**Written Statement of**

**Nina E. Olson\
National Taxpayer Advocate**

**Before the**

**Subcommittee on Financial Services and General Government\
**

**Committee on Appropriations\
United States Senate**

**Hearing on**

**Internal Revenue Service FY 2008 Budget Request**

**May 9, 2007**

**TABLE OF CONTENTS**

[I. The Overriding Mission of the IRS Should Be to Increase Voluntary
Compliance
1](#the-overriding-mission-of-the-irs-should-be-to-increase-voluntary-compliance)

[II. Congress Should Provide Increases in IRS Personnel Funding at a
Steady but Gradual Pace, Perhaps Two Percent to Three Percent a Year
Above Inflation
1](#congress-should-provide-increases-in-irs-personnel-funding-at-a-steady-but-gradual-pace-perhaps-two-percent-to-three-percent-a-year-above-inflation)

[III. IRS Funding Increases Should Be Balanced Between Taxpayer Service
and Enforcement
1](#irs-funding-increases-should-be-balanced-between-taxpayer-service-and-enforcement)

[IV. The IRS Should Devote More Resources to Obtaining Better Research
to Improve its Strategic Planning and Resource Allocation Decisions
1](#the-irs-should-devote-more-resources-to-obtaining-better-research-to-improve-its-strategic-planning-and-resource-allocation-decisions)

[A. The IRS Can and Should Do a Better Job of Measuring the Impact of
Taxpayer Service on Compliance
1](#the-irs-can-and-should-do-a-better-job-of-measuring-the-impact-of-taxpayer-service-on-compliance)

[1. Measuring the Direct Effect 1](#measuring-the-direct-effect)

[2. Measuring Indirect Effects 1](#measuring-indirect-effects)

[3. Return Preparation 1](#return-preparation)

[B. The IRS Should Include the Cost of the Downstream Consequences of
Its Actions in Its Return on Investment (ROI) Calculations
1](#the-irs-should-include-the-cost-of-the-downstream-consequences-of-its-actions-in-its-return-on-investment-roi-calculations)

[C. The IRS Should Conduct Research, Organized by Taxpayer Segment, to
Better Understand Taxpayer Behavior and Taxpayer Response to IRS's
Various Service and Enforcement "Touches".
1](#the-irs-should-conduct-research-organized-by-taxpayer-segment-to-better-understand-taxpayer-behavior-and-taxpayer-response-to-irss-various-service-and-enforcement-touches.)

[V. The IRS Should Address the Impact of IRS Business Systems
Modernization Limitations on Both Taxpayer Service and Enforcement
Initiatives
1](#the-irs-should-address-the-impact-of-irs-business-systems-modernization-limitations-on-both-taxpayer-service-and-enforcement-initiatives)

[VI. Funding for the Private Debt Collection Initiative Should Be
Redirected to Fund Collection Activity by IRS Employees
1](#funding-for-the-private-debt-collection-initiative-should-be-redirected-to-fund-collection-activity-by-irs-employees)

[VII. Trends in Taxpayer Advocate Service (TAS) Case Inventory
1](#trends-in-taxpayer-advocate-service-tas-case-inventory)

[VIII. Conclusion 1](#conclusion)

[APPENDIX: TAXPAYER SERVICE ISSUES
A-1](#appendix-taxpayer-service-issues)

[I. The IRS Needs Additional Funding to Allow for the Implementation of
New Initiatives Designed to Improve Taxpayer Service
A-1](#i.-the-irs-needs-additional-funding-to-allow-for-the-implementation-of-new-initiatives-designed-to-improve-taxpayer-service)

[II. The IRS Should Not Reduce Critical Taxpayer Services
A-1](#ii.-the-irs-should-not-reduce-critical-taxpayer-services)

[A. IRS Has Substantially Reduced the Number of Returns It Prepares at
the TACs.
A-1](#a.-irs-has-substantially-reduced-the-number-of-returns-it-prepares-at-the-tacs.)

[B. The IRS Is Declaring Increasing Numbers of Issues "Out-of-Scope".
A-1](#b.-the-irs-is-declaring-increasing-numbers-of-issues-out-of-scope.)

[C. TACs Are Not Adequately Responding to Emergency Transcript Requests.
A-1](#c.-tacs-are-not-adequately-responding-to-emergency-transcript-requests.)

[D. Small Business Outreach Has Declined.
A-1](#d.-small-business-outreach-has-declined.)

[E. IRS Telephone Assistors Are Answering a Reduced Percentage of Calls
and Taking Longer to Do It.
A-1](#e.-irs-telephone-assistors-are-answering-a-reduced-percentage-of-calls-and-taking-longer-to-do-it.)

[III. The IRS Should Make It Possible for Taxpayers to Prepare and File
Their Tax Returns Electronically Without Paying a Fee
A-1](#iii.-the-irs-should-make-it-possible-for-taxpayers-to-prepare-and-file-their-tax-returns-electronically-without-paying-a-fee)

Mr. Chairman, Ranking Member Brownback, and distinguished Members of the
Subcommittee:

Thank you for inviting me to submit this written statement regarding the
proposed budget of the Internal Revenue Service for Fiscal Year (FY)
2008.[^1] I will address the mission of the IRS, the overall level of
funding I believe the agency should receive, the allocation of that
funding between enforcement and taxpayer service, and then a number of
important issues in tax administration in which I believe this Committee
may have an interest. I approach these issues from my perspective as the
National Taxpayer Advocate, the voice for taxpayers and taxpayer rights
inside the IRS.

# The Overriding Mission of the IRS Should Be to Increase Voluntary Compliance

In developing the IRS budget, the logical starting point is to consider
the IRS's fundamental mission. The IRS is the nation's tax collector,
and its overriding objective should be to maximize voluntary compliance
with the tax laws. In general, the IRS seeks to achieve compliance
through two main types of activity. First, it seeks to enable taxpayers
to comply with their tax obligations voluntarily. In most cases,
outreach, education, and taxpayer assistance are sufficient to produce
complete or substantial compliance. Second, it targets its enforcement
resources at taxpayers who are unwilling to comply with the tax laws.

Voluntary compliance -- as opposed to enforced compliance -- must be our
goal for two overriding reasons.

-   First, it is far preferable for our civic culture when taxpayers pay
    voluntarily rather than pursuant to enforcement action. We should
    strive to make sure taxpayers understand how the tax dollars they
    pay are used to protect and benefit them, and we should make
    compliance as easy as possible.

-   Second, enforced compliance is extremely expensive and therefore
    must be targeted narrowly. For FY 2006, the IRS reported that its
    face-to-face audit rate was 0.23 percent, meaning that only one out
    of every 435 taxpayers was audited in person.[^2] Even taking into
    account less comprehensive correspondence audits, the audit rate was
    less than one percent.[^3] Notably, IRS enforcement actions brought
    in only about two percent (\$48.7 billion)[^4] of total IRS
    collections (\$2.24 trillion).[^5] As the IRS has acknowledged, it
    is simply not realistic to close the tax gap one taxpayer at a time.

In my view, the IRS should go about maximizing voluntary compliance in
four ways:

1.  By improving its outreach and education efforts to minimize
    inadvertent errors attributable to tax law or procedural complexity
    or confusion;

2.  By conducting compliance-oriented audits to reinforce the perception
    that taxpayers may be audited;

3.  By utilizing all IRS collection alternatives while collecting tax
    debts to bring taxpayers into future compliance; and

4.  By reserving targeted enforcement actions to combat clear abuses.

In addition, the IRS should launch a public information campaign that
reminds taxpayers of what taxes really are about \-- the price we pay
for a civilized society.

# Congress Should Provide Increases in IRS Personnel Funding at a Steady but Gradual Pace, Perhaps Two Percent to Three Percent a Year Above Inflation

I strongly encourage the Committee to fund the IRS at approximately the
level requested by the Administration for FY 2008. In the National
Taxpayer Advocate's 2006 Annual Report to Congress, we recommended that
Congress provide the IRS with after-inflation increases of about two
percent to three percent a year for the foreseeable future. Assuming the
funds are wisely spent, I believe that increasing the IRS budget at this
rate is an excellent financial investment.

The IRS collects about 96 percent of all federal revenue.[^6] The more
revenue the IRS collects, the more revenue Congress may spend on other
programs or use to cut taxes or reduce the deficit. The less revenue the
IRS collects, the less revenue Congress has available for these other
purposes.

If the federal government were a private company, its management clearly
would fund the Accounts Receivable Department at whatever level it
believed would maximize the company's bottom line. Since the IRS is not
a private company, maximizing the bottom line is not -- in and of
itself -- an appropriate goal. But the public sector analogue should be
to maximize tax compliance, especially voluntary compliance, with due
regard for protecting taxpayer rights and minimizing taxpayer burden.
Studies show that if the IRS were given more resources, it could collect
substantially more revenue.

In his final report to the IRS Oversight Board in 2002, former
Commissioner Charles Rossotti presented a discussion titled "Winning the
Battle but Losing the War" that detailed the consequences of the lack of
adequate funding for the IRS. He identified 11 specific areas in which
the IRS lacked resources to do its job, including taxpayer service,
collection of known tax debts, identification and collection of tax from
non-filers, identification and collection of tax from underreported
income, and noncompliance in the tax-exempt sector.

Commissioner Rossotti provided estimates of the revenue cost in each of
the 11 areas based on IRS research data. In the aggregate, the data
indicated that the IRS lacked the resources to handle cases worth about
\$29.9 billion each year. It placed the additional funding the agency
would have needed to handle those cases at about \$2.2 billion.[^7]

Significantly, this estimate reflects only the potential *direct*
revenue gains. Economists have estimated that the indirect effects of an
examination on voluntary compliance provide further revenue gains. While
the indirect revenue effects cannot be precisely quantified, two of the
more prominent studies in the area suggest the indirect revenue gains
are between six and 12 times the amount of a proposed adjustment.[^8]

I want to emphasize that the existing modeling in this area is not
especially accurate, and estimates of both the direct and indirect
effects of IRS programs vary considerably. As I will discuss below, the
IRS needs to develop better modeling to produce more accurate
return-on-investment estimates. But I also want to emphasize that almost
all studies show that, within reasonable limits, each additional dollar
appropriated to the IRS should generate substantially more than an
additional dollar in federal revenue assuming the funding is wisely
spent.

# IRS Funding Increases Should Be Balanced Between Taxpayer Service and Enforcement

One of the most critical choices facing tax administration is how to
allocate resources between taxpayer service and tax-law enforcement.
While I believe that both categories would benefit from additional
funding, I am concerned that the IRS has been emphasizing enforcement at
the expense of taxpayer service.

Since FY 2004, funding for enforcement has increased substantially while
funding for taxpayer service has been reduced. For FY 2008, the
Administration has requested a funding increase of 6.5 percent for
enforcement (to \$7.2 billion) and 3.8 percent for taxpayer service (to
\$3.6 billion).[^9] *If the Administration's proposal is enacted,
funding for enforcement will have been increased by 19.4 percent and
funding for taxpayer service will have been reduced by 3.8 percent over
the five-year period, FY 2004-FY 2008.*[^10]

I am deeply concerned about this fundamental shift in the balance
between taxpayer service and enforcement. Under this proposal, the IRS
would be spending literally twice as much on enforcement as it spends on
taxpayer service. There is no reliable data showing that more
enforcement will do more than taxpayer service to increase compliance. I
believe the IRS can produce a positive return on investment from more
funding in both areas. But given limited resources, I think it is
misguided to ramp up enforcement at the expense of taxpayer service.

I discuss some of the specific consequences of this shortchanging of
taxpayer service in the Appendix to this testimony. However, I want to
emphasize that the concerns I am expressing about the relative shift in
emphasis from taxpayer service to enforcement do not reflect simply the
misgivings of a zealous taxpayer advocate. My concerns are shared by
former IRS Commissioner Rossotti. In a memoir about his experience
running the IRS from 1997 to 2002, Mr. Rossotti wrote:

> Some critics argue that the IRS should solve its budget problem by
> reallocating resources from customer support to enforcement. In the
> IRS, customer support means answering letters, phone calls, and visits
> from taxpayers who are trying to pay the taxes they owe. Apart from
> the justifiable outrage it causes among honest taxpayers, I have never
> understood why anyone would think it is good business to fail to
> answer a phone call from someone who owed you money.[^11]

Why is the IRS today putting greater emphasis on enforcement? My sense
is that there are two factors at play.

In the aftermath of the IRS Restructuring and Reform Act of 1998, the
IRS focused on improving taxpayer service, and its enforcement presence
declined. Some observers believe that the IRS's response to the 1998 Act
went too far and that the current emphasis on enforcement is needed to
restore the balance that existed previously. Significantly, this
reasoning rests on the premise that the relative balance between service
and enforcement that existed prior to 1998 -- when IRS answered
taxpayers' phone calls only 51 percent of the time[^12] -- was the
"correct" one.

That may or may not be the case. The IRS's current strategic formula,
"Service + Enforcement = Compliance,"[^13] does not contain any
coefficients. Did the improvements in service more than balance out the
reductions in enforcement, or did compliance suffer? There is no hard
data either way, so we're all left to make educated guesses.

In the absence of hard data, I do not believe it is sound public policy
to make a shift from helping taxpayers comply on the front end toward
clamping down on taxpayers on the back end. The government should prefer
to treat its taxpayers courteously and with respect. While enforcement
actions are clearly necessary, I think it is unwise to make a
significant shift in the relative emphasis on taxpayer service and
enforcement in the absence of data showing it would produce a
significant boost in overall tax compliance.

The second factor supporting more enforcement funding are the
congressional scoring rules. "Direct" enforcement revenue is "scorable,"
while current modeling does not permit economists to measure the
return-on-investment of funds spent on taxpayer service or on the
"indirect" (*i.e.,* deterrent) effect of enforcement spending. While
this is understandable, it may be leading to bad results. As I noted
above, direct enforcement revenue (\$48.7 billion in FY 2006) comes to
only about two percent of overall IRS collections. To make budgeting
decisions by striving to maximize two percent of collections without
grappling adequately with what is required to maximize the remaining 98
percent of collections is a bit like letting the tail wag the dog.

The Administration's FY 2008 budget request acknowledges this problem.
It states: "The IRS cannot currently measure either the impact of
deterrence or service, but they are positive."[^14] Then, having
acknowledged that the effects of spending that brings in 98 percent of
Federal revenue cannot be measured, the budget goes on to recommend the
use of a "program integrity cap." Under this concept, additional funding
can be provided that does not count against the budget caps if certain
conditions are satisfied, notably that the Congressional Budget Office
can certify the spending will produce a positive return on investment
and thus will not increase the budget deficit. *Since the return on
taxpayer service spending cannot be quantified, the "program integrity
cap" approach leads inexorably toward greater funding for enforcement.*

For the reasons I have described, I urge the Committee to consider
carefully the appropriate balance between taxpayer service and
enforcement in making funding decisions for the FY 2008 IRS budget. Many
aspects of taxpayer service are akin to a wholesale operation that
reaches groups of taxpayers (*e.g.,* outreach and education), while IRS
audits constitute a far more costly retail operation that requires
individual taxpayer contact. The IRS should pursue a balanced approach
to tax compliance that puts priority emphasis on improving IRS outreach
and education efforts, while reserving targeted enforcement actions to
combat clear abuses and send a message to all taxpayers that
noncompliance has consequences.[^15]

# The IRS Should Devote More Resources to Obtaining Better Research to Improve its Strategic Planning and Resource Allocation Decisions

As described above, the IRS currently does not know whether its next
dollar is better spent on taxpayer service or enforcement. It does not
know within either category where its funds can be most efficiently
deployed. The IRS will be much better off if it has better information
to guide its resource allocation decisions.

Congress should consider directing the IRS to undertake additional
research studies, perhaps utilizing the expertise of outside experts, to
improve the accuracy of its return on investment (ROI) estimates for
various categories of work, especially taxpayer service and the indirect
effect of enforcement actions, including the downstream costs of such
work. Improved methods should also be developed to verify,
retrospectively, the *marginal* ROI that the IRS has achieved for each
category of work.

Among other things, the IRS should measure and report to Congress on its
progress in handling all significant categories of work, including the
known workload, the percentage of the known workload the IRS is able to
handle and the percentage of the known workload the IRS is not able to
handle, the additional resources the IRS would require to perform the
additional work, and the likely return-on-investment of performing that
work.[^16]

## The IRS Can and Should Do a Better Job of Measuring the Impact of Taxpayer Service on Compliance

The Taxpayer Assistance Blueprint (TAB) notes that it is difficult to
measure the impact of taxpayer service on compliance. Of the private
sector and government entities that the TAB team surveyed, all had
concluded that customer service at least indirectly impacts their
organizations, but only one had attempted to empirically measure that
impact.

Although little work has been done in this area, I believe the IRS does
have the capability to develop useful estimates, and I am suggesting a
general framework for conducting this research. Measuring the compliance
impact of customer service would entail identifying a group of taxpayers
who received a particular service (the "treatment group") and an
otherwise comparable group that did not receive that service (the
control group). Compliance of both groups could then be measured on
returns filed subsequent to the receipt of service by the treatment
group. The three measures used to estimate the tax gap could be
applied -- payment compliance, filing compliance, and reporting
compliance.

We can determine the payment compliance of survey respondents by simply
observing whether the full tax liability was paid at the time of filing.
We can estimate their filing compliance by determining whether
non-filers appeared to have a filing requirement. To determine reporting
compliance, by far the biggest component of the tax gap, we could use
IRS-developed algorithms for estimating reporting compliance. These
algorithms have been updated based on results from the recently
completed National Research Program (NRP) and should provide good
preliminary estimates. The estimates could subsequently be validated
during the next NRP by comparing actual reporting compliance against
predicted reporting compliance based on the IRS algorithms.

### Measuring the Direct Effect

If we accept the above proposed framework as a valid means of estimating
compliance, surveys could then be designed and administered to identify
groups of taxpayers who did or did not receive certain services, such as
telephone or Internet assistance with tax law questions, Internet or
walk-in site (also known as Taxpayer Assistance Center or TAC)
assistance obtaining forms, etc. Subsequent compliance of those who
receive the service could then be compared to compliance for a
comparable group who do not. Taxpayer satisfaction with services
received might also be an interesting variable to examine.

### Measuring Indirect Effects

It is possible that taxpayer compliance behavior may be influenced by
knowledge and attitudes about IRS customer service offerings, even if
the affected taxpayers have not used those services. The same basic
proposed framework could be used to measure these indirect effects. We
would have to determine a set of relevant attributes to identify
taxpayer groups indirectly affected by IRS customer service offerings.
It seems to me that such attributes would probably include use,
awareness, access and general satisfaction level:

-   Use -- To be indirectly affected, a taxpayer could not have used the
    service in question (at least during the year being studied).

-   Awareness -- A taxpayer would have to be aware of the existence of a
    service to be influenced by it.

-   Access -- It seems likely that taxpayers who could access the
    service if they chose to are more likely to be influenced (e.g.,
    those living close to a TAC).

-   Satisfaction Level -- It seems likely that taxpayers having a
    generally favorable level of satisfaction with our services are more
    likely to be positively influenced (and vice versa).

Surveys could be administered to determine whether compliance was
impacted based on the values for the above attributes (or others
suspected of indirectly affecting compliance).

### Return Preparation 

The IRS has data that enable us to estimate compliance for the entire
population of returns by type of preparation: IRS prepared, volunteer,
commercial, and taxpayer prepared. It would be instructive to compare
estimated reporting compliance for IRS prepared returns against
comparable returns (*i.e*., low income, especially Earned Income Tax
Credit) prepared by the other methods. If the data show that
IRS-prepared returns are substantially more compliant, the IRS might
decide to expand return preparation in the TACs.[^17]

## The IRS Should Include the Cost of the Downstream Consequences of Its Actions in Its Return on Investment (ROI) Calculations

The IRS needs to conduct more thorough and accurate analyses when
measuring return on investment (ROI) in order to allocate future dollars
appropriately. For example, although in the short run it may cost more
to process and review an Offer in Compromise and it may appear that the
government is writing off revenue, the taxpayer in the long run may pay
more tax dollars into the system as a result of his promise to be fully
compliant for the five succeeding years.[^18] Five years is a long
enough period to enable the taxpayer to "learn" a new norm of
behavior -- namely, compliance. And when you compare the 16 cents on the
dollar that IRS receives from offers[^19] to the virtually no cents it
collects after year 3 of the 10-year collection period,[^20] the Offer
in Compromise suddenly looks like a very efficient and productive
program.

When computing ROI, the IRS should include the costs of the downstream
consequences of its enforcement actions, which include the costs
associated with cases handled by Appeals or the Taxpayer Advocate
Service. Downstream consequences analysis tells us not only true ROI
(*i.e*., the true cost to the IRS) but also gives us clues as to how to
improve our processes from an IRS *and* a taxpayer perspective. That is,
downstream consequences analysis is a form of taxpayer service.

## The IRS Should Conduct Research, Organized by Taxpayer Segment, to Better Understand Taxpayer Behavior and Taxpayer Response to IRS's Various Service and Enforcement "Touches".

The absence of research about taxpayer needs often leads the IRS to
place its immediate resource needs over taxpayers' immediate and
long-term needs.[^21] This approach may cause more taxpayers to become
noncompliant, thereby requiring more expensive enforcement actions.
Concern over the lack of research and taxpayer-centric strategic
planning led Congress to enact Section 205 of the FY 2006 Appropriations
Act funding the IRS and to direct the IRS to develop a five-year
strategic plan for taxpayer service.[^22]

I have written at length elsewhere on the need to understand the causes
of noncompliance so that the IRS doesn't adopt a one-size-fits-all
enforcement approach.[^23] Each year, academics and other scholars
propose many ideas that a 21^st^ century tax administrator should be
examining and testing. In fact, the IRS has such a vehicle for
partnering with academics in the Intergovernmental Personnel Act (IPA)
program. Unfortunately, this program is underutilized. The IRS must
conduct and underwrite such applied research.

Because taxpayer service and enforcement are the drivers of overall
compliance, we need to measure taxpayer service needs concurrently with
our efforts to measure the tax gap. Thus, the National Research Program
should update its analysis of taxpayer service needs at the same time it
is measuring taxpayer noncompliance for the particular taxpayer
population it is studying. The IRS can make informed resource allocation
decisions only if it is armed with both types of information.

# The IRS Should Address the Impact of IRS Business Systems Modernization Limitations on Both Taxpayer Service and Enforcement Initiatives

When I was in private practice as an attorney representing clients
before the IRS, I did not have a full appreciation of how significant a
role Business Systems Modernization (BSM) plays in both creating and
solving problems for taxpayers and the IRS. As the National Taxpayer
Advocate, I know that on a regular basis my office identifies systemic
problems for which the complete solution requires some sort of BSM fix.

When former Commissioner Everson began his tenure, he ordered three
separate reviews -- two external, one internal -- of the state of IRS
BSM projects. Based on these reviews, the Commissioner quickly -- and, I
believe, correctly -- concluded that the IRS was spreading its internal
BSM resources too thin. Project managers and experts charged with
overseeing our key initiatives -- such as the Integrated Financial
System (IFS) and the Customer Account Data Engine (CADE) -- were also
managing scores of smaller projects, all more or less important but all
detracting from our central progress on IFS and CADE.

For the past several years, the IRS has focused on its primary projects
and strictly controlled the number of other BSM projects. This approach
makes sense because it is critical to both effective service and
enforcement that the IRS move forward with its primary initiatives. On
the other hand, many projects cannot be deferred too much longer without
significantly impacting taxpayer rights, accuracy of taxpayer data, and
effective examination and collection initiatives. Thus, Congress should
ensure that the IRS has the funding to address and is addressing current
taxpayer needs while the IRS moves its primary initiatives forward.

# Funding for the Private Debt Collection Initiative Should Be Redirected to Fund Collection Activity by IRS Employees

In my view, the Private Debt Collection (PDC) initiative is a bad idea
and should be terminated. The premise of the PDC initiative was
essentially this: "There is a significant amount of tax debt that the
IRS can't go after because it doesn't have the resources. If we simply
turn those cases over to private collection agencies, they'll collect
the debt for us and the government will get to keep 75 to 80 cent of
every dollar the debt collectors are able to collect."

The problem with that simple approach is that it fails to take into
account the enormous amount of IRS resources that need to be devoted to
creating and supporting the program. Because tax collection is
considered to be an inherently governmental function, private collection
agencies (PCAs) cannot negotiate or compromise tax liabilities,
interest, or penalties. Unless a taxpayer contacted by a PCA agrees to
pay the tax debt in full, the case must be sent back to the IRS referral
unit for additional work that only the IRS can constitutionally take on
the account. Keep in mind that these are cases the IRS currently
considers too unproductive to devote resources to. Yet ironically, under
the PDC initiative, the IRS will end up pulling employees off
high-priority, high-return cases to work on these low-priority,
low-return cases.

As the IRS's PDC initiative moves forward, PCAs will be given more
complex cases in order to compensate for the smaller number of easy
cases. This change of course began as early as phase 1.2 of the PDC
initiative, when the IRS developed case selection criteria that allowed
certain nonfiler cases to be sent to the PCAs. The determination that a
taxpayer is a nonfiler is a discretionary decision that can be made only
by the IRS, not a private collection agency. Therefore, many of these
nonfilers will raise issues only the IRS can address. The IRS intends to
continue this trend of allowing PCAs to work cases that are complex and
difficult to collect, such as innocent spouse cases, trust fund recovery
penalty cases and business taxes.[^24]

Working on these complex cases increases the likelihood that the PCAs
will make mistakes and decreases the likelihood that the PCAs will be
able to collect any payment from the taxpayer. Moreover, in these more
complex cases, taxpayers are more likely to have questions that the PCA
employees are unable to answer because their knowledge regarding tax
issues is limited, at best, or because PCAs cannot exercise discretion
in either answering a question or working a case. Faced with having to
send the case back to the IRS referral unit, the PCAs may attempt to
pressure the taxpayer into an unreasonable payment plan. As the expanded
case selection increases the likelihood of IRS referral unit
involvement, the underlying business case for the PCA initiative
evaporates.

This approach makes little business sense, and on top of that, the
program raises significant concerns about the adequacy of taxpayer
rights protections and confidentiality of tax return information. In
fact, to make the program profitable, the IRS will be under pressure to
expand the authorized actions that private collection agencies can take
on a case so they can work higher dollar, more complex cases. This
expansion would clearly raise constitutional concerns.[^25]

# Trends in Taxpayer Advocate Service (TAS) Case Inventory

I close with a reflection on the Taxpayer Advocate Service and its role
in identifying and mitigating the downstream consequences of IRS actions
and programs, and improving taxpayers' attitudes toward the tax system.
This recent March 1^st^ marked my six-year anniversary as the National
Taxpayer Advocate. They have been quite remarkable years -- I have
watched my talented and dedicated employees achieve a quality rating of
89.7 percent for FY 2006, up from 71.6 percent in 2001. The performance
of TAS employees over the past two years has been particularly
commendable -- TAS case receipts rose an overwhelming 43 percent from FY
2004 to FY 2006,[^26] while the number of case advocacy employees
working those cases declined seven percent from 1,908 to 1,766 over the
same period. Yet we have managed to handle this increased workload to
date without much decline in our case quality.

The increase in TAS cases is not surprising. The IRS has substantially
increased the number of its compliance actions in recent years, and
about 70 percent of TAS's cases are classified as "compliance" related.
Increasing the number of compliance cases inevitably produces a
corresponding increase in TAS cases. Thus, the greater IRS emphasis on
enforcement has resulted in a greater need for TAS services. Notably,
TAS was able to obtain relief for the taxpayer in 70 percent of the
cases we closed in FY 2006.

TAS Customer Satisfaction surveys provide some evidence that the quality
and nature of taxpayer service has an impact on taxpayer attitudes
toward the tax system. When a taxpayer brings an eligible case to TAS,
he is assigned a case advocate who works with him throughout the
pendency of the case. Taxpayers have a toll-free number direct to that
case advocate, and each TAS office has a toll-free fax number. TAS
employees are required to spot and address all related issues and to
educate the taxpayer about how to avoid the problem from occurring
again, if possible. This level and quality of service drives TAS's high
taxpayer satisfaction scores,[^27] which averaged about 4.35 on a scale
of 5.0 in FY 2004 and FY 2005.[^28] Most importantly, 57 percent of
taxpayers stated that they felt better about the IRS as a whole after
coming to TAS. Even among taxpayers who did not obtain the result they
sought, an impressive 41 percent reported that they had a more positive
opinion of the IRS because of their experience with TAS.

I am concerned that with the increasing volume, complexity, and urgency
of TAS's caseload, the cycle time for our cases has begun to increase.
If the balance between our staffing and the number of cases we handle
continues to deteriorate, TAS is in jeopardy of becoming part of the IRS
problem rather than the advocate for the solution, as Congress intended.

# Conclusion

Compared to the IRS of ten years ago, the IRS of today is a more
responsive and effective organization. On the customer service side, the
IRS Restructuring and Reform Act of 1998 and the IRS response has
brought about fairly dramatic improvements. On the enforcement side, the
IRS has been stepping up its enforcement of the tax laws over the past
five years, particularly with regard to corporate tax shelters and
high-income individuals.

But the IRS can, and should, do better. To increase voluntary
compliance, it should incorporate an ongoing taxpayer-centric assessment
of taxpayer service needs into its strategic plans. It should conduct
research into the causes of noncompliance and apply the resulting
knowledge to IRS enforcement strategies, including those pertaining to
the cash economy. Finally, it must have sufficient resources to move
forward with its technological improvements, on both a short-term and a
long-term basis.

# APPENDIX: TAXPAYER SERVICE ISSUES {#appendix-taxpayer-service-issues .unnumbered}

# I. The IRS Needs Additional Funding to Allow for the Implementation of New Initiatives Designed to Improve Taxpayer Service {#i.-the-irs-needs-additional-funding-to-allow-for-the-implementation-of-new-initiatives-designed-to-improve-taxpayer-service .unnumbered}

Over the past two years, in response to a directive from this Committee,
the IRS -- through its Taxpayer Assistance Blueprint (TAB) team -- has
engaged in extensive research into the needs, preferences, and
willingness of taxpayers to use taxpayer services.[^29] The TAB is a
strategic document that contains a number of recommendations that, if
implemented, will improve taxpayer service for many taxpayers. Many of
the TAB recommendations focus on strengthening electronic service
delivery options, with a focus on the irs.gov website. The goal is to
provide increased service capabilities through the least costly
electronic delivery channel, thereby reserving the more costly telephone
and walk-in services for those taxpayers in need of additional
assistance. As the IRS restructures the delivery of services and
recognizes savings from increased efficiency, the IRS should reinvest
these savings back into taxpayer service programs and initiatives to
further improve on service delivery, including person-to-person and
face-to-face assistance.

Moreover, the TAB report contains a number of recommendations that can
have an immediate impact on the quality of taxpayer service. While the
IRS will begin implementing these and other initiatives during FY 2007,
additional funding is needed in order to implement the proposed changes
fully.

[Online Taxpayer Tools]{.underline}. During FY 2008, the IRS is
scheduled to launch the Internet Customer Account Services (I-CAS)
platform. I-CAS will provide taxpayers with direct access to account
information and services.[^30] The first phase of the I-CAS rollout will
provide taxpayers online access to account and return transcripts. The
second phase will allow taxpayers to submit electronic versions of forms
for change of address, disclosure authorization, and extension to file
forms. With additional funding, future I-CAS capabilities could include
explanation of account issues, movement of payments, and issue diagnosis
and resolution.[^31] Spanish versions of I-CAS and "Where's My Refund"
are also planned for FY 2008.[^32] With additional funding, the IRS
could expand to other languages.

[Improvements in TAC Services]{.underline}. During FY 2007, the IRS is
testing a Facilitated Self-Assistance Model (FSM) in 15 Taxpayer
Assistance Centers (TACs) locations. FSM is designed to help taxpayers
who have indicated a willingness to use alternative service channels,
such as telephone or computer assistance, to learn how to effectively
use those channels -- thereby allowing TAC employees to focus on
services taxpayers have indicated they want to receive in person. The
FSM will provide taxpayers coming into a TAC with the option of using a
self-assisted service to resolve a tax-related question. The TACs will
be outfitted with workstations containing computers and telephones. This
will allow taxpayers to access the irs.gov website or use the toll-free
telephone line to receive assistance. TAC employees will be available to
answer questions and provide assistance to taxpayers willing to use the
workstations.[^33] At any point during the process, the taxpayer will be
able to request assistance from a TAC employee.

After completing their transaction using the workstation, taxpayers will
be asked to complete a brief survey designed to assess the effectiveness
of the FSM and satisfaction with the experience. The survey will also
collect demographic user information to enhance the IRS's understanding
of taxpayer needs, preferences, and behaviors. The goal of FSM will be
to help some taxpayers become more comfortable using online and
telephone alternatives to answer their questions or to obtain
information through forms, publications, and other guidance. TAC
employees can focus on those taxpayers who require face-to-face
assistance or those services (such as payments or account resolution)
that taxpayers cannot or are unwilling to address through alternate
channels.

The IRS is also piloting a test to install payment kiosks in TACs.
Currently, most TACs will accept cash payments from taxpayers who do not
have, or are unable to obtain, a check or money order.[^34] TAC
employees must then convert the cash payment to a bank draft or money
order.[^35] This is particularly burdensome in smaller TAC offices where
there are only one or two employees and one must leave the office in
order to convert the cash payment. The IRS is testing the use of a kiosk
located in the TAC that would allow a taxpayer to convert a cash payment
into a money order without having to leave the TAC. The IRS will test
these kiosks in two locations this year.

FSM and the kiosks have the potential to save both the taxpayer and the
IRS time. If FSM and the kiosks prove to be effective, the IRS will
likely need additional funding to install these features in all TACs.

# II. The IRS Should Not Reduce Critical Taxpayer Services {#ii.-the-irs-should-not-reduce-critical-taxpayer-services .unnumbered}

The TAB report puts forth a number of recommendations designed to
improve taxpayer service. Although the report provides the IRS with
valuable information regarding the needs, preferences, and willingness
of taxpayers to use certain services, it is only a starting point. The
IRS must continue its research efforts to determine how best to
strengthen taxpayer services.

For example, the Taxpayer Advocacy Panel (TAP) has just conducted a
survey that will shed light on the needs and preferences of those who
visit a TAC. The methodology of the TAP survey differs from prior
surveys in that it will attempt to survey taxpayers who attempted to
visit a TAC but were unable to obtain assistance for such reasons as the
line was too long or the TAC office was closed. The TAP survey gathered
some basic demographic information, and it inquired about why the
taxpayer was visiting the TAC and whether the taxpayer was satisfied
with the service received. If the taxpayer did not receive any service,
the survey will ask why none was provided. In addition, the TAP survey
asked specifically why the taxpayer chose to visit the TAC instead of
using a different IRS service and whether there were any services that
were unavailable to them during their visit. The TAP survey results will
provide the IRS with information useful not only in improving TAC
services but in improving other taxpayer services as well.

As the IRS implements the TAB recommendations and conducts additional
research, the IRS needs to maintain its current services until it is
proven that the new service offerings are adequately meeting taxpayer
needs. One of the effects of the IRS's focus on enforcement at the
expense of compliance has been a reduction in taxpayer services that can
have a dramatic impact on taxpayers.

## A. IRS Has Substantially Reduced the Number of Returns It Prepares at the TACs. {#a.-irs-has-substantially-reduced-the-number-of-returns-it-prepares-at-the-tacs. .unnumbered}

The IRS historically has prepared tax returns for low income taxpayers
at its TACs. Low income taxpayers generally qualify for the earned
income tax credit (EITC), which is a refundable credit that caps out at
\$4,536 in 2006. Studies show that the average overclaim rate for EITC
benefits is between 27 percent and 32 percent.[^36] IRS personnel who
prepare tax returns are trained to ask questions that minimize the
likelihood of EITC overclaims and thus can save the government hundreds
of dollars per return. Yet to free up resources for other program
initiatives, the IRS has reduced the number of tax returns it helps low
income taxpayers prepare in its walk-in sites by almost 40 percent over
the past four years. The number of returns prepared dropped from 665,868
in FY 2003 to 406,612 in FY 2006.[^37]

IRS data for tax years 2002 through 2004 suggest that EITC returns
prepared by IRS TACs may be significantly more compliant than
self-prepared and commercially prepared returns. As compared with
TAC-prepared returns, Discriminant Function (DIF) scores were between 21
and 26 percent higher for self-prepared returns and between 25 and 31
percent higher for returns prepared by commercial preparers.[^38] The
DIF score is an estimate of the likelihood of non-compliance on a
return. A higher score indicates a higher likelihood of non-compliance.

These findings are corroborated by examination results for EITC returns
for these tax years. As compared with TAC-prepared returns, average
audit assessments among EITC returns for tax years 2002 - 2004 ranged
from about \$640 to \$1,300 higher for self-prepared returns and from
about \$820 to \$1,300 higher for commercially prepared returns.[^39]
Similarly, a study conducted in 1996 that examined the relationship
between IRS return preparation and compliance over a ten-year period
showed that an increase in the number of returns prepared by the IRS
correlates with substantial improvements in compliance among filers of
individual returns. Indeed, taking into account the indirect effects of
IRS return preparation, the study estimated the return on investment for
each dollar the IRS spent on return preparation was 396:1.[^40]

## B. The IRS Is Declaring Increasing Numbers of Issues "Out-of-Scope". {#b.-the-irs-is-declaring-increasing-numbers-of-issues-out-of-scope. .unnumbered}

In my 2004 Annual Report, I raised concerns about the increasing number
of issues declared "out-of-scope" in TACs, because limiting the issues
TAC employees are able to address reduces the level of service available
to taxpayers.[^41] For example, despite the number of taxpayers in
certain states with taxable income from farming activities, I received a
complaint at a "town hall" meeting in Fargo, North Dakota last year that
questions about Schedule F, the form used to report farming income and
expenses, are considered out-of-scope at IRS walk-in sites. I was
astounded, but my staff has since confirmed that is the case.[^42]

One of the reasons the IRS maintains a geographic presence is to allow
taxpayers to obtain assistance with needs that may be different from the
needs of taxpayers in other regions. Therefore, TAC out-of-scope
questions could differ according to taxpayer needs by geographic region.
Questions about farming may be appropriately considered out-of-scope in
New York City -- an area where complex financial reporting questions may
be routine. In Fargo, North Dakota, it is fair to expect that farming
questions are "ripe" for consideration.

## C. TACs Are Not Adequately Responding to Emergency Transcript Requests. {#c.-tacs-are-not-adequately-responding-to-emergency-transcript-requests. .unnumbered}

Under current IRS policies, taxpayers who request a copy of a return
transcript should have the transcript mailed to their address within 10
days.[^43] If a taxpayer is requesting a hardship exception, she must
provide verification to show why she is unable to wait the normal
processing time to obtain her transcript. While these exceptions should
be "rare" and require managerial approval,[^44] the procedures for
obtaining an exception are not operating as intended. One example comes
from our Omaha office, where a taxpayer went to a TAC requesting a
return transcript. The taxpayer was scheduled for surgery the next day
and needed a copy of a transcript to prove he was financially eligible
to receive assistance. The TAC employee indicated that this was not an
emergency and the taxpayer would receive his transcript in two weeks.
Luckily, the Omaha TAS office was able to immediately provide the
requested transcript. The current IRS procedures for hardships are
clearly not working. Taxpayers who are in need of transcripts for court
proceedings, medical procedures, or student loans are being turned away
and instead are coming to TAS for assistance. This reduction in taxpayer
service is negatively impacting taxpayers and forcing them to turn to
TAS for assistance that the IRS should be providing.

## D. Small Business Outreach Has Declined. {#d.-small-business-outreach-has-declined. .unnumbered}

IRS data show that self-employed taxpayers account for the largest chunk
of the tax gap and indicate that the tax compliance rate for
self-employed taxpayers runs at about 43 percent.[^45] Much of the
underreporting is deliberate, but some is not. For example, many small
businesses are started by individuals who lack detailed knowledge of the
tax laws and do not have the resources to hire tax attorneys or
accountants. When they hire a few workers, they often do not realize
that they are assuming tax reporting, tax withholding, and tax payment
obligations, and they often do not understand enough about the details
of complying with the requirements to do so with reasonable effort.

After enactment of the IRS Restructuring and Reform Act of 1998, the IRS
developed a function known as Taxpayer Education and Communications, or
"TEC." TEC was the IRS's outreach arm to small businesses to try to
educate them about the complexity of their tax obligations. For 2002,
TEC was named the Small Business Administration's agency of the year for
what the SBA called its outstanding progress in creating an effective
education and compliance assistance program for small business and
self-employed taxpayers.[^46] Yet in the name of achieving
"efficiencies," TEC was "realigned" in February 2005 through a merger
with other outreach functions and redesignated as "Stakeholder Liaison."
Prior to the realignment, TEC had 536 employees. After the realignment,
Stakeholder Liaison staffing included 219 employees.[^47]

In my view, the reduction in TEC staffing will reduce tax compliance on
the part of small businesses, result in more IRS audits of small
businesses, and make more small businessmen and women feel like the
government is playing "gotcha" with them by enacting complex
requirements and then failing to help them understand how to comply.

## E. IRS Telephone Assistors Are Answering a Reduced Percentage of Calls and Taking Longer to Do It. {#e.-irs-telephone-assistors-are-answering-a-reduced-percentage-of-calls-and-taking-longer-to-do-it. .unnumbered}

In 2003, the IRS answered 87 percent of all calls. This percentage
dropped to 84 percent in 2006 and to 82 percent through March of this
year's filing season. The average time it took the IRS to answer calls
increased from 3.1 minutes in 2006 to 4.4 minutes so far this filing
season.[^48] While the level of service on IRS phone lines is
substantially better today than it was in the 1990s, we are moving in
the wrong direction.

# III. The IRS Should Make It Possible for Taxpayers to Prepare and File Their Tax Returns Electronically Without Paying a Fee {#iii.-the-irs-should-make-it-possible-for-taxpayers-to-prepare-and-file-their-tax-returns-electronically-without-paying-a-fee .unnumbered}

Electronic filing of tax returns brings benefits to both taxpayers and
the IRS.[^49] From a taxpayer perspective, e-filing eliminates the risk
of IRS transcription errors, pre-screens returns to ensure that certain
common errors are fixed before the return is accepted, and speeds the
delivery of refunds. From an IRS perspective, e-filing eliminates the
need for data transcribers to input return data manually (which could
allow the IRS to shift resources to other high priority areas), allows
the IRS to easily capture return data electronically, and enables the
IRS to process and review returns more quickly.[^50]

In my view, the IRS should place a basic, fill-in template on its
website and allow any taxpayer who wants to self-prepare his or her
return to do so and file it directly with the IRS for free.[^51]

Some representatives of the software industry have taken the position
that such a template would place the IRS in the position of improperly
competing with private industry or, worse, create a conflict of interest
between the IRS's role of tax preparer and tax auditor.

This is nonsense. Since the inception of the tax system, there have
always been two categories of taxpayers -- those who are comfortable
enough with the rules to self-prepare their returns and those who turn
to paid professionals for assistance. In the paper-filing world, the IRS
has always made its forms and instructions universally available without
charge to all taxpayers, and those taxpayers who require help have
always been free to seek the assistance of paid preparers.

Imagine that, shortly after the income tax was enacted, a large group of
bricks-and-mortar tax preparers had launched a lobbying campaign to try
to persuade Congress to prohibit the IRS from making forms and
instructions available to the public on the ground that the availability
of these materials improperly placed the government in the position of
competing with private industry. Or on the ground that it created a
conflict between the government's role as preparer and auditor. Congress
almost certainly would have rejected such arguments as ludicrous. Yet
those are exactly the same conceptual arguments being raised today by
those who contend that the government's provision of a basic web-based,
fill-in form to all taxpayers would undercut the private sector.

The answer to these arguments in today's electronic environment should
be the same answer that Congress would have provided 80 years ago in a
paper environment. For those taxpayers who are comfortable preparing
their returns without assistance, the government will provide the means
to do so without charge. For those taxpayers who do not find a basic
template sufficient and would prefer to avail themselves of the
additional benefits of a sophisticated software program, they are free
to purchase one.

A brief personal anecdote. Although I prepared tax returns
professionally for 27 years before I became the National Taxpayer
Advocate and don't need assistance from others to prepare my return, my
government salary places me above the income cap to qualify to use Free
File products. To prepare my return electronically last month, I
therefore purchased tax preparation software. When I completed preparing
my return, the software program informed me that, to file
electronically, I would have to pay an additional fee. Although I deeply
believe that e-filing is best for both taxpayers and the IRS for a host
of reasons, I resented the notion that I would have to pay separate fees
to prepare my return and to file it, so I printed out my return and
mailed it in.

I am hardly alone. IRS data shows that about 40 million returns are
prepared using software yet are mailed in rather than submitted
electronically.[^52] This is a shame, because the practice delays the
length of time for processing refunds, it requires the IRS to devote
additional resources to entering the data manually when it receives the
return, and it creates a risk of transcription error.

There is no reason why taxpayers should be required to pay transaction
fees in order to file their returns electronically. A free template and
free direct filing mechanism would go a long way toward addressing this
problem and would result in a greater number of taxpayers filing their
returns electronically. When taxpayers elect to use commercial software
but print out their returns for mailing, the IRS should require software
developers to convert data to 2D bar codes, so that all tax information
can be scanned into IRS systems.[^53] Both taxpayers and the government
would stand to benefit from these improvements.

[^1]: The views expressed herein are solely those of the National
    Taxpayer Advocate. The National Taxpayer Advocate is appointed by
    the Secretary of the Treasury and reports to the Commissioner of
    Internal Revenue. The statute establishing the position directs the
    National Taxpayer Advocate to present an independent taxpayer
    perspective that does not necessarily reflect the position of the
    IRS, the Treasury Department, or the Office of Management and
    Budget. Accordingly, congressional testimony requested from the
    National Taxpayer Advocate is not submitted to the IRS, the Treasury
    Department, or the Office of Management and Budget for prior
    approval. However, we have provided courtesy copies of this
    statement to both the IRS and the Treasury Department in advance of
    this hearing.

[^2]: Internal Revenue Service, *Fiscal Year 2006 Enforcement and
    Service Results* (Nov. 20, 2006). The actual face-to-face audit rate
    is apparently lower than the IRS reported. According to a study by
    the Treasury Inspector General for Tax Administration, the IRS
    classifies its audits based on which IRS function handled a case.
    Some cases referred to the IRS function responsible for conducting
    face-to-face audits are resolved without a face-to-face meeting. By
    analyzing data from IRS Audit Technique Codes, TIGTA concluded that
    the face-to-face audit rate was 0.18 percent for FY 2006, about 22
    percent less than the IRS reported. *See* Treasury Inspector General
    for Tax Administration, Ref. No. 2007-30-056, *Trends in Compliance
    Activities Through Fiscal Year 2006* at 2 (March 27, 2007); Allen
    Kenney, *TIGTA Finds Audit-by-Mail Process More Common Than IRS
    Says*, Tax Notes Today (April 6, 2007).

[^3]: Internal Revenue Service, *Fiscal Year 2006 Enforcement and
    Service Results* (Nov. 20, 2006).

[^4]: *Id.*

[^5]: Government Accountability Office, GAO-07-136, *Financial Audit:
    IRS's Fiscal Years 2006 and 2005 Financial Statements* at 95 (Nov.
    2006). The IRS actually collected \$2.51 trillion on a gross basis
    in FY 2006, but issued \$277 billion in tax refunds.

[^6]: Government Accountability Office, GAO-07-136, *Financial Audit:
    IRS's Fiscal Years 2006 and 2005 Financial Statements* 68 (Nov.
    2006).

[^7]: Commissioner Charles O. Rossotti, *Report to the IRS Oversight
    Board: Assessment of the IRS and the Tax System* 16 (Sept. 2002).

[^8]: Alan H. Plumley, Pub. 1916, *The Determinants of Individual Income
    Tax Compliance: Estimating The Impacts of Tax Policy, Enforcement,
    and IRS Responsiveness* 35-36 (Oct. 1996); Jeffrey A. Dubin, Michael
    J. Graetz & Louis L. Wilde, *The Effect of Audit Rates on the
    Federal Individual Income Tax*, 1977-1986, 43 Nat. Tax J. 395, 396,
    405 (1990).

[^9]: Government Accountability Office, GAO-07-673, *Internal Revenue
    Service: Interim Results of the 2007 Tax Filing Season and the
    Fiscal Year 2008 Budget Request* 26 (April 2007).

[^10]: *Id.* at 27. These numbers are apparently not adjusted for
    inflation. GAO reports that overall IRS funding would increase, on
    an inflation-adjusted basis, by a mere 0.5 percent from FY 2004 to
    FY 2008 under the Administration's proposal. *Id.* at 26.

[^11]: Charles O. Rossotti, *Many Unhappy Returns: One Man's Quest to
    Turn Around the Most Unpopular Organization in America* 285 (2005).

[^12]: Annual IRS Restructuring and Reform Act of 1998 Joint
    Congressional Review, Testimony of Mark W. Everson, Commissioner,
    Internal Revenue Service (May 20, 2003) (indicating level of service
    on the telephones for fiscal year 1998).

[^13]: IRS Strategic Plan 2005-2009.

[^14]: Department of the Treasury, FY 2008 Budget-in-Brief at 56.

[^15]: For research purposes, we believe it is important to study
    inadvertent errors as well as deliberate misreporting. Knowledge
    about inadvertent errors can be used to clarify ambiguous laws or
    administrative guidance both to help increase future compliance and
    to better apply IRS outreach, education, and other voluntary
    compliance initiatives.

[^16]: Much of this information was published in former Commissioner
    Rossotti's final report to the IRS Oversight Board. Commissioner
    Charles O. Rossotti, *Report to the IRS Oversight Board: Assessment
    of the IRS and the Tax System* 16 (Sept. 2002). However, we have not
    seen updated statistics published in this format since that time.

[^17]: As I discuss in the Appendix, existing data suggest that EITC
    returns prepared in the TACs are more compliant than other returns.

[^18]: If a taxpayer fails to comply with all his tax obligations over
    the five-year period following IRS acceptance of an offer, the IRS
    may rescind the offer and reinstate the tax debt. *See* IRS Form
    656, Offer in Compromise.

[^19]: IRS Small Business/Self Employed Division, Offer In Compromise
    Program, *Executive Summary Report* (Jan. 2006).

[^20]: IRS Automated Collection System Operating Model Team,
    *Collectibility Curve* (August 5, 2002).

[^21]: The declining number of Taxpayer Assistance Center (TAC) visits
    is an example of IRS placing its resource needs over taxpayer needs.
    For FY 2006, IRS established a goal of preparing 20 percent fewer
    tax returns in TACs than in FY 2005. Not surprisingly, TAC visits
    for year-to-date FY 2006 have declined 14 percent compared with this
    time last year. Even though the decline in TAC usage appears to
    result from IRS-imposed limitations on service, the IRS is
    nonetheless citing this decline as a justification for making
    further reductions in service at the TACs. Wage & Investment, *2006
    Filing Season Data: Cumulative Statistics Report* (Feb. 25, 2006).

[^22]: Pub. L. No. 109-115, § 205, 119 Stat. 2396 (2005). Specifically,
    the statute provides:

    > None of the funds appropriated or otherwise made available in this
    > or any other Act or source to the Internal Revenue Service may be
    > used to reduce taxpayer services as proposed in fiscal year 2006
    > until the Treasury Inspector General for Tax Administration
    > completes a study detailing the impact of such proposed reductions
    > on taxpayer compliance and taxpayer services, and the Internal
    > Revenue Service's plans for providing adequate alternative
    > services, and submits such study and plans to the Committees on
    > Appropriations of the House of Representatives and the Senate for
    > approval: . . . *Provided further,* That the Internal Revenue
    > Service shall consult with stakeholder organizations, including
    > but not limited to, the National Taxpayer Advocate, the Internal
    > Revenue Service Oversight Board, the Treasury Inspector General
    > for Tax Administration, and Internal Revenue Service employees
    > with respect to any proposed or planned efforts by the Internal
    > Revenue Service to terminate or reduce significantly any taxpayer
    > service activity.

    The accompanying Joint Explanatory Statement of the Committee of
    Conference stated: "The conferees direct the IRS, the IRS Oversight
    Board and the National Taxpayer Advocate to develop a 5-year plan
    for taxpayer service activities. . . . The plan should include
    long-term goals that are strategic and quantitative and that balance
    enforcement and service." H. Rep. No. 109-307, 209 (2005).

[^23]: *See* National Taxpayer Advocate 2004 Annual Report to Congress
    211 (Most Serious Problem: IRS Examination Strategy) and 226 (Most
    Serious Problem: IRS Collection Strategy); National Taxpayer
    Advocate 2005 Annual Report to Congress 55 (Most Serious Problem:
    The Cash Economy); Written Statement of Nina E. Olson, National
    Taxpayer Advocate, Before the Subcommittee on Federal Financial
    Management, Government Information, and International Security,
    Committee on Homeland Security and Governmental Affairs, United
    States Senate, on *The Tax Gap* (Oct. 26, 2005); Written Statement
    of Nina E. Olson, National Taxpayer Advocate, Before the Committee
    on the Budget, United States Senate, on *The Causes of and Solutions
    to the Federal Tax Gap* (Feb. 15, 2006).

[^24]: Internal Revenue Service, *F&PC Advisory Council Deck* (Mar. 7
    2007).

[^25]: For a detailed discussion of the IRS Private Debt Collection
    initiative and its constitutional and taxpayer rights implications,
    *see Use of Private Agencies to Improve IRS Debt Collection,*
    Subcommittee on Oversight, House Committee on Ways and Means,
    108^th^ Cong., 1^st^ Sess. (statement of Nina E. Olson, National
    Taxpayer Advocate, May 13, 2003); *see also* National Taxpayer
    Advocate 2005 Annual Report to Congress 76-93.

[^26]: In FY 2006, TAS received a total of 242,173 cases. In FY 2004,
    TAS received a total of 168,856 cases.

[^27]: Taxpayer Advocate Service customer satisfaction survey data for
    the period from October 2003 through September 2005, as collected by
    The Gallup Organization.

[^28]: Last year, TAS began using a new vendor to conduct its customer
    satisfaction surveys. We have not yet refined our new measure to
    make its results comparable to those achieved for years covered by
    the prior vendor.

[^29]: Internal Revenue Service, *The 2007 Taxpayer Assistance Blueprint
    Phase 2* (April 2007).

[^30]: *Id.* at 82.

[^31]: *Id.*

[^32]: *Id.*

[^33]: The IRS designed the FSM model to ensure that taxpayer
    information is protected from unauthorized access and all taxpayers
    using the self-assistance options are provided with proper
    notification and information to make them aware that their computer
    usage is being monitored and recorded for research purposes.

[^34]: IRM 21.3.4.7.2, Cash Payments (Jan. 10, 2007).

[^35]: IRM 21.3.4.7.2.3, Converting Cash Payments (Jan. 10, 2007).

[^36]: Internal Revenue Service, *Compliance Estimates for Earned Income
    Tax Credit Claimed on 1999 Returns 3* (Feb. 28, 2002).

[^37]: Wage and Investment Operating Division, *Business Performance
    Review FY 2006*.

[^38]: IRS Compliance Data Warehouse, Individual Returns Transaction
    File data for tax years 2002-2004.

[^39]: IRS Compliance Data Warehouse, Audit Inventory Management System
    data for tax years 2002-2004.

[^40]: *See* Alan H. Plumley, Pub. 1916, *The Determinants of Individual
    Income Tax Compliance: Estimating The Impacts of Tax Policy,
    Enforcement, and IRS Responsiveness* 41 (Oct. 1996).

[^41]: National Taxpayer Advocate 2004 Annual Report to Congress 12
    (Most Serious Problem: Taxpayer Access -- Face-to-Face Interaction).

[^42]: IRM 21.3.4-1, Scope of Services (Feb. 16, 2007).

[^43]: IRM 21.3.4.14.4, Tax Return and Tax Account Transcript Requests
    (Jan. 16, 2007).

[^44]: *Id.*

[^45]: *See* IRS News Release, IRS Updates Tax Gap Estimates, (Feb. 14,
    2006) (accompanying charts).

[^46]: *See Closing the Tax Gap and the Impact on Small Business,*
    Hearing Before the House Comm. on Small Business, 109^th^ Cong.
    (Apr. 27, 2005) (testimony of John Satagaj, President and General
    Counsel, Small Business Legislative Council).

[^47]: IRS Small Business/Self Employed Division response to Taxpayer
    Advocate Service Information Request (Sept. 5, 2006).

[^48]: Government Accountability Office, GAO-07-673, *Internal Revenue
    Service: Interim Results of the 2007 Tax Filing Season and the
    Fiscal Year 2008 Budget Request* 20 (April 2007).

[^49]: *See* S. Rep. No. 105-174, at 39-40 (1998).

[^50]: The IRS Restructuring and Reform Act of 1998 directed the IRS to
    set a goal of having 80 percent of all returns filed electronically
    by 2007. *See* Internal Revenue Service Restructuring and Reform
    Act, Pub. L. No. 105-206, § 2001(a)(2), 112 Stat. 685 (1998).
    Although the IRS was not able to achieve this goal, we believe
    Congress should reiterate its commitment to seeing the IRS increase
    the e-filing rate as quickly as possible.

[^51]: *See* National Taxpayer Advocate 2004 Annual Report to Congress
    471-477 (Key Legislative Recommendation: Free Electronic Filing for
    All Taxpayers).

[^52]: IRS Tax Year 2004 Taxpayer Usage Study (Aug. 26, 2005).

[^53]: More than 20 states currently use 2D bar-coding for personal
    income tax forms. *See* Federation of Tax Administrators compiled
    data
    [[http://www.taxadmin.org/fta/edi/ecsnaps.html]{.underline}](http://www.taxadmin.org/fta/edi/ecsnaps.html).