27 July 2018 Senate Finance Subcommittee examines ways to modernize tax administration Portman says new bipartisan package of IRS reforms would overhaul Oversight Board and appeals process, protect taxpayers, strengthen agency's technology The Senate Finance Subcommittee on Taxation and IRS Oversight on July 26, 2018, held a hearing on "Improving Tax Administration Today." The witnesses were: — Phyllis Jo Kubey, member of the National Association of Enrolled Agents and the IRS Advisory Council Materials from the hearing are posted here, and PDFs of member statements and witness testimony are also attached with this Alert. Also attached please find a PDF of the text of the "Protecting Taxpayers Act" that subcommittee Chairman Rob Portman (R-OH) introduced with Ben Cardin (D-MD), as well as a press release from the senators with a summary of its provisions. In his opening statement, subcommittee Chairman Portman said the hearing would focus particularly on IRS issues such as "customer service, information technology, interaction with practitioners, low-income taxpayers, and tax administration issues related to workers in the gig economy and 1099 filings." Portman said that during the late 1990s, there was a clear need for reform at the IRS as questions for the agency "went unanswered by the thousands, and the calls that were answered were often incorrect. The agency had also spent $3 billion on IT systems that weren't working." In response, Congress established a commission that Portman co-chaired, which published a comprehensive report that became the basis for a 1998 bill that "led to a long period of substantial improvements at the IRS. Unfortunately, in recent years that period … has unraveled, as the agency suffers from some of the same issues that plagued it in the mid-1990s." For that reason, Portman said he and Sen. Cardin had introduced the Protecting Taxpayers Act, which aims to reform the IRS by: 1) increasing taxpayer protections and modernizing enforcement procedures; 2) improving small business and retirement plan tax administration; 3) better serving low-income taxpayers; 4) overhauling the IRS appeals process; and 5) strengthening the IRS IT infrastructure. Portman highlighted the fact that the bill "completely rethinks" the IRS Oversight Board created by the 1998 law, which suspended operations a few years ago, and would reform the IRS Appeals process, "because access to independent appeals has declined as many cases are being sent to Tax Court and new regulations and guidance are issued." In his statement, delivered without notes, subcommittee Ranking Member Mark Warner (D-VA) said the nature of work is changing. "Classic W2 full-time employment is a thing of the past," partly driven by choices made by "millennials" working in the gig economy. Warner said workers today may have multiple income streams, and he has called for studies to be done by the GAO and Treasury to estimate the size of this workforce. Warner said he has seen estimates that at least a third of the U.S. workforce is earning income from "contingent work … . That means we need to move to a portable benefits system, and to do that we need to have some flexibility on the tax administration," including a discussion about junking the IRS's current legacy systems if necessary and updating them with new technology. Among the witness statements, Caroline Bruckner, managing director of the Kogod Tax Policy Center at American University, said she directed the Center's research on tax and compliance issues surrounding "self-employed small business owners who are renting rooms, providing ride-sharing services, running errands and selling goods to consumers in business transactions coordinated online and through app-based platforms." She said research showed that at least 2.5 million Americans are earning income via on-demand platforms every month during their peak months, their earnings "representing a sizeable but still secondary source of income." About a third did not know whether they were required to file quarterly estimated payments with the IRS on their on-demand platform income; while 36% did not understand what kind of records were needed for tax purposes for business income, and almost half did not know about any tax deductions, expenses or credits that could be claimed related to their on-demand platform income. "The failure of Congress to require that Form 1099 be provided to these small business taxpayers by the platforms they contract with … has significant consequences for taxpayers and the IRS," she said. "Taxpayers are more likely to misreport their income and face audit and penalty exposure." Among other recommendations, Bruckner said Congress should lower the filing threshold for Form 1099-K to $1,500, "to ensure at the very least taxpayers have the forms they need to file their taxes and claim any deductions or credits they may be entitled to in order to lower their tax liability." Phyllis Jo Kubey of the National Association of Enrolled Agents and the IRS Advisory Council said the size of the IRS Oversight Board should be reduced to five private-sector members — representing tax, legal and business expertise, and members should not be subject to Senate approval. The board should be empowered to review and approve all operational plans of agencies, and the IRS Commissioner should be required to certify annually to the Board that the IRS does not use enforcement or approval criteria based on political, religious or racial standards. Kubey said IRS should have a training division to increase competency and "create the appropriate culture," and Congress should re-establish an annual joint hearing charged with providing a detailed statement on levels of service and compliance. Nina Olson, the IRS National Taxpayer Advocate, said that because of budget cuts, "the IRS does not have enough employees to answer the phones, to conduct outreach and education or to provide basic taxpayer service." She said IRS telephone staff answered only 29% of the calls received on the Accounts Management lines during the recent filing season, and the audit rate has dropped to "the lowest level in memory" (0.6%), while collection actions have declined as well. Olson said the IRS's performance measures are misleading and often fail to identify areas of weakness, and she specified 11 core areas where the Service needs to be strengthened, such as: 1) Appointing a Chief Customer Experience Officer with cross-agency oversight of customer service strategy, and direct the IRS to develop and submit to Congress a comprehensive customer service strategy that reflects an "omnichannel" approach; 2) changing the "mailbox rule" to reflect the use of digital communication; 3) requiring the IRS to develop an online strategy that enables taxpayers to submit information to the IRS with a lower level of authentication; and 4) requiring IRS to submit to Congress a comprehensive plan for developing and funding requirements for Enterprise Case Management. John Sapp, chair of the IRS's Electronic Tax Administration Advisory Committee, said the ETAAC had published a report this year identifying potential gaps in the security standards covering the agency's individual and business income tax systems. Specifically, he said the most prevalent security standard currently covering "tax preparers" is limited to those serving consumers, while the tax system requires a high-level security standard, such as the one articulated in the FTC Safeguards Rule. Sapp said IRS's ability to "remotely identity-proof and authenticate taxpayers in a secure and reliable manner is a key enabler for electronic services … the IRS has constantly evolved its current Secure Access identity proofing platform, but it still has its limitations." He said the IRS should continue to collaborate with key stakeholders to help IRS identify, test and implement new identity-proofing and authentication solutions, and he encouraged IRS to consider options to expand in-person identity-proofing opportunities. Rebecca Thompson, director of the Taxpayer Opportunity Network at Prosperity Now, described the Volunteer Income Tax Assistance (VITA) program: "We endure a rigorous training regimen that can in some cases take as much as 24 hours, and pass a certification test annually, so that we are well-equipped to translate what can be a daunting and complex tax code for our clients into a meaningful representation of the life of the people we serve. We do it through conversational interviewing, using IRS Form 13614-C as a guide, to ensure we deliver high-quality, accurate returns for the low-income, underserved, elderly, rural, disabled and limited-English-speaking populations across America." Ranking Member Warner noted the advent of new on-demand services in the gig economy, and that in the past, there was a sense that companies' platforms have been unwilling to provide any benefits such as tax planning, "because of 1099 versus W2" concerns. He asked Bruckner if her research showed that "sliding from independent contractor to traditional employee has restrained workers from getting planning help." Bruckner said that, as an example, Lyft's 1099K filing rules "did a disservice to filing providers — they made a decision to provide 1099K's at $600 instead of a $20,000 threshold … The consensus is that it's not required by law, that they're consistent with law, so the law needs to change." Warner asked Olson, the taxpayer advocate, if there is "an ability to give you a formula that for every hour worked or individual helped, we increase tax compliance by Y? Broken down into individual or hourly basis?" Olson said that few VITA outfits are able to do simple schedule C preparation — "they have small schedule C's, so a bill authorizing VITAs should say clearly that one of the tasks they can do are schedule C's or schedule F's for family farmers." Turning to the IRS's need for updated technology, Warner said, "When we have enterprises like Equifax with no customer relationship, it increases chance of tax fraud. What sort of liability regime or incentives should be in place for enterprises that have access to tax information?" Sapp said that it was a liability for the government in general whenever a tax return is sent to an inappropriate party: "The IRS does diversify entry points to include in-person and online authentications, but the challenge is that we have a diverse population — the ways they want to interact with IRS are diverse. How does a person interact with an Equifax? You can go to a different credit reporting bureau, but you cannot go to a different IRS." Chairman Portman noted that Kubey had offered a series of recommendations for revitalizing the IRS Oversight Board, which the new Portman-Cardin bill addresses. "You mentioned it should have the power to review and approve all operational plans; in our bill we address this by being more explicit in the type of plans they could approve, like an annual performance report." He asked what value she saw in giving the board more authority over operational and strategic plans. Kubey said, "I echo what you say, that IRS has plenty of oversight — we applaud the change of language to a management function. I see the alignment of higher level and management function, operations and rewards for successful outcomes to be highly correlated. I don't want to have oversight or management functions without the power to also monitor operational functions. You could have one point of view from the top — and if the Service is going off and doing something else, you would not have the implementation you want." Olson told Portman that she found the board in 2001 "to be composed of very engaged individuals with a range of experiences … the battle came when IRS leadership and Treasury did not support the board and saw it as intrusive. It came to a head when the board tried to weigh in on IRS performance measures — the IRS really fought that, and that became a part of the demise of the board." Olson thought the board should be authorized to look at performance measures and hold the senior leadership accountable, as would happen in the private sector. Portman said his bill "doesn't go as far as what you're saying." Later in the hearing, Portman asked Sapp about the difficulty of managing the balance between the ease of use provided by "e-services" and the problems associated with authenticating users. Portman said many people who try to set up online accounts at the IRS failed because of the authentication rules. "How could IRS incorporate ideas and comments from stakeholders more effectively?" Sapp said ETAAC had evaluated different options for how IRS can authenticate people. "Taxpayers have different access to the internet or telephones — 30% might not be a bad number, but we need to get to 100% … The IRS has to solve that issue. One idea is the electronic filing program - they brought in stakeholders from the private sector. Some may need to do it in person, so why not use tax preparers and have them be trained in how to authenticate a taxpayer, and let the taxpayers leverage that" during their in-person appointments with preparers? Olson said the United Kingdom allows taxpayers to sign in to their accounts with Amazon or their banks, "and that message is sent back [to the agency] that you are who you say who you are." Olson said it was problematic that IRS has "the same level of security for pulling information out as they do for sending it in. So a taxpayer who just wants to send an email with a picture of a document has to be able to go through high authentication, even though they're not pulling any information or even accessing their account." Ben Cardin (D-MD) said one of IRS's chief problems is a lack of resources, and that the agency is challenged in its ability to deal with paid providers and private debt collection. Olson said she had recommended in 2012 that IRS have "a regulatory minimum competency regime around unenrolled return preparers … I really think that's vital to the future of IRS … . Preparers have no accountability or training … Congress should require them to declare themselves to the IRS." Sheldon Whitehouse (D-RI) highlighted statistics showing that the highest-earning taxpayers — 1,400 people who earn an average of $142 million — pay only a 24% average tax rate. He wondered if the low rate is "a function of the IRS's ability to deal with them … They have the ability to come to Congress and get favorable tax treatment legislatively. But to extent that these organizations and people have enormous clout to manipulate the IRS and outgun them and apply political pressure — how is that a factor in their low contributions?" Whitehouse also cited a "weird wrinkle" in which the Justice Department "won't prosecute a plain vanilla false-statements case unless the IRS has made a referral, which gives them a chokehold on those referrals. I believe with respect to 501c4's, the referral number is exactly zero, despite the evident discrepancies between what they report to IRS and the FEC." He asked the witnesses to respond in writing for the record. Whitehouse also mentioned these concerns at a separate Finance Committee confirmation hearing today on nominees to the Treasury and IRS. Chairman Portman said he hoped to get Protecting Taxpayers Act "across the finish line by the end of the year."
Document ID: 2018-1513 | |||||
