETFs. (They can still purchase individual stocks, but this is a very
risky endeavor when starting to invest). This is because Americans
living in Europe are no longer able to take advantage of their U.S.
citizenship to purchase U.S.-based Exchange Traded Funds (ETFs),
because of the Markets in Financial Instruments Directive (MiFID) rules
that require to all U.S. investments to produce a Key Information
Document or KID for EU-domiciled retail investors. So far, no U.S.-
based ETFs have produced KIDs.
Difficulty finding banks (and mortgages) if you are a U.S.
citizen living in Europe because may banks and investment/financial
service companies are no longer accepting Americans as clients due to
the FATCA legislation. EU banks that fail to follow FATCA potentially
face significant penalties; thus, many EU banks have decided that it is
more cost-efficient for them to avoid having any American clients at
all. And, because they are not a resident of the United States (no U.S.
address), they do not have the right to have a bank account in the U.S.
or to open an U.S. investment.
Beyond reasonable requirements for U.S. citizens living abroad:
Since 1970, U.S. citizens living abroad have been obligated to file a
Foreign Bank Account Report (FBAR) each year, for all non-U.S.
(``foreign'') bank or other accounts that they have in which the
balance has exceeded $10,000 during the year. All foreign accounts are
reportable, even those with zero balances, if the aggregate total in
all accounts exceeds $10,000 and the maximum amount held in any of
these accounts must be reported--even if it was a transfer from one
account to another, even if only for a day. And, even if held jointly
with a partner who is European and has no U.S. reporting obligations.
In conclusion, my daughters, as proud U.S. citizens born and raised and
still living in Belgium, are being denied bank accounts and investment
opportunities only because of their U.S. citizenship and the compliance
burden FATCA. My daughters will find it impossible to properly manage
their financial livelihood and retirement planning because of the
effects of U.S. citizenship taxation and FATCA. And as for me: I am
nearing retirement age and truly have no idea what is in store for me
when I begin taking U.S. social security and withdrawals from my 401K
(from when I lived and worked in the U.S.) and how that will be taxed
by both the U.S. and Belgium.
Please consider this as a real-life example of what is happening to me,
but more importantly, to the future: my children. Consider a change to
the system for those living permanently outside of the U.S. but who do
not want to give up their citizenship, which is a part of their
identity.
If you decide not to consider the burden this has on U.S. citizens
living permanently abroad, you can also look at this problem from the
viewpoint of good ole' Uncle Sam and the fact that the uniquely
American definition of ``tax residency'' includes the imposition of
taxation on the worldwide (including non-U.S. source) income of persons
who are tax residents of other countries. This system requires the IRS
to do the impossible: to administer not only a domestic tax system for
U.S. residents and a system of source taxation for non-resident aliens,
but also an extraterritorial one whose details are defined by unique
interactions with the tax codes of other countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed, the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter. Please feel free to
contact me if you would like to discuss my situation in more detail.
Kind regards,
Paula Hemdal, Ph.D.
______
Letter Submitted by John Holmes
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
My wife and I are dual citizens of Australia and the U.S., having been
born in Australia. I worked and raised a family for 23 years in Florida
through 2015. Our motivation for moving back to Australia is to provide
care and assistance to parents in their 8th and 9th decades. We
continue to actively vote in Pinellas County in state and federal
elections. We are not affiliated with any party. We previously held
property in Florida which we since have sold and have fully complied
with U.S. tax law filing returns every year and paying applicable taxes
related to U.S. holdings. We now have only 401k retirement accounts.
My financial life is entirely in Australia and my income is subject to
full taxation under the laws of Australia. I try very hard to fulfill
the requirements of the U.S. tax system in addition to the tax
requirements in Australia. The reality, though, is that the U.S.
requirements (especially the myriad of required informational filings)
get increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious. This results in me being
forced to pay over $1200+ in accounting fees every year to complete
forms with no tax being due. Not to mention the tax years do not
coincide creating an extra burden.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
7. More specifically in my case the contributions to
superannuation--a version of 401K is considered as income so it is
taxed by both Australia and the U.S.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Sincerely,
John Holmes
______
Letter Submitted by Lynn Frances Levenson
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I was born in New York, NY in 1947 from Alvin Levenson, who was a U.S.
Navy pilot on the USS Yorktown and Marjorie Murphy. I spent my younger
years in school in West Hempstead Long Island and worked in New York
City.
At the age of twenty-two I got married to an Italian citizen and
transferred to Italy, where he was and we still are living. I returned
to the States to see my parents and family during brief holidays. I
have no property or financial interest in the USA at all. I have not
worked in Italy outside the family and was never involved in any
activity procuring me any monetary income. My husband who is only an
Italian citizen, now retired as one of the former directors of the
civil air traffic services, provides for the income of the family. The
Italian citizenship was granted to me because of the marriage. I have
dual citizenship since 1971 and am a permanent resident of Italy since
the same year. My husband allowed my name as well in all his bank
accounts hence making me eligible for FATCA and FBAR. All my husband's
income and bank accounts are subject to Italian taxation. Because of
FATCA and FBAR I have to spend his moneys for the lawyer and accountant
taking care of my reports to IRS, to report his property already taxed
in Italy, to the USA IRS. To find qualified lawyers in U.S. tax laws is
a very, very difficult operation and a very, very expensive one, as
well, while all responsibilities continue to lay on the tax payer only.
Should my husband die before me I would be allowed to receive a
percentage of his pension, making me an earner of already taxed money,
to be reported and possibly taxed again because of my U.S. citizenship.
The house my husband bought with his Italian income, sharing that
property with me, would be subject to IRS taxation. On top of all the
already proposed disturbing issues I wish to mention that You are
proposed with the case of U.S. males living, earning and married to
foreign, outside USA. I am proposing to you my case of an American
woman married to a foreigner and living outside the USA with no income
from my interest in working activities or financial investments still
subject to taxation FATCA and FBARS.
My financial life is entirely in Italy, and my income is subject to
full taxation under the laws of Italy. I try very hard to fulfill the
requirements of the U.S. tax system in addition to the tax requirements
in Italy. The reality, though, is that the U.S. requirements
(especially the myriad of required informational filings) get
increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations oftax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20lnternational%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions mode to the internotionol working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-choirs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Lynn Frances Levenson
______
Letter Submitted by Stephen Matthew
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I am a proud American citizen, registered to vote in Connecticut,
expatriated in The Netherlands since 1978. I came originally to The
Netherlands to play semi-
professional baseball in the Amsterdam area. Eventually I met my wife
of over 40 years and was able to secure a job with an American company
located here (a part of GE Capital) which I recently retired from after
40 years of service. We have 2 adult aged children that had dual
nationality despite only living in The Netherlands.
My financial life is entirely in The Netherlands, and my income is
subject to full taxation under the laws of The Netherlands. I try very
hard to fulfill the requirements of the U.S. tax system in addition to
the tax requirements in The Netherlands. The reality, though, is that
the U.S. requirements (especially the myriad of required informational
filings) get increasingly burdensome every year, and the compliance
costs for knowledgeable tax preparers are egregious.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Humbly yours,
Stephen Matthew
______
Letter Submitted by C. Chase McCarthy
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I'm American. Born in TN, raised in CA, educated in NJ and currently
registered to vote there. My wife is Spanish. We lived in Germany and
Spain for more than 14 years and plan to return there soon for
retirement. We had financial interests in Spain that we had to divest
because the taxation, FBAR laws are excessive and onerous for honest
citizens. We would like to plan more for our retirement with
investments in Spain but that is not feasible to any degree with the
current tax laws in place.
My financial life is CURRENTLY split between income in the U.S. and
Spain. We've had to change so many things in our lives including where
we live because of the draconian tax measures taken by the U.S. While I
would like to live in Spain, my country's tax laws prevent me from
doing so in realistic terms that I cannot afford a combined dual tax
rate given the minimal credit provided to citizens currently--
disregarding the substantial administrative costs of living abroad for
both myself and our bank in Spain. The reality is that the U.S.
requirements (especially the myriad of required informational filings)
get increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
______
National Taxpayers Union
122 C Street, NW, Suite 650
Washington, DC 20001
Phone: (703) 683-5700
Fax: (703) 683-5722
https://www.ntu.org/
The Honorable Ron Wyden The Honorable Mike Crapo
Chair Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
219 Dirksen Senate Office Building 219 Dirksen Senate Office Building
Washington, DC 20510 Washington, DC 20510
Dear Chair Wyden, Ranking Member Crapo, and Members of the Committee:
On behalf of National Taxpayers Union (NTU), the nation's oldest
taxpayer advocacy organization, we write in regards to your hearing
with IRS Commissioner Rettig on the agency's fiscal year (FY) 2023
budget request. NTU and its research arm NTU Foundation have been
actively engaged on IRS budget and reform matters since our founding in
1969, and our experts and advocates have been especially involved of
late in the challenges facing the agency during the 2022 tax filing
season.
In recent years, NTU and NTU Foundation have often weighed in on
efforts to increase the IRS budget. While we continue to believe that
it would be a serious mistake to provide the agency $80 billion over 10
years almost exclusively for enforcement purposes--and that such a
proposal would represent a nearly blank check to an agency with serious
structural flaws and long-term challenges--we have expressed our
support for Congressional efforts aimed at improving customer service
and modernizing the agency's infrastructure. We believe that resources
properly directed to these ends should aim to be fully offset by
spending reductions elsewhere in the federal budget, and we believe
that any IRS budget increases should come with solidly-grounded
guardrails, robust Congressional oversight, and strong taxpayer rights
and privacy protections.
The IRS FY 2023 Budget Request
As you well know, the agency's FY 2023 budget request would increase
spending by $1.5 billion, or 11.9 percent, above FY 2022 enacted
levels.\1\ The Taxpayer Service Account would see the largest increase
under the budget proposal: $904 million or 32.5 percent above FY 2022
enacted levels. The Enforcement Account would see an $834 million
increase, or 15.3 percent above enacted levels. The Business Systems
Modernization Account would see a $35 million, or 12.7 percent
increase, over FY 2022 enacted levels.
---------------------------------------------------------------------------
\1\ For more, see: Office of Management and Budget. ``Internal
Revenue Service.'' March 2022. Retrieved from: https://
www.whitehouse.gov/wp-content/uploads/2022/03/tre_fy2023.pdf#page
=40 (Accessed April 5, 2022.); Congress.gov. (Introduced April 13,
2021.) ``H.R. 2471--Consolidated Appropriations Act, 2022.'' Retrieved
from: https://www.congress.gov/bill/117th-congress/house-bill/2471/text
(Accessed April 5, 2022.)
NTU and NTU Foundation are still evaluating the agency's full FY 2023
budget request, and we look forward to hearing from Commissioner
Retting at the Committee's April 7th budget hearing. However, we urge
the IRS and the Committee to explore reforms that (1) advance taxpayer
rights and privacy, (2) improve customer service at the agency, (3)
modernize the IRS, and (4) help the agency enforce the nation's tax
laws while fully respecting taxpayer rights and due process.
Protecting Taxpayer Rights and Privacy
Taxpayer rights--including the right to due process and the right to
relief when the agency makes an error that affects the taxpayer--are of
the utmost importance and have traditionally enjoyed bipartisan support
on Capitol Hill. However, between concerns about the agency's proposed
(but since canceled) use of facial recognition technology, and the
ProPublica breach of sensitive tax data, it is clear the agency is not
as prepared to protect taxpayer privacy and safeguard taxpayer rights
as the nation's taxpayers should expect. The following recommendations
may, over the long run, right the ship at the IRS.
Pass Additional Taxpayer Protections Through a New Taxpayer Bill
of Rights (TBOR): NTU has endorsed legislation from Sen. John Cornyn
(R-TX), the Small Business Taxpayer Bill of Rights, which would create
an alternative dispute resolution program for audits, give the IRS
greater latitude to release levies that cause financial hardship, and
strengthen safeguards against taxpayer abuses by IRS officers and
agents, among other commendable provisions.\2\ These and similar
reforms should receive bipartisan support in Congress, either as part
of the appropriations process or as standalone legislation.
---------------------------------------------------------------------------
\2\ Sepp, Pete; and Lautz, Andrew. ``Senate Bill Would Provide
Small Business Taxpayers With New Rights.'' NTU, May 17, 2021.
Retrieved from: https://www.ntu.org/publications/detail/senate-bill-
would-provide-small-business-taxpayers-with-new-rights.
---------------------------------------------------------------------------
Safeguard Taxpayer Privacy From Unauthorized Attempts to Access
Data: Targeted budget increases that improve the agency's information
technology (IT) infrastructure and data security could prevent harmful
and embarrassing data breaches like the ProPublica series on high-
income filers' tax returns. As NTU Foundation has noted, ``A 2020
report by the Treasury Inspector General for Tax Administration looked
at 67 requests for taxpayer data that should have been monitored for
unauthorized access. Of these, just 6 received adequate scrutiny--30
received inaccurate and incomplete audit trails, and 31 received no
audit trails at all.''\3\
---------------------------------------------------------------------------
\3\ Wilford, Andrew; Sepp, Pete; and Bishop-Henchman, Joe.
``Taxpayers Desperately Need Help with Disastrous Filing Season.'' NTU
Foundation, February 17, 2022. Retrieved from: https://www.ntu.org/
foundation/detail/taxpayers-desperately-need-help-with-disastrous-
filing-season.
---------------------------------------------------------------------------
Require the Agency to Reduce its Response Time for Resolving ID
Theft Claims: The agency is currently taking nearly a year to resolve
identity theft claims, a significant increase from their average
response time ``due to extenuating circumstances.''\4\ However, outside
of extenuating circumstances, the agency's average response time is 120
days. Taking 4 months to a year to respond to identity theft claims is
unacceptable, and the agency should work with Congress to reduce the
average response time to identity theft claims. If this requires a
targeted funding increase, so that the agency may hire more personnel
to respond to identity theft claims, Congress should carefully consider
such a request.
---------------------------------------------------------------------------
\4\ Internal Revenue Service. ``IRS Operations During COVID-19:
Mission-critical functions continue.'' Updated March 18, 2022.
Retrieved from: https://www.irs.gov/newsroom/irs-operations-during-
covid-19-mission-critical-functions-continue (Accessed April 6, 2022.)
---------------------------------------------------------------------------
Evaluate and Remediate Problems with Current Taxpayer Rights
Laws. Both practitioners and the taxpayers they represent have raised
concerns that the Independent Office of Appeals created by the Taxpayer
First Act of 2019 is under-resourced, and that agency guidance released
subsequent to the law's enactment may be limiting taxpayer access to
this critical avenue of redress. At the same time, the tripartite
accountability structure of the National Taxpayer Advocate, Treasury
Inspector General for Tax Administration, and IRS Oversight Board has
been tottering because the latter element has not had a quorum to
function for many years. These are but two examples where Congress
needs to step in and affirm or even strengthen its intent to provide
more safeguards for taxpayers.
Improving Customer Service at the Agency
One area of the IRS budget where additional funding may be required is
customer service. Taxpayers currently experience long wait times to
reach an IRS agent with questions or concerns about their tax return,
if they can even reach a real agency representative at all. While some
IRS customer service struggles are no doubt tied to the agency's slow
pace at modernization and its resource constraints, some are unique to
this tax filing season and the challenges of the COVID-19 pandemic.
Congress can step in with several reforms, outlined below. In some
cases, emergency funding directed at the agency's short-term obstacles
may be necessary.
Expand Funding for Taxpayer Services: Narrowly tailored funding
increases--targeted at, for example, hiring more customer service
representatives to answer taxpayer questions or hiring more agents to
reduce the agency's return backlog--could benefit both taxpayers and
the agency as they face a difficult 2022 filing season. NTU Foundation
noted in February, ``[p]roviding the agency with emergency funding
earmarked for the taxpayer services account would at least reduce the
problems that taxpayers are likely to face over the coming months.''\5\
---------------------------------------------------------------------------
\5\ Wilford, Andrew; Sepp, Pete; and Bishop-Henchman, Joe.
``Taxpayers Desperately Need Help with Disastrous Filing Season.'' NTU
Foundation, February 17, 2022. Retrieved from: https://www.ntu.org/
foundation/detail/taxpayers-desperately-need-help-with-disastrous-
filing-season.
---------------------------------------------------------------------------
Ensure That Taxpayers Are Not Punished for IRS Delays: NTU and
NTU Foundation have been leaders in demanding the IRS and/or Congress
provide taxpayers with immediate relief for delays that are no fault of
their own. A bipartisan group of lawmakers have made similar demands,
indicating support across the ideological spectrum for immediate
taxpayer relief this filing season. Lawmakers' demands have included
``that the IRS halt late fees and penalties for taxpayers who have paid
70 percent of assessed tax liability and have pending penalty abatement
requests waiting to be processed. [Demands also include] halting
automated collections until three months after the end of this tax
season, and temporarily speeding up the reasonable cause penalty
abatement process by eliminating the need for written
correspondence.''\6\
---------------------------------------------------------------------------
\6\ Ibid.
---------------------------------------------------------------------------
Provide a Legislative Fix to ``One Day Late'' Dispute: One area
where Congress can step in is for taxpayers who have been harmed by the
current IRS position that ``any taxpayer who fails to file an appeal
within 30 days forfeits all rights to go to Tax Court.'' As NTU
Foundation has written, ``The IRS concedes that 26 U.S.C.
Sec. 6330(d)(1) allows taxpayers to go to Tax Court, but they argue
that a parenthetical reference to `such matter' instead of `such
determination' means that Congress intended to forbid judges from
granting equitable relief to taxpayers who miss the deadline. This
harsh reading is at odds with the rest of the 1998 law, with common law
equitable doctrines, and other provisions in the same statute.''\7\
Congress could clarify the statute so that judges may grant relief to
taxpayers who miss the deadline.
---------------------------------------------------------------------------
\7\ Ibid.
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Apply a Consistent Mailbox Rule Deadline to Electronically
Submitted Payments: According to NTU Foundation, ``Taxpayers who mail
checks to the IRS can utilize the `mailbox rule' of 26 U.S.C.
Sec. 7502, which treats paper payments as timely if mailed with a
postmark before the deadline. By contrast, the Treasury Department's
Electronic Federal Tax Payment System (EFTPS) states that electronic
payments must be made by 8:00 PM Eastern Time the day before the
deadline in order to be timely.''\8\ These uneven rules effectively
punish taxpayers trying to file electronically, and Congress should
amend the law to equalize the electronic filing rules with the current
``mailbox rule'' for paper returns.
---------------------------------------------------------------------------
\8\ Ibid.
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Increase Interest Rate for Delayed Refunds: NTU Foundation's
February paper also recommended increasing the three-percent interest
rate on tax refunds, amid significant IRS processing delays and
historic levels of inflation that exceed three percent.\9\
---------------------------------------------------------------------------
\9\ Ibid.
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Raise the 1099-K Reporting Threshold: NTU Foundation has written
extensively on the need for Congress to raise the reporting threshold
for 1099-K forms, which Congress recently changed from 200 transactions
and $20,000 on web platforms to just $600. The new $600 threshold is a
burden to online sales platforms, digital economy apps, and millions of
workers across the country. While NTU would prefer that Congress revert
to the $20,000 and 200 transaction thresholds, there are bipartisan
proposals to raise the threshold above the current $600 level,
including to $5,000.\10\
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\10\ Yepez, Will. ``Bipartisan Focus on 1099-K Reporting Issue Will
Hopefully Lead to Taxpayer Relief.'' NTU, March 18, 2022. Retrieved
from: https://www.ntu.org/publications/detail/bipartisan-focus-on-1099-
k-reporting-issue-will-hopefully-lead-to-taxpayer-relief.
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Modernizing the IRS
As NTU Foundation wrote in February of this year, IRS technology and
infrastructure are in many cases woefully inadequate and outdated.\11\
NTU and NTU Foundation have compiled numerous recommendations to hasten
the pace of the agency's modernization efforts. We recognize that
narrowly-tailored funding increases, relative to the agency's current
baseline, may be necessary to facilitate more rapid modernization.
However, if expanding IRS electronic filing options, for example, or
updating years- or sometimes decades-old infrastructure improves the
agency's ability to answer taxpayer questions and deliver tax refunds,
the benefits of such targeted funding increases may outweigh the short-
term costs to taxpayers.
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\11\ Ibid.
Promote Increased Digitization of Tax Filing and Processing: As
NTU Foundation wrote in February, ``A good number of . . . paper
filings occur because the IRS does not accept certain forms in digital
format. Even among those that have been recently converted, some are
still manually processed, such as Form 1040-X, or amended individual
returns. If the IRS had the capability to automatically process the 3.6
million Forms 1040-X it received in 2021, it would significantly cut
down on processing delays.''\12\ Congress and the agency should
prioritize electronic filing and processing for all or nearly all tax
forms.
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\12\ Ibid.
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Promote Improved Digital Communications Tools: NTU Foundation
also recommended in February that the IRS ``expand the use of virtual
assistants'' and increase the use of ``existing secure digital
communications tools'' that allow taxpayers to contact the agency
through email, text chat, and digital attachment uploads. Such efforts
could reduce the amount of phone calls taxpayers make to the agency,
reducing wait times for those taxpayers, resolving their questions or
concerns faster, and putting less of a burden on the agency's workforce
in the process.
Enforcing the Nation's Tax Laws
NTU remains strongly opposed to efforts to send the IRS $80 billion
largely for enforcement purposes. The agency is ill-equipped to handle
its basic customer service, processing, and data security
responsibilities, much less an $80 billion bucket of cash aimed at
generating revenue to pay for a variety of new federal spending
programs. However, the tax gap remains a relevant concern for the
agency and for taxpayers, and both Congress and the IRS should explore
measures to reduce the tax gap that nonetheless respect taxpayer rights
and privacy. NTU outlines a few possible paths forward below. We would
remind lawmakers that the IRS's mission statement, which was given a
great deal of forethought in its development some 25 years ago, is to
``provide America's taxpayers top quality service by helping them
understand and meet their tax responsibilities and by applying the tax
law with integrity and fairness to all.'' Fulfilling this mission first
can actually help, not hinder, the IRS's functions of law enforcement,
which continue to rely heavily on voluntary compliance. Above all, the
agency should move slowly on reducing the tax gap--starting with more
up-to-date estimates of the current tax gap--and Congress should not
see tax gap reduction as consequence-free revenue to pay for new or
expanded government programs.
Demand an Updated Study From the IRS on the Tax Gap: The last
tax gap estimate from the IRS, completed nearly 3 years ago, covers tax
years 2011-2013--9 to 11 years ago. Though the IRS is reportedly
working on a 2022 study for tax years 2014 through 2016, and though
data lag continues to be an issue in providing up-to-date estimates of
the tax gap, Congress should require a more robust analysis from the
IRS of the present-day tax-gap estimated using new IRS methodologies
referenced by an official in 2021 testimony to the Senate Finance
Committee.\13\
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\13\ Senate Committee on Finance. ``Written Testimony of Internal
Revenue Service Before the Senate Finance Committee Subcommittee on
Taxation and IRS Oversight on the Tax Gap.'' May 11, 2021. Retrieved
from: https://www.finance.senate.gov/imo/media/doc/2021%20ODonnell
%20Johnson%20Tax%20Gap%20Written%20Testimony%20SFC%20051121.pdf
(Accessed April 6, 2022.)
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Require an IRS Plan for Reducing the Tax Gap for Nonfarm
Proprietor Income: According to the most recent IRS study of the tax
gap, the single largest component of the gap is underreporting of non-
farm proprietor income--a total of $68 billion, or more than 15 percent
of the estimated gross tax gap.\14\ The agency should have a detailed
plan for reducing this gap in particular.\15\ That action plan should
include steps to protect the due process rights of small businesses who
report income on individual returns (so-called ``pass-through
income''). Another useful element of such a plan would be to compare
the cost-effectiveness of alternative strategies for closing this gap.
For example, would creation of an administrative quadrennial
simplification process for tax law affecting small business, along with
more resources to promulgate advance guidance, yield better compliance
(and revenue) than relying more heavily on examinations and
investigations? Such research is not beyond the capabilities of IRS
technical experts.
---------------------------------------------------------------------------
\14\ Internal Revenue Service. ``Federal Tax Compliance Research:
Tax Gap Estimates for Tax Years 2011-2013.'' September 2019. Retrieved
from: https://www.irs.gov/pub/irs-pdf/p1415.
pdf (Accessed April 6, 2022.)
\15\ For more, see: Sepp, Pete; and Lautz, Andrew. ``Senate Bill
Would Provide Small Business Taxpayers With New Rights.'' NTU, May 17,
2021. Retrieved from: https://www.ntu.org/publications/detail/senate-
bill-would-provide-small-business-taxpayers-with-new-rights.
In conclusion, the IRS faces significant short-term challenges with the
2022 tax filing season, and long-term challenges related to the
agency's structural flaws and outdated infrastructure. A pot of cash
for tax law enforcement will not improve customer service and data
security at the agency, nor are we convinced that the agency's FY 2023
budget request meets all of the above challenges outlined by NTU, NTU
Foundation, and other stakeholders in the taxpayer advocate community.
Congress should carefully consider requests from the agency to increase
budgets in various accounts, but should also insist that any budget
increases are fully offset and come with robust reforms aimed at
solving the agency's long-term struggles. We appreciate your
consideration of our recommendations, and should you have any questions
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we are at your service.
Sincerely,
Pete Sepp,
President
Andrew Lautz
Director of Federal Policy
______
Professional Managers Association
700 12th St., NW, Suite 700, PMB 95968
Washington, DC 20005
https://www.promanager.org/
o: 202-793-6262
f: 888-396-6975
April 21, 2022
Hon. Ron Wyden Hon. Mike Crapo
Chairman Ranking Member
U.S. Senate U.S. Senate
Committee on Finance Committee on Finance
219 Dirksen Senate Office Bldg. 219 Dirksen Senate Office Bldg.
Washington DC, 20510 Washington DC, 20510
Re: Written Comments for April 7, 2022, Hearing on ``The IRS, the
President's Fiscal Year 2023 Budget, and the 2022 Filing Season''
Dear Chair Wyden and Ranking Member Crapo:
On behalf of the Professional Managers Association (PMA)--the non-
profit professional association that has, since 1981, represented
professional managers, management officials, and non-bargaining unit
employees at the Internal Revenue Service (IRS)--I write to urge the
Committee to support robust and timely appropriations for the IRS.
PMA vehemently supports the White House's request for a $14.1 billion
in funding for the Service with $310 million dedicated for systems
modernization. When Congress allocated $12.6 billion for the IRS in FY
2022, PMA applauded the historic investment in the IRS and the
bipartisan recognition of the IRS's financial constraints. However, we
also level set expectations: At $12.6 billion in funding, the IRS is
still nearly $4 billion below its 2011 peak of $16.4 billion,\1\ when
accounting for inflation.
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\1\ https://www.irs.gov/statistics/irs-budget-and-workforce.
Ranking Member Crapo is correct to point out that the IRS, despite
funding, has failed to modernize its technology systems in a meaningful
way. However, the culprit for this inefficiency is closer to home than
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the Senator assumes.
The IRS cannot modernize under the current broken appropriations
process. Congress passed three continuing resolutions prior to passing
FY 2022 appropriations, passed the measures five months late, and
Congress is now scheduled to appropriate FY 2023 funds in just 6
months. The IRS cannot enact long-term plans to modernize its IT system
when it is unsure what funding it will have in six months.
The constant inability of Congress to fund the government adequately
and on time has widespread ramifications on long-term planning, mission
delivery, and taxpayer services. Each year when Congress delays
appropriations, the IRS is placed in a continuing resolution state
where the Service is deeply cautious and limited in its spending. The
IRS also cannot conduct robust hiring, onboarding, and training while
on a continuing resolution. This makes employees less equipped to
handle the tax season and leads to more frustrations for taxpayers.
Most recently, this Committee expressed frustration that the IRS has
not yet fully spent the $1 billion allocated in the American Rescue
Plan Act (ARPA). As the National Taxpayer Advocate Erin Collins
explained, this discrepancy boils down to the consistency of funding.
Each time Congress fails to pass appropriations, the IRS must
cautiously couch funding to ensure it can continue functioning if
additional funding does not materialize. Congress's inability to pass
consistent and timely appropriations makes long term planning, and
execution of those plans, impossible.
For example, when Congress passed ARPA, it passed IRC Section 6428B.
The provision says: ``$1,464,500,000 to remain available until
September 30, 2023 for necessary expenses for the Internal Revenue
Service for the administration of the advance payments, the provision
of taxpayer assistance, and the furtherance of integrated, modernized,
and secure Internal Revenue Service systems, of which up to $20,000,000
is available for premium pay for services related to the development of
information technology as determined by the Commissioner of the
Internal Revenue occurring between January 1, 2020 and December 31,
2022, and all of which shall supplement and not supplant any other
appropriations that may be available for this purpose.''
In prior years, the IRS had to raid its personnel budget to fund IT
overages, and it seems likely the IRS is spending these funds
cautiously because other modernization dollars might not materialize
and, if they do not, the IRS will need the $1 billion for ``the
furtherance of integrated, modernized, and secure Internal Revenue
Service systems'' which, again, they have all the way until 2023 to
spend.
In our view, the IRS is being responsible--it spent a third or so in
FY21, perhaps it will spend a third or so this year rather than raid
personnel budgets and leave the balance for FY23. The IRS is not hiding
this money in a rainy-day fund--Congress specifically authorized the
agency to hold the money. To its credit, the IRS is currently deploying
those funds to help mitigate its historic backlog. We are proud of the
agency for making more than 2,500 job offers in the past month.
PMA ultimately agrees that the IRS must have robust plans for
onboarding new employees, addressing the backlog, and modernizing the
IT systems. But Congress's failure to pass timely and robust
appropriations stifles all these plans.
Further, the Committee's focus on 2D bar-code scanning, while helpful,
is misplaced. It is true the IRS's IT must be updated and 2D barcode
scanning would be an element of that modernization. But it is a drop in
the ocean. Most of the IRS's paper ``kryptonite'' will not be
alleviated by 2D scanning, especially considering our outdated computer
system will not likely integrate with most modern scanners. This also
assumes that the agency's paper burden is primarily original tax
returns--tax returns are the smallest component of the IRS's service-
wide paper inventory. The IRS needs real investment and real long-term
solutions, not band aids or a piecemeal approach.
For these reasons, PMA support multi-year funding dedicated to IRS
technology modernization. All IRS technology needs a facelift, not just
our scanning systems. The IRS is the largest revenue source for the
federal government--simply put, we fund freedom. Yet, the IRS's aging
IT infrastructure does not reflect the IRS's critical role in our
nation.
There is not a single federal lawmaker who has been working for 61
years--there should not be an IT system that has been working for that
long without modernization. Our nation should not rely on technology
that predates Hawaii statehood, the Berlin Wall, and the Space Needle.
Dedicated, multi-year funding for IT modernization would allow the
Service to take consistent steps toward improvement isolated from
Congress's annual appropriations panic.
Only with consistent, robust, and timely funding can the IRS truly
improve the quality of taxpayer services for all Americans; therefore,
we urge the Committee to support our call for dedicated, multi-year
funding for IRS technology.
Thank you for your consideration of PMA's perspective. Please contact
PMA Washington Representative Natalia Castro
([email protected]) if we can be of further assistance on these
matters or provide addition insights on the issues facing the IRS.
Sincerely,
Chad Hooper
Executive Director
______
Letter Submitted by Keiko I. Pulin
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I am an American citizen and am a registered voter in the County of
Orange in the State of California where I had lived most of my life. I
moved to New Zealand in 2014 for love; my love is a retired New
Zealander and he and I live in Auckland where we recently moved to a
retirement community. I received my New Zealand Permanent Resident Visa
in 2018.
I am a New Zealand Tax Resident and my income is subject to full
taxation under the laws of New Zealand. I try very hard to fulfill the
requirements of the U.S. tax system in addition to the tax requirements
in New Zealand. The reality, though, is that the U.S. requirements
(especially the myriad of required informational filings) get
increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious. I am tax compliant but still
have painful issues because of complex requirements. I pay over $2,500
in fees for my U.S. tax preparer and an additional $2,700-plus for my
New Zealand tax accountant.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of tax return but owe nothing in U.S. taxes,'' with 41% of
those who engaged a professional preparer paying more than $1,000 in
fees.
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\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency''' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
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\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail (which usually takes 7 to 8 weeks
and longer).
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
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\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Keiko I. Pulin
______
Letter Submitted by Amy Purcell
U.S. Senate
Committee on Finance
To whom it may concern,
I am writing to request that USA adopt resident-based taxation. I feel
it is necessary abolish the unfair tax and reporting burdens to which
USA citizens abroad are subject. I am a USA citizen abroad. I live in
Australia, where I was born. I have never lived in USA. My USA
citizenship is due to my American mother. I earn no USA income and own
no USA assets. I feel that these requirements are burdensome and
unfair. I would gratefully appreciate your assistance in this matter
please.
I have been advised that these regulations have been applied to
everyone, irrespective of economic status or geographic location in
order to ensure that USA has the opportunity to catch tax cheats. As I
am sure you are aware, the majority of people are average income
earners with no opportunity or incentive to cheat tax. Also, the
majority of people lack the financial sophistication to earn income in
multiple countries. Accordingly, I feel these regulations are punishing
the majority of people for the crimes of a few. Applying tax and
reporting laws to every USA citizen in the world is an over-reaction.
There would be methods of catching tax cheats without the need to
resort to such extreme measures. Please consider that this system is
not catching tax cheats anyway, but it is simply hurting innocent
people. This is not a good representation of America on an
international level.
I feel that paying any tax to USA government offers me no benefit since
I do not live in America. Dual citizens and expats are already paying
tax in the countries we live in. The services we use are provided by
the countries we live in, so it is fair we should pay to the countries
we live in. It is not fair for us to file taxes or to pay taxes to USA
when we are not currently benefitting from the services provided by
USA.
I acknowledge that there are foreign income tax concessions. These
often reduce and even eliminate an American tax liability. However, the
paperwork involved in this is excessive and time consuming. There is
also the obvious risk that if I make a mistake on my USA tax statement,
this could cost me a significant amount of money.
To prevent the risk of expensive mistakes on a tax return, it is
necessary to hire a tax specialist. However, this is very expensive. On
average, the price will amount to $650 Australian dollars per year
filed. This equates to USD$480 per year. This expense is exorbitant for
an average person, especially when trying to be compliant with law of a
country we don't live in and don't earn in.
I was shocked to learn that the IRS can tax me on the sale of my
primary residence here in Australia. I pay for this home out of my
Australian money which I earn from my Australian job. The services
provided to that home are provided by Australian governments. It is
important to note that in Australia, the sale of a primary residence is
exempt from capital gains tax. While this means that there is no
obvious risk of double taxation on the capital gain, I still see no
reason why USA has a right to tax the capital gain, even though I am a
USA citizen. America has no role in my primary residence and therefore
should not have the right to tax the capital gain, even though I am a
USA citizen.
I have also been told that my Australian retirement fund is subject to
USA tax. In Australia, retirement funds are mandatory. Each time we are
paid by our employer, our employer deposits part of our pay into a
retirement fund on our behalf. This is so that we have money to live on
when we retire. Of course, the money deposited into these retirements
fund are Australian as it is earned from our Australian jobs. Yet, when
we retire and withdraw the money to live off, the USA taxes this money.
USA citizens residing in Australia may end up in poverty in senior
years because of this as Australian government is phasing out the aged
pension. I consider the practice of taxing our retirement funds to be
unfair and uncompassionate.
The Foreign Account Tax Compliance Act (FATCA) has caused great
difficulty to USA citizens abroad. While I acknowledge that FATCA was
introduced to prevent USA citizens from avoiding tax by utilizing
foreign bank accounts, the outcome of this law has been terrible. Many
USA citizens around the world have been prevented from accessing
banking services in their country of residence because those banks are
unwilling to comply with USA's reporting requirement. Accordingly,
these banks purge themselves of USA clients, thereby leaving the USA
citizens without access to banking services.
The Foreign Bank Account Reporting (FBAR) also needs to be repealed.
This requirement is time-consuming and the potential penalties for an
error or missed FBAR are astronomical. As this reporting requirement
requires us to state the bank details and not the source of income,
this process is note helpful to IRS in determining whether the citizen
abroad may be a tax cheat. The threat of fines ranging between
USD$10,000 and half the value of the account are a great cause of
stress to citizens abroad. Also, as stated, the money in our accounts
is not American in origin anyway. Therefore, I consider that our bank
accounts are not the business of the USA government and the fines are
unconscionable.
It has been suggested to me that I consider renouncing my USA
citizenship if I find the tax obligation to be too onerous. However, it
is a condition that any tax obligation be complete prior to renouncing
a USA citizenship. Outstanding fines on income and assets originated
from our country of residence could prevent successful renunciation.
Additionally, there is a substantial fee of $2,350 to renounce USA
citizenship. This fee is not affordable to the average person.
Considering the renunciation often occurs as a result of unfair tax
expenses, this $2,350 fee can cause financial distress to an average
person. Nevertheless, it is noted that the number of renunciations has
increased significantly since the introduction of FATCA. Removing
citizenship taxation and FATCA would be significantly reduce the number
of renunciations of USA citizenship.
As I stated earlier, as a USA citizen abroad, I have no representation
in USA government. Yet, I am bound by whatever decisions the USA
government imposes upon me. I have often heard it said that in USA,
there is a culture of no taxation without representation. Since it is
not possible to provide USA citizens abroad with representation, I feel
it is necessary to cancel the taxation obligation in order to comply
with this requirement.
You will certainly be disappointed to learn that the tax and reporting
requirements have created tensions between USA homeland citizens and
USA citizens abroad on social media platforms. Many arguments have
occurred on social media over this issue as homeland citizens and
representatives of USA government have attempted to persuade citizens
abroad to adopt a more positive attitude towards citizenship-based
taxation as well as voting in USA elections. A number of citizens
abroad, myself included, have stated in these threads that we see no
value in voting or participating in civic life in USA when we feel so
used by USA government. Obviously, this in turn as the effect of
insulting homeland citizens and representatives. Therefore, the policy
of taxing citizens abroad is clearly responsible for the perceived lack
of value in USA citizenship.
I have been told that the citizenship-based approach to taxation rules
adopted by USA is also only used in Eritrea. Every other country uses a
resident-based approach to taxation. I consider a resident-based
approach to taxation to me more equitable as it imposes the financial
liability as well as the paperwork on those who live there and benefit
from the services. I feel that USA should consider using a resident-
based approach to taxation.
I would appreciate it if you would please assist in the removal of this
onerous obligation upon citizens abroad.
Kind Regards,
Amy Purcell
______
Letter Submitted by Elizabeth Ruh, EA et al.
April 8, 2022
U.S. Senate
Committee on Finance
Dear Senators:
We are writing today in a desperate hope that someone will listen to
us. We are practitioners, many of us small mom and pop operations just
trying to make an honest living. We are trying to help our fellow
Americans stay compliant with our voluntary tax system. We are
exhausted and are in desperate need of your assistance for our
profession to survive.
Since the pandemic we have been working non stop to keep up with the
changes, assist the public with learning, applying for and honestly
obtaining all the various options for COVID Relief. We were learning on
the fly. Making assumptions (conservative) while we waited on guidance.
We have weathered mid-season tax law changes that affected returns we
already filed. Meaning we had to touch completed files all over again
during our busiest part of the filing season. We have survived shut
downs. We have been trying for years to get clients refunds released or
unnecessary letters to be resolved. We are exhausted.
We thought this year would be better. It is not. It seems every single
return we touch is more complicated than ever. Exploding cryptocurrency
investors, K2/K3 issues, advanced child tax credit issues, stimulus
issues. Our clients are exhausted. They are weary of all our questions
and document requests. They fight us every step of the way because they
do not understand why this is so hard now. Our administrative staff is
beat down by the new customer service culture we are experiencing. The
general public has no idea how complicated taxes have become and they
are mad we cannot keep up like we used to.
We are exhausted. We want quality of life returned to us. Our filing
season is now compressed to about three weeks with brokerage statements
often having until March 15th to be finalized. We are unable to work
enough hours to get it all done, let alone get it all done well. The
public does not understand this, and we are taking beatings.
We fully support the IRS receiving all the funding it needs to correct
their problems, modernize its technology and improve customer service.
We are leery that the IRS will have success finding more people to
hire, as is the experience of the rest of the country also trying to
hire.
Our one main request at this time is that the filing season be
permanently extended to July 15th or even October 15th. We are wasting
time filing and trying to calculate extensions when with just a few
more months available to us we could have just filed the return.
We are exhausted. We need your help to keep this tax system
functioning.
Sincerely,
Elizabeth Ruh, EA Charles Streig, CPA
Personal Financial Services, LLC
Matthew J. Cordes, EA Joe Kristan
Scott T Rediger, CPA Logan Graf, CPA
Chase Helms, EA Alicyn McLeod, CPA, Atlanta Tax LLC
Mark Burch, EA Andrew Carroll, CPA
Matt Metras, EA Scott Sanchez, S&S Accounting, LLC
Denise C Yelvington, CPA, Sheffield
Advisors Katherine Graci
Franklin Bryant, EA Adam Markowitz, EA, Howard L
Markowitz PA CPA
Andra Zachow, Ingalls Associates PA
CPAs Jason Staats
Olivia Henley, EA
______
Letter Submitted by Linda Scurr
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I came to live in England from Florida, 30 years ago, after marrying my
husband, who is English. While I enjoy visiting the U.S. to see family
and friends, my life is here, and I will most likely never go back to
the U.S. to reside.
As a result, my financial life is entirely in England, and my income is
subject to full taxation under English laws. I try very hard to fulfill
the requirements of the U.S. tax system in addition to the tax
requirements of England. The reality, though, is that the U.S.
requirements (especially the myriad of required informational filings)
get increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious. I usually spend at least
$500 per year to get my tax return prepared and I can't understand why
this burden is considered to be acceptable.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
country of residence. I have an investment trust, for example, to help
save for my retirement, but have been forced to pay taxes on it to the
---------------------------------------------------------------------------
U.S. because it is a ``foreign'' company.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Mrs Linda Scurr
______
Stop Extraterritorial American Taxation (SEAT)
3 impasse Beausejour
78600 Le Mesnil le Roi
France
[email protected]
http://www.seatnow.org
April 14, 2022
Please accept this as our submission with respect to the subject of the
April 7, 2022 Senate Finance Committee Hearing: ``The IRS, the
President's Fiscal Year 2023 Budget, and the 2022 Filing Season.''
The United States is the only developed nation to impose its tax code
on all citizens, regardless of where they live, using the same rules
for both domestic and international taxpayers. Most other countries
assert the right to tax the worldwide income of residents, but not of
non-resident citizens. The U.S. taxes the worldwide income of both
residents (regardless of citizenship) and non-resident citizens.
Because the Internal Revenue Code has many special and punitive rules
for ``foreign'' income, assets, and investments, this means that U.S.
tax rules have a significant impact on the ability of Americans
overseas to plan for retirement, invest, run small businesses, and have
bank accounts in the countries where they live. While SEAT strongly
advocates for a move to taxation based on residence rather than
citizenship (as widely practiced in the rest of the world), if
citizenship-based taxation is to continue, it is incumbent on Congress
to carefully consider the impact of new legislation on this subset of
American citizens.
The Biden Green Book for fiscal year 2023, released on March 28, 2022,
contains a number of proposals to both increase tax rates and increase
the tax base by increasing the number of activities that are taxable
events. Generally, the proposals include a number of provisions to
create and enhance taxation on both income from capital and capital
itself. Significantly the Green Book does not suggest a move away from
U.S. citizenship taxation toward resident taxation as embraced by the
rest of the world. In their totality, the proposals (particularly those
that create income realization events when a gift is made) suggest a
worsening of the situation for Americans abroad. That said, one
proposal ``might'' (depending on Treasury) allow for the relaxation for
the 877A Exit Tax rules, for a narrow group of Americans abroad under
certain circumstances.
We would like to highlight six proposals in the Green Book that could
have a disproportionate effect on Americans abroad:
1. Raising The Corporate Tax Rate To 28 percent--Creating Subpart
F Income and Making More Americans Abroad GILTI--Page 2.
2. Reducing Phantom Gains and Losses: Simplify Foreign Exchange
Rate and Loss Rules for Individuals and Exchange Rate Rules for
Individuals--Page 90.
3. Strengthening FATCA: Provide for Information Reporting by
Certain Financial Institutions and Digital Asset Brokers for the
Exchange Of information--Page 97.
4. Expatriation--The Stick: Extend the Statute of Limitations for
Auditing Expatriates to Three Years from The Date from Which 8854
Should Have Been Filed (Possibly Forever)--Page 87.
5. Expatriation--The Carrot: Exempting Certain Dual Citizen
Expatriates from The Exit Tax--Page 87.
6. Reform the Taxation of Capital Income--Page 30.
1. Raising the Corporate Tax Rate to 28%
The Internal Revenue Code is a complex machine with many interdependent
moving parts. Even a change as conceptually simple as raising the
corporate tax rate can cause unforeseen problems due to interactions
within the tax code. Raising the corporate tax rate will adversely
affect Americans abroad with corporations. Unlike Americans living
inside the U.S., when Americans abroad own a small business
corporation, that corporation is likely to be ``foreign'' and therefore
considered a Controlled Foreign Corporation (CFC) under rules found in
951 to 965 of the Internal Revenue Code. Increasing the U.S. corporate
tax rate will affect the ability of American entrepreneurs abroad to
avoid double taxation through exclusions to both Subpart F income and
GILTI based on the ratio of the effective corporate tax rate paid where
they live and the U.S. corporate tax rate. Furthermore, as noted in the
Green Book, increasing the corporate tax rate has the effect of
increasing GILTI. GILTI and the CFC rules, applied to small businesses
run by individual Americans abroad, constitute an additional cost that
their local competitors do not bear and therefore erode the competitive
position of these entrepreneurs solely because they are American
citizens.
2. Reducing Phantom Gains and Losses
All American citizens are tethered to the U.S. dollar as their
functional currency. Yet they live their lives in the currency of the
country where they reside. Every taxable transaction that takes place
in that foreign currency must be converted to the U.S. dollar to
determine its U.S. tax impact. Many Americans abroad have experienced
the pain of having to pay tax on phantom capital gains. Where an
American abroad has a mortgage on their principal residence, these
rules operate separately on the mortgage and the value of the home,
guaranteeing that there will be a currency gain on one leg of the
position and a loss on the other. However, to add insult to injury,
with respect to personal use real estate, the gains are taxable, but
the losses are not deductible. This peculiar form of the American
nightmare is found in Internal Revenue Code 988. The proposal to allow
currency losses on a mortgage to the extent of gain realized on the
home solves half of this problem. The other side of the transaction
should be recognized as well by exempting currency gains on the
mortgage to the extent of losses on the home.
3. Strengthening FATCA
The Green Book recognizes:
1. The importance of information exchange; and
2. The fact that the U.S. is not meeting its exchange obligations
under the FATCA IGAs.
This proposal is an attempt to strengthen FATCA (which is why it is of
interest to individuals) by requiring the U.S. to meet its obligations
under the FATCA IGAs. The current lack of reciprocity has made the U.S.
one of the biggest tax havens for non-Americans. But FATCA has an ugly
side as well. Across Europe it has caused financial institutions to
deny or limit bank accounts to U.S. citizens residing abroad. As
regularly suggested by the Taxpayer Advocate, Treasury should use the
discretion granted by Congress to exempt from FATCA reporting (by both
FFIs and individuals) accounts held by individuals resident in the
country or economic zone where the account is located. Americans abroad
are not evading U.S. taxes by having their wages deposited in a bank
account where they live.
4. Expatriation: Extend the Statute of Limitations for Auditing Form
8854
Apparently, there are ``expatriates'' who fail to file Form 8854. This
change would allow for IRS audits of expatriates who fail to file Form
8854 for up to three years from the date Form 8854 is filed, thus
leaving the statute of limitations open if the form is not filed. It
would be interesting to know whether this proposal is intended to be
retrospective. This change would definitely encourage more people to
avail themselves of the provisions in the 2019 ``Relief Procedures For
Former Citizens''.
5. Expatriation: Exempting Certain Dual Citizen Expatriates from the
Exit Tax
``Expatriation'' is defined as either ``relinquishing U.S.
citizenship'' or ``Ceasing to be a Permanent Resident''. The Internal
Revenue Code defines the tax consequences of ``expatriation'' in 877A
(which for the definitions of ``covered expatriate'' and ``long term
resident'' reference 877(a)(2) and 877(e)(2) respectively). The 877A
Exit Tax rules are harsh and extremely punitive as applied to U.S.
citizens living outside the United States who have little connection to
the United States.
Actually, the idea of the United States imposing worldwide taxation on
individuals with no residential connection to the United States is
absurd. Many of them don't know they are considered to be U.S.
citizens. Others learn they are U.S. citizens because they are
identified by a bank pursuant to the FATCA IGAs. A significant
percentage don't speak English. It is entirely reasonable that these
individuals should NOT be subjected to any aspect of U.S. worldwide
taxation, including the 877A Exit Tax. Furthermore, the Green Book
frankly admits that there is significant noncompliance with filing Form
8854. Therefore, in a remarkable and unusual instance of common sense,
the Green Book proposes an exemption from the Exit Tax rules for
certain ``dual citizens'' (whether dual citizens at birth or not). . .
Query: Is this an admission from the Biden administration that for the
purposes of U.S. taxation there really is a difference between U.S.
citizens who live within the United States and those who live without
the United States? Could this possibly be treated as a ``crack in the
wall''--of that most American tradition--the notion that it should
impose worldwide taxation on individuals with no residential connection
to the United States?
Conclusion: This proposal would appear to grant Treasury the authority
(whether by formal regulation or informal notice) to exempt certain
dual citizens from the 877A Exit Tax rules. In other words, they can
renounce and simply be done with the USA once and for all. This
proposal is clearly in the interest of the United States of America (it
is generating a lot of bad will over this issue), the IRS (clearly the
biggest victim of U.S. citizenship-based taxation) and the individuals
impacted (who are being taxed on non-U.S. income while they are tax
residents of another country). What's not to like?
The real problem is the continued existence of U.S. citizenship-based
taxation. The time has come to ``Stop Extraterritorial American
Taxation.''
That said, this proposal would provide relief for the individuals who
are most unjustly treated under an extremely unjust tax system. If
adopted, this would become one more example of what SEAT members John
Richardson, Dr. Karen Alpert, and Dr. Laura Snyder have previously
proposed as ``A Simple Regulatory Fix For
Citizenship-based Taxation.''
6. Reform the Taxation of Capital Income
One of the proposals here is to treat transfers of appreciated property
by gift or on death as realization events for the purpose of taxing the
capital gain.
For Americans abroad the impact of treating gifts as income realization
events is (at least) two-fold:
First, Americans abroad may be subject to a U.S. income recognition
event where there may be no corresponding income recognition event in
the country where they reside. This is because the United States might
be imposing tax where there was no actual income realization. The
country of residence may impose taxation only where there is the
realization of income. To the extent that this creates a U.S. tax event
without a corresponding realization event in the other country, the
proposed taxation on gifts would be similar to the effect of the
Subpart F, GILTI, Transition Tax and 877A Exit Tax rules. All of these
are examples where there is a U.S. income realization event with no
corresponding taxable event in the country of residence.
Second, the Green Book proposes an exemption for gifts made to U.S.
citizen spouses but NOT to spouses who are not U.S. citizens! This
continues the U.S. tradition of imposing punitive tax consequences on
those U.S. citizens who marry non-citizens.
Finally, as goes the complexity of U.S. taxation so goes the difficulty
of continuing the U.S. extraterritorial tax regime! The proposed
treatment of gifts as income realization events would be one more step
in a process of making it impossible for Americans abroad to survive
under both the tax system of their country of residence and the U.S.
tax system.
It is time for the United States to abolish citizenship taxation--the
imposition of U.S. worldwide taxation on people who live in and are tax
residents of other countries. Instead, the U.S. should join the world
in adopting residence taxation.
Thank you for your attention to these matters.
Respectfully submitted by:
Stop Extraterritorial American Taxation (SEAT) Board Members
(info@seatnow.
org):
Dr. Laura Snyder (President)
Dr. Karen Alpert
Suzanne Herman
David Johnstone
Keith Redmond
John Richardson
______
Stop Extraterritorial American Taxation (SEAT)
3 impasse Beausejour
78600 Le Mesnil le Roi
France
[email protected]
http://www.seatnow.org
April 14, 2022
Please accept this as our second submission with respect to the subject
of the April 7, 2022 Senate Finance Committee Hearing: ``The IRS, the
President's Fiscal Year 2023 Budget, and the 2022 Filing Season.''
The United States is the only developed nation to impose its tax code
on all citizens, regardless of where they live, using the same rules
for both domestic and international taxpayers. Most other countries
assert the right to tax the worldwide income of residents, but not of
non-resident citizens. The U.S. taxes the worldwide income of both
residents (regardless of citizenship) and non-resident citizens.
Because the Internal Revenue Code has many special and punitive rules
for ``foreign'' income, assets, and investments, this means that U.S.
tax rules have a very different impact on overseas Americans than on
their U.S.-resident counterparts. Compliance issues are particularly
difficult for those with no access to IRS in-person assistance while
facing complex international information reporting requirements. While
SEAT strongly advocates for a move to taxation based on residence only
(as widely practiced in the rest of the world) rather than including
citizenship as a criterion for taxing worldwide income, if citizenship-
based taxation is to continue, it is incumbent on Congress to carefully
consider the impact of new legislation on this subset of American
citizens.
In this submission we would like to focus on four aspects of
Commissioner Rettig's testimony at the hearing:
1. Customer Service Backlog and Paper Returns.
2. Identity verification and Online accounts.
3. In person assistance.
4. Disaster Relief and Advance Child Tax Credits.
Many of the points made are not new. We refer the committee to
``Mission Impossible: Extraterritorial Taxation and the IRS,'' by Laura
Snyder, Karen Alpert, and John Richardson (Tax Notes Federal, Volume
170, March 22, 2021).
1. Customer Service Backlog and Paper Returns
Americans abroad are much more likely to file paper returns rather than
e-filing. One of the main drivers of this trend is that Americans
abroad are more likely to be married to non-resident aliens, and most
tax preparation software does not deal well with the situation where an
NRA spouse does not have a U.S. Social Security number. The IRS should
ensure that all free-file providers will allow e-filing of a Married
Filing Separate return where the spouse is an NRA without a social
security number.
When an American abroad has an issue with their tax return, they often
have difficulty getting appropriate assistance from the IRS. Most IRS
service agents are not trained in the issues that frequently arise on
an international return, such as non-U.S. retirement savings, non-U.S.
business or trust structures, and the treatment of non-U.S. government
assistance or welfare payments. When contacting overseas taxpayers, the
IRS uses postal mail, which has recently experienced severe delays due
to the pandemic. Even before the pandemic, taxpayers were reporting
that they were receiving IRS correspondence months after it had been
mailed. Add to that the abysmal record of the IRS in answering taxpayer
phone enquiries, and the service level experienced by Americans abroad
is well below the poor level of service experienced domestically.
Finally, the persistence of the IRS in sending paper checks for refunds
to overseas taxpayers is causing particular difficulty. For those
without a U.S. bank account, cashing a U.S. check can be prohibitively
expensive, if it is even possible. Much of the rest of the world has
discontinued the use of paper checks, and in some countries,
individuals report that they are unable to find a bank that is willing
to accept a U.S. check at all.
2. Identity verification and online accounts
Many Americans abroad report difficulty in accessing their IRS accounts
online, often due to the requirement of using a U.S. phone number for
verification. If the IRS is to be expected to administer a truly
international tax system to provide the minimum level of service for
Americans abroad, they must find a way to verify identity that does not
rely on having a U.S. presence.
3. In person assistance
In his testimony, Commissioner Rettig noted that the IRS provides many
opportunities for taxpayers to receive free in-person assistance at IRS
Taxpayer Assistance Centers or through the Volunteer Income Tax
Assistance program. All of these programs are available only to
taxpayers currently living inside the U.S. If the U.S. is to continue
its practice of taxing non-resident citizens, those U.S. taxpayers
residing outside of the U.S. deserve the same level of taxpayer
support. In the 1980s the IRS had 15 overseas posts in consulates
around the world. These were progressively closed until the last four
closed in 2014 and 2015. The only way for international taxpayers to
access in-person support in an accessible location is to pay for
assistance from a U.S. tax professional. This fee is incurred
regardless of whether any U.S. tax is owed (and about 55 percent of
returns filed from overseas show no tax owed). Americans overseas are
not the wealthy tax dodgers of popular myth. They include people from
all walks of life, homemakers, minimum wage workers, and middle-class
families in addition to a small number of high net worth individuals.
For some, the compliance cost of meeting their U.S. tax obligations is
excessively expensive, especially when compared with their minimal (or
zero) U.S. tax liability.
4. Disaster Relief
While the last three point dealt with IRS service issues, this final
issue addresses inequities in the tax code that would require
Congressional action to correct. By basing jurisdiction to tax on both
citizenship and residence, the U.S. has taxpayers who live in all
countries of the world. When tax breaks or relief is based on physical
presence in the U.S., those U.S. taxpayers residing outside of the U.S.
are specifically denied the tax breaks or relief allowed to similarly
situated taxpayers resident inside the U.S. How can such a tax system
be ``fair and just''?\1\
---------------------------------------------------------------------------
\1\ The right to a ``fair and just tax system'' is included in the
Taxpayer Bill of Rights in IRC Sec. 7803(a)(3)(J).
Currently, any taxpayer affected by a federally declared natural
disaster is eligible for extensions to file or pay taxes and the
ability to claim disaster-related casualty losses. By definition, this
applies only to disasters that occur inside the United States. However,
U.S. taxpayers residing outside of the U.S. may be affected by
disasters that are just as terrible as those eligible for U.S. tax
relief. By limiting disaster losses to losses incurred in a federally
declared disaster zone, Congress is effectively saying that the
Australian Black Summer bushfires in 2019-20 are less worthy of relief
than the California wildfires in 2017 and 2018; and that the victims of
the earthquake that hit Haiti in January 2010 are less worthy of relief
than victims of Hurricane Katrina. While there will be fewer U.S.
taxpayers affected by non-U.S. disasters, their pain and financial
suffering is no less. Equal treatment requires that non-resident
taxpayers be afforded similar treatment when faced with surviving a
---------------------------------------------------------------------------
natural disaster.
Similarly, the Advance Child Tax Credits available in 2021 were
available only for children residing inside the U.S. There were
American citizen children living outside the U.S. who were just as
severely impacted by the pandemic and resulting economic disruption.
These children, however, were generally forced to wait until their
parents were able to file their 2021 tax return before receiving the
Child Credits provided by Congress.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
Thank you for your attention to these matters.
Respectfully submitted by:
Stop Extraterritorial American Taxation (SEAT) Board Members
(info@seatnow.
org):
Dr. Laura Snyder (President)
Dr. Karen Alpert
Suzanne Herman
David Johnstone
Keith Redmond
John Richardson
______
Letter Submitted by Steven Clark Seeds
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I moved with my family, aged 14, to Canada in 1968; my father was
transferred by his employer, Crown Zellerbach Corp. I finished school
and university in Canada and was granted a Canadian passport, travelled
for nearly a year and arrived in the UK in 1977, where I've lived and
worked ever since. As an American by birth, I was required to get a
U.S. passport in the mid-2000s. I spent nearly $10,000 establishing
``compliance'' re U.S. tax, and now regularly spend a considerable
sum--and many hours--preparing and paying for an international tax
accountant to file yearly with the IRS on my behalf.
I have the vote in the UK, and I registered to vote in the last state
in which I was resident (Louisiana) in 2021. I never will earn enough--
and have never in the past earned enough--to pay any U.S. income tax
whatsoever. I am not at all happy about renouncing my U.S. citizenship,
which is not only hugely expensive and time-
consuming (with a very long waiting list in the UK)--but primarily
because I am a proud American.
My financial life is entirely in the UK, and my income is subject to
full taxation under the laws of the UK. I try very hard indeed to
fulfill the requirements of the U.S. tax system in addition to the tax
requirements in here in the UK. The reality, though, is that the U.S.
requirements (especially the myriad of required informational filings)
get increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson explain that the failure of
the IRS to provide access to the following services, individually and
collectively, constitute violations of the Taxpayer Bill of Rights:
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report (released in July of 2015), it was
stated that:
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Yours most sincerely
Steven Clark Seeds
______
Letter Submitted by Ronald Walther
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
In 1975, after an employee relocation of my father ended, my German
parents decided to return home. I was a child at that time but born in
the A. The family has remained in Germany since then. Due to my German
father I also have German citizenship.
Forty-seven years later it turns out, that the USA sees returning home
of a family as a kind of wrongdoing of anyone who had the misfortune to
be born at the wrong place (in my case the USA). The USA sees anyone
born on it's territory but not residing in the U.S. as a sort of ``tax
cheat'' to be hit by sanctions, no matter if this was ever intended or
not.
What are these sanctions in detail?
- The necessity to file a U.S. federal tax declaration in a for me
foreign language (in my case English) under highly complex rules (more
than 400 pages instructions) without any help in a for the taxpayer
usable form (no written German instructions available). This results in
very high costs for specialized tax advice for 0 (zero) tax due. (To
avoid misunderstandings: I pay plenty of German taxes on my income.)
- The necessity to declare all ``accounts'' under a procedure that
was intended to catch high profile criminals (FBAR) under the threat of
economical destruction for even the smallest mistakes. Also here: no
written German information available.
- To be hit by sanctions by the finance industry because this
industry is sanctioned themself for having me as customer due to costly
but useless FATCA reporting.
- To accept to remain an employee for my lifetime, because highly
complex (and thus very expensive) U.S. tax reporting for business
owners would immediately choke off all attempts to start and continue
an own business in the country I live in. One can call this a lifetime
occupational ban.
- To be entirely and constantly ignored by any political party in
the USA. It feels like being a second-class citizen.
My financial life is entirely in Germany, and my income is subject to
full taxation under the laws of Germany. I try very hard to fulfill the
requirements of the U.S. tax system in addition to the tax requirements
in Germany. The reality, though, is that the U.S. requirements
(especially the myriad of required informational filings) get
increasingly burdensome every year, and the compliance costs for
knowledgeable tax preparers are egregious.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
The right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
The right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
The right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
The right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
---------------------------------------------------------------------------
\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
---------------------------------------------------------------------------
\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
---------------------------------------------------------------------------
F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
Ronald Walther
______
Letter Submitted by Edward Francis Wundheiler
Dear Chairman Wyden, Ranking Member Crapo, and Members of the
Committee:
I am an accidental American born and raised overseas. My father was
holocaust survivor who immigrated to United States, joined the Army,
fought in Korean War, became a veteran and had to move overseas. We
ended up living our entire life in Brazil. However, I am a registered
voter in New York State where I have family ties.
My financial life is entirely in Brazil, and my income is subject to
full taxation under the laws of Brazil which is already a tax nightmare
well know globally. I try very hard to fulfill the requirements of the
U.S. tax system in addition to the tax requirements in Brazil. The
reality, though, is that the U.S. requirements (especially the myriad
of required informational filings) get increasingly burdensome every
year, and the compliance costs for knowledgeable tax preparers are
egregious.
The extraterritorial application of the U.S. federal income tax system
is a painful issue for the 9 million U.S. citizens who reside outside
the United States. In a survey \1\ of 1,564 overseas resident citizens
conducted by Stop Extraterritorial American Taxation (``SEAT''), an
independent, non-partisan not-for-profit association, 46% of
participants agreed with the statement ``I pay significant fees for
preparation of U.S. tax return but owe nothing in U.S. taxes,'' with
41% of those who engaged a professional preparer paying more than
$1,000 in fees.
---------------------------------------------------------------------------
\1\ http://seatnow.org/survey_report_intro_page/.
This is a reflection of the burden non-residents face due to complex
information reporting requirements related to ordinary banking,
investment and pension products which are ``foreign'' to the United
States but just a part of living an ordinary financial life in one's
---------------------------------------------------------------------------
country of residence.
The uniquely American definition of ``tax residency'' includes the
imposition of taxation on the worldwide (including non-U.S. source)
income of persons who are tax residents of other countries. This system
requires the IRS to do the impossible: to administer not only a
domestic tax system for U.S. residents and a system of source taxation
for non-resident aliens, but also an extraterritorial one whose details
are defined by unique interactions with the tax codes of other
countries in the world.
Administering an extraterritorial tax system has become an overwhelming
task, both procedurally and substantively. The IRS cannot remotely
serve U.S. tax residents in the more than 100 countries in the world
where they live, let alone in the languages that they speak. Nor can
the IRS know how U.S. laws apply to the local financial services, small
business structures, and retirement savings plans that are common in
all those other countries.
Indeed the IRS itself has identified ``international taxpayers'' as a
community which is underserved by the IRS. Although the IRS's
Publication 54, ``Tax Guide for U.S. Citizens and Resident Aliens
Abroad,'' is helpful, it does not adequately enable non-resident
taxpayers to understand their U.S. tax obligations in the context of
the financial systems of the countries in which they live. Since IRS
guidance is not sufficient for non-resident taxpayers to accurately
understand how the U.S. tax system applies to them, they require the
support of professional tax service providers, which is unaffordable
for many.
The IRS's inability to provide non-resident taxpayers with essential
services violates several aspects of the Taxpayer Bill of Rights,
including the following:
the right to be informed, including the right to know what to do
to comply with tax laws and the right to receive clear explanations.
the right to quality service, including the right to receive
prompt service and clear and easily understandable communications from
the IRS.
the right to pay no more than the correct amount of tax,
including the right to have the IRS apply all tax payments properly.
the right to a fair and just tax system, including the right to
expect the tax system to consider facts and circumstances that might
affect taxpayers' underlying liabilities and ability to timely provide
information.
In order for the IRS to fairly administer the system of
extraterritorial taxation which the United States currently imposes,
the IRS must provide equal levels of service to both taxpayers resident
in the United States and non-resident U.S. citizens. The level of
service currently provided by the IRS is highly unequal.
In a paper entitled, ``Mission Impossible: Extraterritorial Taxation
and the IRS'' published in the Tax Notes Federal journal, authors Laura
Snyder, Karen Alpert and John Richardson \2\ explain that the failure
of the IRS to provide access to the following services, individually
and collectively, constitute violations of the Taxpayer Bill of Rights:
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\2\ Snyder, Laura, et al. ``Mission Impossible: Extraterritorial
Taxation and the IRS,'' Tax Notes Federal, Volume 170, March 22, 2021.
In-person assistance.
Toll-free telephoning.
Knowledgeable IRS agents.
Online accounts.
E-filing.
Timely delivery of postal mail.
Use of other languages.
Explanations of tax obligations.
Making payments to the IRS.
Receiving payments from the IRS.
Third-party assistance.
Low income taxpayer clinic.
IRS internal organization.
According to Snyder, et al., these failures when considered as a whole,
``manifest a systemic pattern of discriminatory treatment of
international taxpayers as compared with domestic taxpayers. The
collective failures are evidence that the IRS is either unable or
unwilling to administer an extraterritorial tax system.''
With limited ability to interface with non-resident taxpayers, the IRS
has shut itself off from taxpayers, and as a result is unable to
determine whether the taxpayer is providing accurate information,
unless the IRS selects his or her return for audit. For their part,
Americans living abroad are subject to potentially devastating
penalties for failure to file a variety of documents accurately, even
for inadvertent non-compliance. According to the SEAT survey, 80%
``experience personal stress in relation to U.S. taxation,'' a large
part of which is due to the constant sense of fear because of the
excessive penalties that could be applied for making an honest mistake
in tax compliance. The inability of the IRS to address their questions
makes it more likely that filers will get it wrong. As a result, the
inaccessibility of these basic services leads to further non-
compliance, as evidenced by the low rate of filing compared to domestic
citizens.
The IRS should take immediate steps to address the many valid concerns
that have been raised by Americans abroad. If the IRS is unwilling or
unable to administer a system of extraterritorial taxation, then it is
time for Congress to take action to cease the imposition of tax on the
non-U.S. source income of non-residents. The cost-benefit analysis of
the impact of a transition from
citizenship-based taxation to a residence-based system of taxation
should include an assessment of the investments which would be required
to enhance the capabilities of the IRS to provide fair and equitable
support to non-resident taxpayers under the current system.
The practice of imposing U.S. worldwide taxation on individuals, who
are tax residents of other countries, because of their citizenship is a
uniquely American practice. In 2015, the Senate Finance Committee
embarked on an extensive study of the U.S. international taxation. On
the last page of the 82-page report \3\ (released in July of 2015), it
was stated that:
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\3\ https://www.finance.senate.gov/imo/media/doc/
The%20International%20Tax%20Bipartisan
%20Tax%20Working%20Group%20Report.pdf.
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F. Overseas Americans
According to working group submissions, there are currently 7.6
million American citizens living outside of the United States.
Of the 347 submissions made to the international working group,
nearly three-quarters dealt with the international taxation of
individuals, mainly focusing on citizenship-based taxation, the
Foreign Account Tax Compliance Act (FATCA), and the Report of
Foreign Bank and Financial Accounts (FBAR).
While the co-chairs were not able to produce a comprehensive
plan to overhaul the taxation of individual Americans living
overseas within the time-constraints placed on the working
group, the co-chairs urge the Chairman and Ranking Member to
carefully consider the concerns articulated in the submissions
moving forward.
It is now 2022 and there has been no consideration of the taxation of
U.S. citizens who live outside the United States as tax residents of
other countries. Notably, in the Spring of 2021, the Senate Finance
Committee conducted numerous hearings about international tax issues.
In spite of numerous submissions by impacted individuals and advocacy
groups, the issues of Americans abroad were not considered. No one
representing Americans abroad was invited to be a witness.
The combination of U.S. citizenship-based taxation and FATCA is
destroying the lives of U.S. citizens living outside the United States
who are bona fide residents (and tax residents) of other countries.
Issues causing a particularly devastating impact include:
1. Double taxation--due to misalignment of tax systems--that
cannot be mitigated using the Foreign Earned Income Exclusion, Foreign
Tax Credit, or existing Tax Treaties.
2. Disproportionately high tax-preparation costs and excessive
compliance risks associated with information reporting required for
financial assets held in a U.S. citizen's country of residence, which
harms ordinary Americans who are unable to afford sophisticated tax
preparers, which (as noted) can be prohibitively expensive even if no
tax is owed.
3. Excessively large and regressive penalties related to
information reporting errors that far exceed taxes owed or balances of
accounts concerned and individuals' ability to pay.
4. Americans abroad with a non-U.S. citizen spouse facing
discriminatory treatment in the tax code and greater difficulty in
meeting filing obligations due to the lack of a Social Security Number
for their spouse.
5. Corporate tax rules intended to apply to overseas subsidiaries
of multinational corporations that are applied to small businesses
owned by Americans residing abroad, resulting in unreasonably high
compliance costs and punitive taxation of undistributed income.
6. A lack of access to necessary financial products and services
caused by a mix of burdensome reporting obligations and punitive
treatment of local products in the U.S. tax code.
I urge the Senate Finance Committee to hold a hearing focused on the
difficulties U.S. citizens who reside outside the United States are
facing in navigating the increasingly complex extraterritorial tax
compliance regime that the U.S. imposes on its non-resident citizens.
These issues are not well known or understood, but they are a
tremendous burden on millions of ordinary people who happen to live
overseas.
The best solution to this problem is for the U.S. to come into
alignment with every other developed nation on the planet and move to a
residence-based taxation system for individuals. U.S. citizens who are
tax residents of other countries would continue to be liable to pay
U.S. Federal income tax on any income which is effectively connected
with the United States, as all non-resident aliens do, by using Form
1040-NR instead of Form 1040.
Thank you for your attention to this matter.
[all]