Written Statement of Nina E. Olson

National Taxpayer Advocate

Before the

Subcommittee on Financial Services and General Government

Committee on Appropriations

U.S. House of Representatives

On

Tax Fairness: Policy and Enforcement

March 5, 2007

**Table of Contents**

[I. Overview of the Problem of IRS Underfunding
1](#overview-of-the-problem-of-irs-underfunding)

[II. The Consequences of Underfunding the IRS
1](#the-consequences-of-underfunding-the-irs)

[III. Insufficient IRS Funding Leads to a Failure to Collect Unpaid
Taxes
1](#insufficient-irs-funding-leads-to-a-failure-to-collect-unpaid-taxes)

[IV. Insufficient Measures and Funding Result in an Unbalanced and
Inadequate IRS Compliance Program
1](#insufficient-measures-and-funding-result-in-an-unbalanced-and-inadequate-irs-compliance-program)

[V. Insufficient Funding Leads to Inadequate Face-to-Face Audit Coverage
1](#insufficient-funding-leads-to-inadequate-face-to-face-audit-coverage)

[VI. Identifying Appropriate Inventory for Correspondence Examinations
1](#identifying-appropriate-inventory-for-correspondence-examinations)

[VII. Insufficient IRS Funding Limits Personal Contact in Earned Income
Tax Credit Audits and Can Lead to Incorrect Audit Results
1](#insufficient-irs-funding-limits-personal-contact-in-earned-income-tax-credit-audits-and-can-lead-to-incorrect-audit-results)

[VIII. Insufficient Funding Leads to Outsourcing Tax Collection
1](#insufficient-funding-leads-to-outsourcing-tax-collection)

[IX. Insufficient IRS Funding Can Lead to Collection Practices that Harm
Taxpayers , Particularly Low Income Taxpayers, and Increase Accounts
Receivable.
1](#insufficient-irs-funding-can-lead-to-collection-practices-that-harm-taxpayers-particularly-low-income-taxpayers-and-increase-accounts-receivable.)

[A. IRS Collection Practices Do Not Promote Early Intervention in
Collection\
Cases
1](#irs-collection-practices-do-not-promote-early-intervention-in-collection-cases)

[B. IRS Collection Practices Do Not Realistically Determine the
Reasonable Collection Potential of Cases Involving Low Income Taxpayers
1](#irs-collection-practices-do-not-realistically-determine-the-reasonable-collection-potential-of-cases-involving-low-income-taxpayers)

[X. IRS Emphasis on Automated Levies Harms Elderly and Disabled Social
Security Recipients
1](#irs-emphasis-on-automated-levies-harms-elderly-and-disabled-social-security-recipients)

[XI. Insufficient Funding Leads to Neglect of Important Taxpayer Service
Programs
1](#insufficient-funding-leads-to-neglect-of-important-taxpayer-service-programs)

[A. Tax Return Preparation 1](#tax-return-preparation)

[B. Portal for Free Electronic Filing of Tax Returns
1](#portal-for-free-electronic-filing-of-tax-returns)

[C. Meeting Taxpayers' Service Needs and Preferences
1](#meeting-taxpayers-service-needs-and-preferences)

[D. Reasonable Accommodations for Taxpayers with Disabilities
1](#reasonable-accommodations-for-taxpayers-with-disabilities)

[E. Assistance to Persons with Limited English Proficiency
1](#assistance-to-persons-with-limited-english-proficiency)

[F. Small Business Outreach 1](#small-business-outreach)

[XII. Insufficient Funding For Programs that Assist Taxpayers Will
Negatively Impact Taxpayer Compliance
1](#insufficient-funding-for-programs-that-assist-taxpayers-will-negatively-impact-taxpayer-compliance)

[A. Low Income Taxpayer Clinics 1](#low-income-taxpayer-clinics)

[B. Taxpayer Advocate Service 1](#taxpayer-advocate-service)

[XIII. A Proposal to Revise the Congressional Budget Rules to Improve
IRS Funding
Decisions\..............................................................................................1](#a-proposal-to-revise-the-congressional-budget-rules-to-improve-irs-funding-decisions)

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

Thank you for inviting me to testify today about tax fairness in policy
and enforcement.[^1] Before I discuss specific issues of fairness in tax
administration, I would like to make three threshold observations about
the components of a balanced tax system.

First, I think we can all agree that good tax administration requires
the IRS to collect the correct amount of tax from each taxpayer while it
respects the rights of each taxpayer. In order for the IRS to treat
taxpayers fairly, even when it takes a compliance or enforcement action
against them, the IRS must be properly funded. In the National Taxpayer
Advocate's 2006 Annual Report to Congress, I made a recommendation that
squarely addresses IRS funding -- namely, to change the budget rules by
which IRS funding decisions are made to provide funding at whatever
level will maximize tax compliance, with due regard for protecting
taxpayer rights and minimizing taxpayer burden.[^2]

Second, in our focus on closing the net tax gap, estimated to be about
\$290 billion for 2001, we must not forget that taxpayers paid almost 84
percent of the tax dollars known to be due and owing. Of the \$2.24
trillion collected annually by the IRS, only two percent is attributable
to enforcement activity. Taxpayer service surely plays an important role
in collecting the other 98 percent of revenue. With the recent focus on
closing the upper end of the tax gap, we must be very careful not to
take currently compliant taxpayers for granted and fail to provide them
the services they need to comply. Once we lose these taxpayers'
confidence and trust by degrading IRS level of service, it will be very
hard to gain it back.

My third observation relates to the importance of research in addressing
the tax gap. Without a clear understanding of the causes of
noncompliance, we will be shooting in the dark. We need to know whether
noncompliance is inadvertent (due to tax law or procedural complexity)
or facilitated by preparers or promoters, or whether it is asocial
(evasion) or social (in response to a perceived unfairness in the
application of the laws). Each type of noncompliance requires a
different approach to bring the taxpayer into compliance. Thus, Congress
should fund a robust IRS research program. A starting point would be to
fund the National Research Program on an ongoing basis, with taxpayer
interviews conducted by a neutral party after completion of the audit
and designed to understand the causes of the identified noncompliance.
Such knowledge lays the groundwork for a sound and strategic approach to
minimizing the tax gap without harming well-meaning taxpayers in the
process.

#  {#section .unnumbered}

# Overview of the Problem of IRS Underfunding

The Internal Revenue Service is effectively the Accounts Receivable
Department of the United States Government. On a budget of about \$10.6
billion,[^3] the IRS currently collects about \$2.24 trillion a
year.[^4] That translates to an average return-on-investment (ROI) of
about 210:1.[^5]

Rather than recognizing the IRS's unique role as the revenue generator
for the federal government, however, the congressional budget rules
treat spending for the IRS exactly the same way they treat spending for
all other federal agencies.

The current budget procedures work essentially as follows: Early each
year, a spending ceiling is established for a category of programs that
in recent years included the Department of Transportation, the
Department of the Treasury (of which the IRS is a part), the Department
of Housing and Urban Development, the Judiciary, the District of
Columbia, and independent federal agencies.[^6] The House and Senate
Appropriations subcommittees with jurisdiction over this grouping of
federal programs must apportion the total number of dollars it receives
among them. If more funding was provided for transportation programs,
for example, less funding was available for the IRS. Thus, the IRS
competes dollar-for-dollar against many other federal programs for
resources.

These procedures make little sense. The IRS collects about 96 percent of
all federal revenue.[^7] The more revenue the IRS collects, the more
revenue Congress may spend on other programs or may use to cut taxes or
reduce the deficit. The less revenue the IRS collects, the less revenue
Congress has available for other purposes.

If the federal government were a private company, its management clearly
would fund the Accounts Receivable Department at a level that 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. If the IRS were given more resources,
studies show the IRS could collect substantially more revenue.

Former IRS Commissioner Charles Rossotti has written:

> When I talked to business friends about my job at the IRS, they were
> always surprised when I said that the most intractable part of the
> job, by far, was dealing with the IRS budget. The reaction was usually
> "Why should that be a problem? If you need a little money to bring in
> a lot of money, why wouldn't you be able to get it?"[^8]

Yet obtaining a little extra money to bring in a lot of extra money
remains an intractable challenge for the IRS. Over the past few years,
Congress has focused increasing attention on the "tax gap" [^9] -- the
difference between taxes owed and taxes paid, even while it holds the
IRS accountable for improving taxpayer service.[^10] As part of this
discussion, it should be recognized that the IRS currently suffers from
a "resources gap," and the IRS's lack of resources is a significant
impediment to its ability to improve taxpayer service, help close the
tax gap, and thereby reduce the federal budget deficit.[^11]

# The Consequences of Underfunding the IRS

The failure to fund the IRS at appropriate levels leads to two sets of
consequences. First, the IRS lacks the resources to collect a
significant amount of unpaid tax, resulting in a larger tax gap and a
larger budget deficit. Second, the lack of resources often leads the IRS
to take steps that are, in my judgment, unwise and unfair from the
standpoint of tax compliance and taxpayer rights. For example, in a
tight budget environment, the IRS demonstrates an increased tendency to
look for "efficient" approaches to tax administration (*i.e.*, efficient
from the IRS perspective) and a resistance to analyzing problems from
the taxpayer perspective. I provide examples of this tendency to
superficial efficiency below.

# Insufficient IRS Funding Leads to a Failure to Collect Unpaid Taxes

In his final report to the IRS Oversight Board in 2002, former
Commissioner 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
nonfilers, 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.[^12]

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 the proposed adjustment.[^13]

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. 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 additional
federal revenue assuming the funding is wisely spent.

# Insufficient Measures and Funding Result in an Unbalanced and Inadequate IRS Compliance Program

The IRS can do more -- much more -- to improve tax compliance. Yet the
lack of appropriate and reliable measures of investment return for
taxpayer service leads the IRS to chronically underfund taxpayer service
activities. And the pressure to show activity and generate numbers in
the enforcement arena leads the IRS to centralize and automate much of
its compliance and enforcement activity, and virtually walk away from a
meaningful face-to-face presence in communities throughout the United
States.

For example, despite a finding by a leading IRS researcher that the
direct and indirect benefits of IRS's preparing tax returns for low
income taxpayers pays for itself many times over,[^14] the IRS has
reduced by about half the number of tax returns it helps low income
taxpayers prepare in its walk-in sites.[^15] Despite the challenges
individuals who start small businesses face in learning for the first
time about the legal requirements they face as employers (including the
payroll responsibilities of income and employment tax withholding,
paying over tax to the IRS, reporting to the IRS, and reporting to the
employee), the IRS has substantially reduced its field outreach
operation.[^16] Despite the number of taxpayers in certain states with
taxable income from farming activities, the IRS has apparently declared
questions about farm income and expenses "out of scope" for IRS walk-in
sites in those areas.[^17]

On the enforcement side, the IRS is currently conducting face-to-face
audits of only about one out of every 435 tax returns.[^18] It does not
have the resources to pursue a significant percentage of its accounts
receivable. And the private debt collection initiative, a controversial
program that is projected to raise only about \$1.4 billion over the
next 10 years,[^19] results from the IRS's lack of resources to pursue
these cases itself.

# Insufficient Funding Leads to Inadequate Face-to-Face Audit Coverage

During fiscal year (FY) 2005, the IRS examined 1,215,308 individual
income tax returns, with 84 percent of those examinations conducted by
correspondence.[^20] Correspondence examinations accounted for 88
percent of the FY 2005 examinations of individuals with incomes under
\$100,000 and 67 percent of those with incomes of \$100,000 or
more.[^21] While face-to-face examinations rose by 25 percent from FY
2002 through FY 2005, correspondence examinations increased by 170
percent over the same period.[^22]

**TABLE 1. FACE-TO-FACE AUDIT RATES**[^23]

![](media/image1.wmf){width="5.069444444444445in" height="3.48125in"}

![](media/image2.wmf){width="5.125in"
height="3.3354166666666667in"}**TABLE 2. CORRESPONDENCE AUDIT
RATES**[^24]

In correspondence examinations, the IRS generally sends an initial
contact letter informing the taxpayer that his or her return is under
examination, then a 30-day letter accompanied by a report detailing any
tax adjustment attributable to examined issues, and finally a Statutory
Notice of Deficiency if the taxpayer does not agree to, or otherwise
resolve, the proposed adjustment.[^25] Each phase of the process has
timeframes established by internal policy. If the taxpayer does not
respond within a prescribed time for action, the case moves to the next
phase through an automated batch process.[^26]

# Identifying Appropriate Inventory for Correspondence Examinations

The IRS utilizes internal database information to identify audit issues
such as the Earned Income Tax Credit (EITC). The exam functions may
select a return for correspondence audit if all the questioned items are
susceptible to direct verification from records that the taxpayer could
easily provide by mail, and a review of the return clearly indicates the
taxpayer can effectively communicate with the IRS in writing.[^27]

Correspondence examinations rely heavily on information reporting. While
correspondence examiners may request certain documents to identify
unreported income, the revenue agents and tax compliance officers who
conduct field and office examinations, respectively, use more
sophisticated indirect methods. Unlike correspondence examiners, revenue
agents are trained to use a "dynamic" examination strategy and change
the focus of the examination in response to new information. This
approach allows agents to find unreported income that the IRS could not
locate in a correspondence examination of limited scope.[^28] There are
indications that the IRS is using correspondence examinations to
accomplish work that is better reserved for interviews or field audits.
As depicted in the following chart, since fiscal year 2000, high income
taxpayers filing individual income tax returns are increasingly examined
by correspondence.

**TABLE 3. PERCENTAGE OF FORMS 1040 EXAMINED FACE-TO-FACE OR THROUGH
CORRESPONDENCE**[^29]

![](media/image3.wmf){width="5.372916666666667in"
height="3.3868055555555556in"}

Correspondence examinations have expanded to include strategies for
dealing with nonfilers, projects involving return preparers, and high
income taxpayers. However, the complexity of a case should dictate the
audit method. Conducting a correspondence examination that fails to
identify adjustments attributable to a complex issue only serves to
reinforce the noncompliance, not deter it.

A 2006 report by the Treasury Inspector General for Tax Administration
(TIGTA) found the IRS either abated or did not collect 86 percent of the
audit assessments on high income taxpayers, almost two years after the
assessments.[^30] In addition, of the \$2.1 billion assessed on high
income taxpayers through correspondence examination in

FY 2004, \$1.4 billion (66 percent) was attributable to taxpayers who
did not respond to the examiner.[^31]

The increase in correspondence examinations of taxpayers with Schedule C
businesses rose to about 30 percent of all high income taxpayer Schedule
C examinations from FY 2002 through FY 2004, and 54 percent of all high
income taxpayer Schedule C examinations in fiscal year 2005.[^32] Given
the potential for unreported income in Schedule C business activities
and the lack of third-party information reporting, it would appear that
the IRS should conduct most of these examinations face-to-face. Recent
reports on the makeup of the tax gap support this notion, indicating
that well over half (\$109 billion) of the individual underreporting gap
came from understated net business income --- underreported receipts and
overstated expenses.[^33]

# Insufficient IRS Funding Limits Personal Contact in Earned Income Tax Credit Audits and Can Lead to Incorrect Audit Results 

While the IRS is currently auditing only one out of 64 high income
returns, it is auditing one out of 41 EITC returns.[^34] In my view, the
level of EITC examinations is reasonable. On the other hand, as compared
to the low audit rate of high income and other taxpayers, there is
clearly disparate audit presence in the low income EITC taxpayer
population. This effect is even more obvious when comparing EITC audit
coverage to individual taxpayer coverage in general, where the EITC
audit coverage rate was 2.4 percent in FY 2005, but the overall
individual income tax audit rate was 0.9 percent.

**TABLE 4. INDIVIDUAL INCOME AND EITC RETURN COVERAGE RATES
(1997-2005)**

![](media/image4.wmf){width="5.75in" height="2.9993055555555554in"}

**CHART 1. INDIVIDUAL INCOME AND EITC RETURN COVERAGE RATES
(1997-2005)**[^35]

![](media/image5.wmf){width="6.491666666666666in"
height="1.5173611111111112in"}

In 2004, the Taxpayer Advocate Service conducted a study of audit
reconsideration cases where taxpayers claimed the EITC.[^36] The
findings suggest that the manner in which the IRS communicates with
taxpayers may significantly affect the outcome of the audit process. TAS
found that the likelihood of a taxpayer receiving additional EITC in
audit reconsideration increased with the number of phone calls made by
TAS employees. Overall, of taxpayers who went through the audit
reconsideration process and received no phone calls, only 38 percent
were awarded additional EITC. This percentage increased to 67 percent
for taxpayers who received three or more calls. [^37] Considering that
more than 40 million adults, or approximately 21 percent of the adult
population of the United States, have less than a high school education,
the lack of telephone or face-to-face individual contact can negatively
impact those taxpayers.[^38]

The IRS has made some significant improvements to its ability to answer
taxpayer calls. In January 2006, the Wage & Investment (W&I) Operating
Division instituted Intelligent Call Management on its toll-free phones
to improve the quality of correspondence examinations. This service
provides more immediate assistance to taxpayers by providing a better
level of service on unassigned cases and reduces the need for the
taxpayer to call several times to seek assistance. Additional
programming now allows extension routed calls to roll over to the next
available examiner if the assigned examiner is not available. As a
result of these improvements, the number of calls answered by a live
assistor rose from 14.9 percent in FY 2005 to 39.8 percent in

FY 2006.[^39]

This increased level of service is a significant move in the right
direction. However, the IRS's ability to sustain or enhance service
depends on staffing. Telephone assistors who serve a dual role as
correspondence examiners may be assigned cases that reduce telephone
communication with taxpayers as well as the overall level of service.
With FY 2007 funding levels for taxpayer service held to FY 2006 levels,
the IRS is moving employees from processing correspondence to answering
phones. Thus, when taxpayers send in responses to IRS inquiries, these
letters are often "unassociated" with their cases. Taxpayers who need
their refunds are harmed by these delays. In some instances, IRS may
issue a Notice of Deficiency without reviewing the taxpayer's
correspondence.

Moreover, taxpayers and their representatives continue to cite problems
with inconsistencies in the acceptance of documentation for
correspondence examination issues. These problems are especially
burdensome for low income taxpayers subject to EITC examinations and can
lead to incorrect results and IRS reworking the case as an audit
reconsideration when the taxpayer objects to collection of the tax.

In 2004, the IRS tested the use of an EITC certification form offering
three options for certifying child residency, a significant cause of
EITC disallowance. The study marked the first time that the IRS accepted
affidavits from third parties with record or personal knowledge of the
child's residency.[^40] Form 8836, Qualifying Children Residency
Statement, including the affidavit, guides the taxpayer through the
process of proving the EITC child residency test and eliminates the need
for multiple contacts by correspondence. The test results showed that
affidavits had the highest acceptance rate and provided a reliable way
to substantiate EITC eligibility, with significantly less burden to the
taxpayer.[^41] The IRS is resisting the National Taxpayer Advocate's
request that it utilize Form 8836 in all EITC examinations, on the
ground that the form requires further testing.[^42] In our view, the
IRS's failure to use this form in all EITC examinations burdens
taxpayers and wastes IRS resources by causing unnecessary calls or
correspondence, incorrect audit results, and rework in the form of audit
reconsiderations.

# Insufficient Funding Leads to Outsourcing Tax Collection 

In his final report to the IRS Oversight Board, former Commissioner
Rossotti reported the IRS was receiving sufficient resources to work
only 40 percent of some 4.5 million accounts receivable cases each year.
IRS research estimated that with an additional \$296.4 million, the
agency could collect \$9.47 billion.[^43] That translates to a return on
investment of 32:1. Among collection cases handled solely through phone
calls, the IRS has estimated an ROI of about 13:1.[^44]

Because Congress has not provided IRS with sufficient funding to work
these accounts, the Administration requested the authority to outsource
the collection of certain tax debts to private collection agencies.
Congress granted the requested authority in 2004,[^45] and the IRS began
to send cases to private debt collectors in September 2006.

Under the terms of the program, the IRS is paying out commissions of up
to 25 percent of each dollar collected to the private collection
agencies. The IRS is also bearing significant additional costs to
create, maintain, and oversee the program.[^46]

Internal IRS estimates show that the IRS, if given the funding, could
generate a substantially higher ROI than private contractors with the
potential to receive commissions of nearly 25 percent can produce.
Assuming a roughly 20 cent commission per dollar collected by PCAs, the
best the PCAs can do is a return of 4:1, disregarding IRS investment or
overhead costs. The significant administrative costs the IRS is
incurring to run the program, including the opportunity costs of pulling
experienced IRS personnel off higher dollar work to assist with this
initiative, reduce the ROI further. Despite supporting the use of
private debt collectors because of IRS resource limitations, IRS
Commissioner Mark Everson has repeatedly acknowledged that IRS employees
could collect unpaid taxes more cheaply and efficiently.[^47]

The result of underfunding the IRS in this area is that the government
is not maximizing its revenue collection and the risk of taxpayer rights
violations has been heightened due to the use as collectors of
non-governmental employees who will receive only limited taxpayer-rights
training. Collection practices that involve the "psychological pause"
("the next person who speaks loses") or instructions to "close the sale"
seem closer to boiler room techniques than efforts to bring taxpayers
into compliance. At the very least, such approaches are inconsistent
with the values built into IRS customer service initiatives since the
Internal Revenue Service Restructuring and Reform Act of 1998.

# Insufficient IRS Funding Can Lead to Collection Practices that Harm Taxpayers , Particularly Low Income Taxpayers, and Increase Accounts Receivable. 

## IRS Collection Practices Do Not Promote Early Intervention in Collection Cases {#irs-collection-practices-do-not-promote-early-intervention-in-collection-cases .Style-Heading-2-+-Not-Italic}

In the 2006 Annual Report to Congress, we analyzed IRS collection
practices and noted that the lack of early, meaningful interventions by
the IRS on delinquent tax accounts contributes to long-term financial
problems for many taxpayers and cost the government billions of dollars
in lost revenue.[^48] IRS methods for establishing the priority of
collection cases have traditionally placed primary emphasis on the
aggregate dollar amounts of delinquencies.[^49] As a result, many
collection accounts do not receive adequate attention because the
taxpayer does not owe "enough" delinquent taxes, at least not yet. The
IRS usually cites a lack of available collection resources as a barrier
to providing personal attention to many of these cases.[^50]

This IRS collection strategy harms taxpayers, particularly low income
taxpayers. Specifically, because low income taxpayers generally incur
relatively small tax debts and the IRS considers them low priority
cases, these accounts carry a high probability of being "surveyed,"
*i.e*., systemically reported as not collectible. Since penalty and
interest continue to accrue on these unresolved accounts, by the time
they grow to the level that triggers IRS attention, the amounts are so
large that the low income taxpayer cannot pay the debt in full or over
time.

## IRS Collection Practices Do Not Realistically Determine the Reasonable Collection Potential of Cases Involving Low Income Taxpayers {#irs-collection-practices-do-not-realistically-determine-the-reasonable-collection-potential-of-cases-involving-low-income-taxpayers .Style-Heading-2-+-Not-Italic}

When low income taxpayers proactively attempt to resolve their
delinquency problems, IRS collection practices serve as barriers to
mutually beneficial solutions. For example, the IRS's current national
standards for allowable living expenses (ALEs), used to calculate the
reasonable collection potential for purposes of offers in compromise and
installment agreements, discriminate against low income taxpayers.

The IRS's current ALE "national standards," which primarily represent
allowances for food and clothing, group taxpayers into eight income
stratifications.[^51] As defined by the ALE, *a family of four living at
the lowest defined income level is only entitled to \$11 more per month
for food than a family of three -- or \$132 per year!* The lowest three
income stratifications -- with their attendant "allowable" expenses --
are actually below the poverty income level as defined by the U.S.
Department of Health and Human Services.[^52] Thus, by basing "national
standards" on actual expenditure data instead of realistic cost of
living allowances, the IRS forces low income taxpayers to live *below*
the poverty threshold with respect to their basic living expenses.[^53]
For the federal government to expect a family of four to feed a child on
\$132 a year is an affront to basic human dignity.

The IRS's failure to develop reasonable allowable expense standards that
recognize the need for taxpayers to retain sufficient net income to rise
above the poverty level, as measured by federal poverty guidelines (or
some reasonable percentage above them), harms taxpayers by requiring
them to pay unrealistic amounts, increases the IRS's accounts receivable
by failing to provide for account resolution, and alienates taxpayers
who may be trying to become compliant.

# IRS Emphasis on Automated Levies Harms Elderly and Disabled Social Security Recipients

The Taxpayer Relief Act of 1997 (TRA 97) authorized the IRS to issue
continuous levies for up to 15 percent of federal payments due to
taxpayers who have an unpaid federal tax liability.[^54] Under the
Federal Payment Levy Program (FPLP), an automated system matches IRS
records against those of the government's Financial Management Service
(FMS) to locate federal payment recipients who have delinquent income
tax debts.[^55] Once a match occurs, the IRS attempts to notify the
recipient of the potential levy by sending a letter with information
about the liability and the taxpayer's appeal rights. As an additional
precaution for taxpayers who receive benefits paid by the Social
Security Administration (SSA), the IRS sends a second notice before
transmitting the levy to the FMS. When the FMS generates a levy payment,
it sends a notice to the taxpayer's address of record on file with the
appropriate federal agency.

From FY 2002 through the first quarter of FY 2006, 84 percent of all
FPLP levies involved SSA payments to the elderly and disabled.[^56]
Although the law limits FPLP levies to only 15 percent of each Social
Security payment, the remainder may not be enough to avoid a financial
hardship, considering that:

-   Social Security provides at least half of the total income for 65
    percent of beneficiaries aged 65 or over, and is the only source of
    income for more than 20 percent of this population;[^57] and

-   As of August 2006, Social Security recipients received an average
    monthly benefit of \$923.30. An FPLP levy would reduce the amount to
    \$784.80 per month.[^58]

Between FY 2005 and FY 2006, FPLP case receipts in the Taxpayer Advocate
Service increased by 143 percent (from 1,707 case receipts in FY 2005 to
4,147 case receipts in FY 2006). Of the 3,527 FPLP cases closed by TAS
in FY 2006, 73 percent received full or partial relief from the
levy.[^59] TAS FPLP cases often involve not only the TAS case advocate
but also several IRS, Social Security Administration, and FMS employees.
Frequently, at least four federal employees must undo what an effective
screen could prevent occurring. This situation is not only harmful and
burdensome to taxpayers but it is also an astonishing waste of valuable
resources.

All of these statistics demonstrate how imperative it is that the IRS
develops an effective screen to eliminate the need for low income
elderly or disabled individuals to contact the IRS and seek relief from
a levy after the fact. Yet despite two IRS task forces, a GAO audit, and
multiple National Taxpayer Advocate Annual Reports to Congress (with
specific recommendations) over the past five years, the IRS has been
unable to devise a feasible method of screening out low income taxpayers
from this automated process.[^60]

The IRS has finally agreed, in response to the 2006 Annual Report to
Congress, to conduct the necessary research to develop an appropriate
screen. While this research has yet to commence, elderly and disabled
Social Security recipients are today having their benefits reduced under
the FPLP. Congress needs to let the IRS know that this research and the
development of an effective screening mechanism is of the utmost
importance for protecting the rights of this vulnerable population.

# Insufficient Funding Leads to Neglect of Important Taxpayer Service Programs

The IRS has long acknowledged that taxpayer service plays a significant
role in promoting tax compliance. In fact, its current strategic plan is
based on the principle: "Service + Enforcement = Compliance."[^61] Yet
the following examples illustrate the neglect of important services that
likely is resulting in a higher tax gap.

## Tax Return Preparation

The IRS historically has prepared tax returns for low income taxpayers
at its walk-in sites (called "Taxpayer Assistance Centers," or "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.[^62] 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 substantially reduced return preparation at its TACs. The number of
tax returns it prepared dropped from 665,868 in FY 2003 to a projected
305,000 in FY 2006.

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. Discriminant Function
(DIF) scores[^63] for self-prepared returns were between 21 and 26
percent higher than returns prepared at the TACs. The DIF scores for
returns prepared by commercial preparers were between 25 and 31 percent
higher than returns prepared at the TACs.[^64]

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.[^65]
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 improvements in compliance among filers of individual
returns.[^66]

## Portal for Free Electronic Filing of Tax Returns

Few policy decisions make less sense to me than the IRS's failure to
provide taxpayers with the ability to file a return electronically and
directly with the IRS *for free*. The IRS is far behind in meeting its
congressional mandate to achieve electronic filing of 80 percent of all
returns by FY 2007.[^67] For the 2006 filing season, about 42.4 million
individual tax returns, or about 32.5 percent, were prepared using
computer software yet were printed out on paper and mailed to the
IRS.[^68]

Taxpayers in focus groups and town hall meetings consistently say that
the cost of electronically filing and privacy concerns about data going
through third parties are significant barriers to them e-filing their
returns. Given the benefits that could be realized by reallocating the
significant IRS savings from increased e-filing -- increased phone
coverage, increased responsiveness to taxpayer correspondence, early
intervention in collection accounts (including outbound calling) -- it
makes economic sense as well as common sense to mandate the IRS to
undertake the research and development of a portal for directly
receiving electronically-filed returns.

## Meeting Taxpayers' Service Needs and Preferences

In September 2005, the IRS formed the Taxpayer Assistance Blueprint
(TAB) team, with employees from several IRS functions, including the
Taxpayer Advocate Service (TAS), in response to a congressional
directive to develop a five-year plan for taxpayer service.[^69] The TAB
delivered an initial report to Congress in April 2006[^70] and plans to
release its final report in early 2007. The critical part of the
upcoming report is the five-year plan for how the IRS should provide
taxpayer service. [^71]

In developing a five-year plan for taxpayer service and weighing various
policy and budget considerations, the IRS must decide what obligation it
has to provide information and services to taxpayers to meet their
needs. There are a number of sources available to meet taxpayer needs,
including the IRS, volunteer organizations, and paid practitioners. When
deciding how to meet taxpayer needs in the future, the IRS must be sure
it is not shifting this responsibility from itself to volunteers and
paid practitioners. While volunteer groups and practitioners play an
important role in the tax community, where the IRS is the best source
for providing information and services to meet taxpayer needs, it should
not shift that responsibility to outside groups over which it has little
or no control.

Taxpayer preferences are linked to their ability to use a certain method
(or channel) of service delivery. Factors such as age, income, literacy,
language skills, and disability also influence preferences.[^72] When
analyzing taxpayer preferences, the IRS must keep in mind the needs of
certain taxpaying populations such as the elderly, low income, low
literacy, limited English proficiency, and disabled. While the general
taxpayer population may have certain preferences for obtaining needed
services, these preferences may not hold true for all taxpayers. The IRS
owes an obligation to provide services in a manner that all taxpayers
can access them, including those taxpayers whose needs differ from the
general population.

## Reasonable Accommodations for Taxpayers with Disabilities

Persons with disabilities are the largest protected class in the United
States. This group is diverse in age, race, and economic standing.

-   There are 51.2 million Americans, 18 percent of the population, who
    have some level of disability.

-   There are 32.5 million Americans, or 12 percent of the population,
    who have a severe disability.

-   10.7 million Americans age six and older need daily assistance with
    one or more activities of life, such as taking a bath or using the
    telephone.

-   1.8 million Americans 15 and older report being unable to see.

-   There are 2.6 million Americans, 15 or older, who report some
    difficulty having their speech understood by others.

-   There are 14.3 million Americans with limitations on their cognitive
    function or an emotional or mental illness.[^73]

    The median income for Americans who have a non-severe disability is
    \$22,000, compared to \$25,000 for those who have no
    disability.[^74] Twenty-six percent of Americans with a severe
    disability fall below the poverty line, compared with 11 percent of
    those with a non-severe disability and six percent with no
    disability.[^75] Thirty--three percent of Americans between the ages
    of 25 and 64 who have a non-severe disability, and 22 percent of
    those with severe disabilities have graduated from college, compared
    to the 43 percent who do not have disabilities.[^76] Thirty-six
    percent of Americans between the ages of 15 and 64 with a severe
    disability have a computer and 29 percent use the Internet at home,
    compared with 61 percent of Americans who do not have a disability
    and have a computer and 51 percent who use the Internet at
    home.[^77] Finally, 2.6 million veterans receive compensation for
    service related disabilities.[^78] Clearly, persons with
    disabilities constitute a large and diverse segment of the U.S.
    population.

In the 2006 Annual Report to Congress, I identified three major barriers
encountered by disabled taxpayers:

-   communication barriers, which limit or deter taxpayers' ability to
    receive IRS assistance or communicate effectively in audits or
    collection matters;

-   insufficient education and outreach to the disabled community,
    particularly with respect to disabled persons who are self-employed
    or running a small business; and

-   the complexity of tax deductions and credits designed to act as
    incentives for employment of disabled persons, which leads to
    underutilization of these provisions.

The IRS's inability to adequately serve this taxpayer population does
not arise from a lack of caring. In fact, the IRS's Stakeholder
Partnership, Education, and Communication (SPEC) function has many
innovative products and projects to assist these taxpayers. The IRS has
the ability and the will to do much more than it is currently doing, but
it needs to establish a strategic plan that reaches across all IRS
functions to ensure access at each stage of a disabled person's
interaction with the tax system. And Congress should adequately fund
implementation of that plan.

## Assistance to Persons with Limited English Proficiency

In the 2006 Annual Report to Congress, I commend the IRS for many of its
efforts but also highlight several challenges facing tax administrators
as they attempt to assist taxpayers with limited English proficiency
(LEP).[^79] I would like to discuss one particular aspect here, as I
believe that it has the greatest likelihood of harming LEP taxpayers.
When corresponding with taxpayers, the IRS does not offer written
language assistance to a large number of LEP taxpayers, and does not
translate into other languages vital documents that significantly impact
taxpayers' rights.

Executive Order 13166 requires all federal agencies to develop and
implement a system by which LEP individuals can meaningfully access
services without unduly burdening the fundamental mission of the
agency.[^80] Per the Executive Order, the Department of Justice issued
guidance and provided a framework for federal agencies to carry out this
mission, including determining what documents should be considered for
translation.[^81] Using this guidance, the IRS has designated 108
documents as "vital."[^82] The IRS defines vital documents as either
"required by law or critical to the receipt of a federal benefit or
service."[^83]

The IRS plans to translate these vital documents only into Spanish, its
sole designated "regularly encountered" language. This policy, which
precludes the translation of vital documents into any language but
Spanish, leaves millions of LEP taxpayers struggling to understand their
tax obligations and navigate the tax controversy process. For example,
the IRS offers no written language assistance or translated notices to
approximately 1.3 million people who speak Chinese and identify
themselves as speaking English less than "very well."[^84] The IRS
recognizes the Asian population as the second fastest growing LEP
population segment in the U.S., yet does not include any Asian languages
in its translation policy.[^85]

The IRS has translated a limited number of documents into other
languages, mostly for education and outreach purposes.[^86] Individuals
who speak languages other than English or Spanish must look outside the
IRS for help in translating forms, notices, and letters, many which
directly impact taxpayer rights. Expecting LEP taxpayers to find their
own translators to interpret forms, notices, and publications places a
burden upon these taxpayers. Further, not being aware of the complexity
or importance of IRS forms and notices, these LEP taxpayers may seek
help from others, such as their school-age children, who only have
limited English skills or who cannot comprehend and translate complex
IRS issues.

The IRS has translated over 240 documents into Spanish.[^87] While this
figure includes 87 of the 108 "vital" documents, the IRS has yet to
translate several "vital" documents that are essential to the
examination or collection process and the protection of taxpayer
rights.[^88]

**TABLE 5. SAMPLE OF VITAL DOCUMENTS NOT CURRENTLY TRANSLATED INTO
SPANISH**[^89]

+--------------------+----------+-----------+-------------------------+
| **Document Title** | *        | **Product | **Legislative           |
|                    | *Product | Number**  | Requirement**           |
|                    | Type**   |           |                         |
+--------------------+----------+-----------+-------------------------+
| Notice of          | Letter   | 531(DO)   | IRC 6212/6155/6303      |
| Deficiency[^90]    |          |           |                         |
|                    |          | 531(SC)   |                         |
+--------------------+----------+-----------+-------------------------+
| CP 2000 -- AUR     | Notice   | CP 2000   | IRC 6212                |
| Notice of Proposed |          |           |                         |
| Tax Changes[^91]   |          |           |                         |
+--------------------+----------+-----------+-------------------------+
| Notice of Intent   | Notice   | CP-90     | IRC 6331/6320           |
| to Levy and Notice |          |           |                         |
| of Your Right to a |          |           |                         |
| Hearing[^92]       |          |           |                         |
+--------------------+----------+-----------+-------------------------+
| LT 11 Notice of    | Notice   | LT 11     | IRC 6330/6331           |
| Intent to          |          |           |                         |
| Levy[^93]          |          |           |                         |
+--------------------+----------+-----------+-------------------------+

As noted earlier, the IRS defines "vital documents" as those that are
"required by law or critical to the receipt of a federal benefit or
service."[^94] Following this definition without consideration for
IRS-specific rights may lead the IRS to omit documents for translation
that impact taxpayer rights or provide taxpayer protections. It is clear
from the list above that the IRS has adopted a narrow definition of the
term "federal benefit or service" -- perhaps driven by resource
concerns. Notwithstanding resource levels, fundamental statutory
taxpayer rights, such as the right to be heard in Tax Court or have a
Collection Due Process (CDP) hearing, are indeed "fundamental benefits
or services." In our view, the IRS's current translation policy does not
comply with Executive Order 13166.

## Small Business Outreach

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 sole proprietors runs at about 43 percent.[^95] 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 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.[^96] 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.[^97] In my view, the reduction
in TEC staffing will reduce tax compliance and place a greater burden on
IRS enforcement personnel.

I cite these examples to make two points. First, although I disagree
with certain decisions the IRS has made, the failure to provide the IRS
with adequate resources to collect taxes has forced the IRS to cut
corners in places where corners should not have to be cut. Second, I
cite the examples of tax return preparation and TEC to underscore the
important role taxpayer service plays in promoting tax compliance.
Additional funding for the IRS should be provided in a balanced manner.
The revenue derived from direct enforcement actions may be easier to
measure, but the effects of taxpayer service may be equally significant
and perhaps more significant.

# Insufficient Funding For Programs that Assist Taxpayers Will Negatively Impact Taxpayer Compliance

## Low Income Taxpayer Clinics

In 1998 Congress authorized funding for the Low Income Taxpayer Clinic
grant program to provide access to representation for low income
taxpayers, so that achieving a correct outcome in an IRS dispute did not
hinge on the taxpayer's ability to pay for representation. IRC § 7526
provides for matching grants of up to \$100,000 per year for qualifying
organizations that represent low income taxpayers involved in
controversies with the IRS and for organizations that provide tax
education and outreach to taxpayers who speak English as second language
(ESL taxpayers) or who have limited English proficiency (LEP). IRC §
7526 requires clinics to provide services for free or for no more than a
nominal fee.

In the 2006 grant cycle, the LITC Program funded at least one clinic in
every state, the District of Columbia, and Puerto Rico. For the 2007
grant cycle, TAS received 192 grant applications, including 52
first-time applicants -- many in areas where taxpayers are underserved
-- and for the first time in the history of the LITC program, TAS
received an application from Guam. TAS awarded 2007 grants to at least
one clinic in the District of Columbia, Puerto Rico, Guam, and every
state except Colorado. We plan to issue a 2007 supplemental grant
application that will focus solely on Colorado, so we have coverage in
each state.

In addition to educating ESL and LEP taxpayers about their rights and
responsibilities under the U.S. tax system, LITCs provide much-needed
representation to taxpayers in all types of tax controversies, including
audits, levies, liens, installment agreements, offers in compromise, and
nonfilers re-entering the system. For example, LITCs represent low
income taxpayers before the United States Tax Court. LITCs also have
stepped in to help low income taxpayers in the following situations:

-   Representation of taxpayers is EITC audits, including Somali low
    income taxpayers whose returns were prepared by incompetent,
    unscrupulous or criminal preparers;

-   TAS referrals for representation of claimants in the "Pigford" class
    action with respect to general tax issues faced by claimants;[^98]
    and

-   Representation of low income taxpayers who are victims of identity
    theft.

The Taxpayer Advocate Service has established the following goals for
the Low Income Taxpayer Clinic program:

-   Ensure each state (plus the District of Columbia and Puerto Rico)
    continues to be served by at least one clinic;

-   Expand coverage in states that do not have both controversy
    representation and ESL education and outreach; and

-   Ensure grant recipients demonstrate they are serving geographic
    areas that have sizable populations eligible for and requiring LITC
    services.

Additional funding for the LITC grant program is good for taxpayers and
good for the government. LITCs help taxpayers re-enter the tax system or
remain in compliance. I encourage Congress to support this program by
providing for further expansion of the clinics. By statute, every dollar
Congress invests in this program must be matched by another dollar
raised by the LITC for LITC services. This is surely an excellent
investment.

## Taxpayer Advocate Service

The Taxpayer Advocate Service was created by Congress to help taxpayers
solve their problems with the IRS and make legislative and
administrative recommendations to mitigate such problems.[^99] The two
main functions in TAS are "case advocacy" and "systemic advocacy."
Approximately 90 percent of TAS's operating funds in FY 2006 were spent
on case advocacy. By statute, TAS is required to maintain at least one
office in each state, and TAS maintains multiple offices in the largest
states and in co-location with each IRS campus. Since FY 2001, TAS's
first full year of existence, the results of TAS's case advocacy quality
measure have improved from 71.6 percent

(+/- 1.01%) in FY 2001 to 89.7 percent (+/- .73%) in FY 2006.[^100] At
the same time, we have managed to reduce cycle time (median cycle time
on TAS cases was 45 days in FY 2006), and satisfy the taxpayers whom we
serve (on a scale of 0-5, taxpayers reported an average satisfaction
level of 4.34 in FY 2006). In 70 percent of the cases TAS closed in
FY 2006, we were able to obtain relief for the taxpayer.

I am particularly pleased that TAS has managed to maintain its high
levels of TAS case quality and timeliness in the face of a 43 percent
increase in TAS cases over the past two years (from 168,856 in FY 2004
to 242,173 in FY 2006) and a reduction in TAS staffing of seven
percent.[^101] The increase in cases combined with the reduction in
staffing means that the average workload of each TAS case advocate has
increased by about 50 percent.

Because cases generally come to TAS only when taxpayers have encountered
problems trying to resolve their problems directly with other IRS
functions, it is essential to sound tax administration that these
taxpayers be properly treated on the second attempt. While we have
managed to handle our increasing inventory to date, I am concerned that
our effectiveness in meeting the needs of the taxpaying public will
decline if the gap between the number of cases we receive and the
staffing we have available to work those cases widens much further.

# A Proposal to Revise the Congressional Budget Rules to Improve IRS Funding Decisions

In light of the IRS's unique role as the government's revenue generator,
and to increase voluntary compliance by maintaining the appropriate
balance between service and enforcement activities, we believe IRS
funding decisions should stand on their own and not be subject to the
general spending caps. Thus, we make the following recommendations:

-   Congress should consider revising its budget rules in a manner that
    allows the budget and appropriations committees to make a judgment
    about the answer to the question: "What level of funding will
    maximize tax compliance, particularly voluntary compliance, with our
    nation's tax laws, with due regard for protecting taxpayer rights
    and minimizing taxpayer burden?" and then set the IRS funding level
    accordingly, without regard to spending caps.

-   In allocating IRS resources, Congress should keep in mind that tax
    compliance is a function of both high quality taxpayer service and
    effective tax-law enforcement, and it is essential that the IRS
    continue to maintain a balanced approach to improving tax
    compliance.

-   Congress should provide increases in IRS personnel funding at a
    steady but gradual pace, perhaps two percent to three percent a year
    above inflation. We do not think the IRS can ramp up its staffing
    more quickly without encountering significant transitional
    difficulties. However, Congress should consider providing more rapid
    funding increases for technology and research improvements, as the
    transitional challenges of absorbing additional resources are
    probably less significant in these areas and the potential exists to
    generate substantial productivity gains.

-   To assist Congress in performing its oversight responsibilities and
    determining the appropriate IRS funding level in future years,
    Congress should require the IRS to provide annual or semiannual
    reports detailing IRS's 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.[^102]

[^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]: National Taxpayer Advocate 2006 Annual Report to Congress 442 --
    457.

[^3]: Department of the Treasury, *FY 2007 Budget in Brief* at 59.

[^4]: 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.

[^5]: When collecting tax from the vast majority of taxpayers who file
    returns and pay all or substantially all of the tax they owe
    voluntarily, the cost the IRS incurs per taxpayer is very low. As
    the IRS attempts to collect tax from noncompliant taxpayers through
    broader outreach efforts or through examination and collection
    actions, the cost per taxpayer rises substantially. Therefore, the
    *marginal* return on investment (ROI) the IRS achieves as it
    attempts to collect unpaid taxes is likely to be considerably lower
    than the *average* ROI of 210:1 that the IRS achieves on taxes paid
    voluntarily. But if the IRS were given more resources, most data
    indicate that the IRS could generate a substantially positive
    marginal ROI.

[^6]: In the current Congress, the Appropriations subcommittees have
    been restructured, and the IRS will be funded through the
    Appropriations Subcommittee on Financial Services and General
    Government.

[^7]: Government Accountability Office, GAO-07-136, *Financial Audit:
    IRS's Fiscal Years 2006 and 2005 Financial Statements* 68 (Nov.
    2006).

[^8]: Charles O. Rossotti, *Many Unhappy Returns: One Man's Quest to
    Turn Around the Most Unpopular Organization in America* 278 (2005).
    On pages 278-286, Mr. Rossotti presents an interesting personal
    perspective on the budget process and the politics behind the
    chronic underfunding of the IRS.

[^9]: The recent IRS National Research Program study estimates the 2001
    "gross tax gap" -- the difference between the amount of tax imposed
    by law and the amount of tax paid voluntarily and timely -- at \$345
    billion. It estimates the "net tax gap" -- the difference between
    the amount of tax imposed by law and the amount of tax paid after
    taking into account late payments and enforced collection -- at
    \$290 billion.

[^10]: *See* Pub. L. No. 109-115, § 205, 119 Stat. 2396 (2005), which
    provided:

    > 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.

[^11]: The chairman and ranking member of the Senate Budget Committee
    supported additional funding for the IRS in the FY 2007 budget
    resolution. Senator Judd Gregg acknowledged that the existing budget
    procedures have the effect of shortchanging the IRS. He said: "We've
    got to talk to the \[Congressional Budget Office\] about scoring on
    \[additional funding provided to IRS\]. Clearly there's a return on
    that money." Dustin Stamper, *Everson Pledges to Narrow Growing Tax
    Gap,* 110 Tax Notes 807 (Feb. 20, 2006). Similarly, Senator Kent
    Conrad stated: "Rather than a tax increase, I think the first place
    we ought to look . . . is the tax gap. If we could collect this
    money, we'd virtually eliminate the deficit." Emily Dagostino,
    *Senate Budget Resolution Would Increase IRS Enforcement Funding,*
    110 Tax Notes 1129 (Mar. 13, 2006).

[^12]: Commissioner Charles O. Rossotti, *Report to the IRS Oversight
    Board: Assessment of the IRS and the Tax System* 16 (Sept. 2002).

[^13]: 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).

[^14]: *S**ee* 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).

[^15]: IRS Wage & Investment Operating Division, *Business Performance
    Review, Wage and Investment Operating Division, FY 2006*; IRS Wage &
    Investment Operating Division, *Business Performance Review, Wage
    and Investment Operating Division, FY 2005*; IRS Wage & Investment
    Operating Division, *Business Performance Review, Wage and
    Investment Operating Division, FY 2004*; IRS Wage & Investment
    Operating Division, *Business Performance Review, Wage and
    Investment Operating Division, FY 2003.*

[^16]: IRS Small Business/Self Employed Operating Division, Response to
    Taxpayer Advocate Information Request (Sept. 5, 2006).

[^17]: This concern was raised by a taxpayer during a 2006 Town Hall
    meeting with the National Taxpayer Advocate in Fargo, North Dakota.

[^18]: Internal Revenue Service, *Fiscal Year 2006 Enforcement and
    Service Results* (Nov. 20, 2006).

[^19]: *See* IRS News Release IR-2006-42, *IRS Selects Three Firms to
    Take Part In Delinquent Tax Collection Effort* (March 9, 2006).

[^20]: Treasury Inspector General for Tax Administration, Ref. No.
    2006-30-055, *Trends in Compliance Activities through Fiscal Year
    2005* 8 (Mar. 27, 2006).

[^21]: Treasury Inspector General for Tax Administration, Ref. No.
    2006-30-055, *Trends in Compliance Activities through Fiscal Year
    2005* 8 (Mar.27, 2006).

[^22]: Treasury Inspector General for Tax Administration, Ref. No.
    2006-30-105, *While Examinations of High-Income Taxpayers Have
    Increased, the Impact on Compliance May Be Limited* 2 (Jul. 25,
    2006).

[^23]: Treasury Inspector General for Tax Administration, Ref. No.
    2006-30-055, Trends in Compliance Activities, IRS Data Book
    Spreadsheet (Mar. 2006).

[^24]: Treasury Inspector General for Tax Administration, Ref. No.
    2006-30-055, *Trends in Compliance Activities,* IRS Data Book
    Spreadsheet (Mar. 2006). The significant drop in correspondence
    audits between 1996 and 1997 may be due to Congress authorizing the
    IRS to use Math Error Authority for specific dependency, EITC, and
    child tax credit issues. Once the IRS received summary assessment
    authority, it didn't have to use deficiency procedures to assess tax
    so the results are excluded from correspondence audit rates. For a
    more detailed discussion of the IRS's math and clerical error
    authority, *see* National Taxpayer Advocate 2002 Annual Report to
    Congress 25-31 and 185-197.

[^25]: IRC § 6212. If the IRS proposes changes to a tax liability and
    the taxpayer does not respond or cannot reach an agreement with the
    IRS, the IRS issues a Statutory Notice of Deficiency. The notice of
    deficiency allows the taxpayer 90 days to petition the United States
    Tax Court and outlines the procedures to follow. If the taxpayer
    does not petition the Tax Court, the IRS assesses the tax and gives
    notice and demand to the taxpayer for the amount due.

[^26]: IRS Wage and Investment Division, *Correspondence Examination
    Automation Support, Concept of Operations* 6 (Jul. 16, 2004).

[^27]: IRM 4.1.5.9.1(4) (Oct. 1, 2001).

[^28]: *The Tax Gap: Hearing Before the Subcomm. on Federal Financial
    Management, Government Information, and International Security,
    Senate Comm. On Homeland Security and Governmental Affairs*, 109^th^
    Cong., 2^nd^ Sess (Oct.26, 2005) (statement of Nina E. Olson,
    National Taxpayer Advocate).

[^29]: Treasury Inspector General for Tax Administration, Ref. No.
    2006-30-055, *Trends in Compliance Activities* 33 (Mar. 2006).

[^30]: Treasury Inspector General for Tax Administration, Ref. No.
    2006-30-105, *While Examinations of High-Income Taxpayers Have
    Increased, the Impact on Compliance May Be Limited* 2 (Jul. 25,
    2006).

[^31]: For a related discussion of non-responders, *see* National
    Taxpayer Advocate 2006 Annual Report to Congress, Most Serious
    Problem, *Taxpayer No Response Rates,* 355 -- 375.*.*

[^32]: Treasury Inspector General for Tax Administration, Ref. No.
    2006-30-105, *While Examinations of High-Income Taxpayers Have
    Increased, the Impact on Compliance May Be Limited* 2 (Jul. 25,
    2006).

[^33]: IRS, *Business Income and the Tax Gap*, at
    <http://www.irs.gov/newsroom/article/0,,id=158618,00.html> (Jun.
    2006).

[^34]: High income returns are defined as those for which the total
    positive income is \$100,000 or more, where total positive income is
    defined, in general, as the sum of all positive amounts shown for
    the various sources of income reported on the individual income tax
    return and, thus, excludes net losses. IRS Data Book 2005, Table 10.
    Earned Income Tax Audits are from the Audit Information Management
    System (AIMS) Closed Case Database.

[^35]: Individual Income Tax Audits and Coverage Rates from IRS Data
    Books FY 1997 -- FY 2005. Earned Income Tax Audits FY 1997 -- FY
    2003 from IRS Summary of Compliance Activity. Earned Income Tax
    Audits FY 2004 and 2005 from Audit Information System Closed Case
    Database. EITC Coverage Rate computed by dividing EITC audits by
    EITC returns filed from prior processing year (IRTF).

[^36]: National Taxpayer Advocate 2004 Annual Report to Congress vol. 2,
    at i.

[^37]: *Id.* The National Taxpayer Advocate\'s Earned Income Tax Credit
    (EITC) Audit Reconsideration Study included a random sample of more
    than 900 EITC audit reconsideration cases closed between July 1,
    2002, and January 31, 2003. Ultimately, 679 cases (340 IRS
    Examination and 339 TAS) were analyzed in detail. The study found 70
    percent of the EITC audit reconsideration cases came to TAS for
    assistance because the taxpayer had not heard from IRS concerning
    his or her original audit or audit reconsideration request. For the
    339 TAS cases, employees made 293 follow-up contact phone calls with
    the taxpayers and sent 436 follow-up letters. In contrast, of the
    340 IRS Examination cases, tax examiners made only six follow-up
    contact phone calls to taxpayers and sent only 173 follow-up letters
    during the initial audit process. The likelihood of a taxpayer
    receiving additional EITC increased with the number of phone calls
    made by the TAS employees. Overall, of taxpayers who went through
    the audit reconsideration process and received no phone calls, only
    38 percent were awarded EITC. This percentage increased to 67
    percent for taxpayers who received three or more calls.

[^38]: Beth Lasater and Barbara Elliott, RTI International Center for
    Research in Education, *Profiles of the Adult Education Target
    Population*, Information from the 2000 Census 1-9 (Revised Dec.
    2005). That is, they have not completed a high school diploma or
    equivalent adults who have completed four or fewer years of
    secondary schooling constitute 11.3 percent of the target
    population, or 2.4 percent of the total adult population.

[^39]: IRS Wage and Investment Operating Division research request
    response (Nov. 22, 2006).

[^40]: *See* IRS, *IRS Earned Income Tax Credit (EITC) Initiative: Final
    Report to Congress, October 2005* 17 (Oct. 2005).

[^41]: *Id*. at 33. The overall acceptance rate of documents was 64
    percent. Affidavits had the highest acceptance rate of 82 percent,
    followed by letters with an acceptance rate of 55 percent, and
    records with an acceptance rate of 48 percent.

[^42]: *See* National Taxpayer Advocate 2006 Annual Report to Congress
    305.

[^43]: Commissioner Charles O. Rossotti, *Report to the IRS Oversight
    Board: Assessment of the IRS and the Tax System* 16 (Sept. 2002).

[^44]: Government Accountability Office, GAO-06-1000T, *Tax Compliance:
    Opportunities Exist to Reduce the Tax Gap Using a Variety of
    Approaches,* at 17 (July 26, 2006).

[^45]: Pub. L. No. 108-357, § 881(a)(1) (enacting IRC § 6306).

[^46]: For a detailed discussion of the private debt collection program,
    *see* National Taxpayer Advocate 2006 Annual Report to Congress at
    34-61 (Most Serious Problem: *True Costs and Benefits of Private
    Debt Collection)*.

[^47]: *See, e.g.,* Dustin Stamper, *Everson Admits Private Debt
    Collection Costs More, Defends Return Disclosure Regs,* 111 Tax
    Notes 11 (Apr. 3, 2006).

[^48]: National Taxpayer Advocate 2006 Annual Report to Congress, *Most
    Serious Problem: Early Invention in IRS Collection Cases*, 62 -- 82.

[^49]: IRS, Small Business/Self-Employed Operating Division, *Risk Based
    Collection* (Mar. 2006), available at
    http://sbse.web.irs.gov/ACS/Risk_Based/Risk_Based_Collection.htm.

[^50]: Treasury Inspector General for Tax Administration, Ref. No.
    2006-30-055, *Trends in Compliance Activities Through Fiscal Year
    2005* (Mar. 2006).

[^51]: IRS, *National Standards for Allowable Living Expenses*, at
    http://www.irs.gov/businesses/small/article/0,,id=104627,00.html.

[^52]: United States Department of Health and Human Services, *Poverty
    Guidelines Research and Measurement* at http://aspe.hhs.gov/poverty.

[^53]: To deviate from the national standard ALEs, the taxpayer must
    provide documentation that his or her expenses are greater than the
    sum of *all* the categories covered by the national standards. This
    requirement is virtually impossible for low income taxpayers to
    meet, who are often "unbanked" and conduct transactions in cash.
    *See* IRM 5.15.1.8(3) (Rev. 05-01-2004).

[^54]: IRC § 6331(h)(2)(A). Payments subject to the Federal Payment Levy
    Program include any federal payments other than those for which
    eligibility is based on the income or assets of the recipients.

[^55]: The Financial Management Service (FMS) is the Department of
    Treasury agency that processes payments for various federal
    agencies.

[^56]: IRS, W&I Operating Division spreadsheets titled "FPLP Monthly
    counts CUM" (May 5, 2006) and "FPLP Monthly counts FY 2006"
    (February 28, 2007). \[Total number of SSA levies from FY 2002
    through FY 2006 divided by total number of FPLP levies from FY 2002
    through FY 2006 = 84 percent.\]

[^57]: Social Security Administration, *Fast Facts & Figures About
    Social Security*, 2005 (Sept. 2005).

[^58]: Social Security Administration, Office of Policy, Research,
    Evaluation and Statistics, *Monthly Statistical Snapshot*, Table 2,
    Social Security Benefits (Oct. 2006). \[\$923.30 x .15 = \$138.50
    and \$923.30 -- 138.50 = \$784.80.\]

[^59]: Taxpayer Advocate Management Information System (TAMIS).

[^60]: *See* National Taxpayer Advocate 2001 Annual Report to Congress
    202 - 209; National Taxpayer Advocate 2003 Annual Report to Congress
    206 -- 212; National Taxpayer Advocate 2004 Annual Report to
    Congress 246 -- 263; National Taxpayer Advocate 2005 Annual Report
    to Congress 123 - 135. *See also,* National Taxpayer Advocate 2006
    Annual Report to Congress 114 -- 117.

[^61]: In the preface to the National Taxpayer Advocate 2006 Annual
    Report to Congress, I argue that compliance should be viewed as a
    third category or IRS emphasis rather than as the sum of service and
    enforcement. There are many compliance activities the IRS
    undertakes, such as document matching, that catch errors taxpayers
    make either inadvertently or negligently. In my view, these
    activities should be classified as "compliance" activities, and the
    "enforcement" label should be reserved for cases of willful
    violation of the laws. I argue that nomenclature matters in this
    area because if the IRS treats willful and inadvertent compliance
    the same way, IRS personnel will treat innocent taxpayers harshly
    and taxpayers will feel that the IRS has dealt with them unfairly,
    perhaps alienating them from the tax system and reducing their
    future compliance.

[^62]: Internal Revenue Service, Compliance Estimates for Earned Income
    Tax Credit Claimed on 1999 Returns 3 (Feb. 28, 2002).

[^63]: The DIF score is an estimate of the likelihood of noncompliance
    on a return. A higher score indicates a higher likelihood of
    noncompliance.

[^64]: IRS Compliance Data Warehouse, Individual Returns Transaction
    File data for tax years 2002-2004.

[^65]: IRS Compliance Data Warehouse, Audit Inventory Management System
    data for tax years 2002-2004.

[^66]: *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).

[^67]: In 2006, through August 26 of that year, about 72 million
    individual income tax returns out of the approximately 130 million
    individual returns filed were filed electronically (about 55%). Tax
    Year 2005 Taxpayer Usage Study (August 26, 2006).

[^68]: *Id.*

[^69]: H. Rep. No. 109-307, at 209 (2005). The Senate Committee Report
    provides further detail on the content of the five-year plan,
    directing the IRS to:

    > . . . undertake a comprehensive review of its current portfolio of
    > taxpayer services and develop a 5-year plan that outlines the
    > services it should provide to improve services for taxpayers. This
    > plan should detail how it \[IRS\] plans to meet the service needs
    > on a geographic basis (by State and major metropolitan area),
    > including any proposals to realign existing resources to improve
    > taxpayer access to services, and address how the plan will improve
    > taxpayer service based on reliable data on taxpayer service needs.
    > As part of this review, the Committee strongly urges the IRS to
    > use innovative approaches to taxpayer services, such as virtual
    > technology and mobile units. The IRS also should expand efforts to
    > partner with State and local governments and private entities to
    > improve taxpayer services.

    S. Rep. No. 109-109, at 133-34 (2005).

[^70]: IRS, *Taxpayer Assistance Blueprint: Phase I* (April 16, 2006).

[^71]: For an analysis of taxpayer survey data about taxpayer needs and
    preferences, *see* National Taxpayer Advocate 2006 Annual Report to
    Congress, vol. 2, *Study of Taxpayers Needs, Preferences, and
    Willingness to Use IRS Services* 1 -- 16.

[^72]: *See* National Taxpayer Advocate 2006 Annual Report to Congress:
    Most Serious Problem, *Reasonable Accommodations For Taxpayers With
    Disabilities,* 376 - 395*; see also* Most Serious Problem, *Limited
    English Proficient Taxpayers: Language And Cultural Barriers to Tax
    Compliance,* 333 - 354*.*

[^73]: U.S Census Bureau, *Question and Answer Center,* at
    http://www.census.gov/Press-Release/www/releases/archives/facts_for_features_special_editions/006841.html
    (last visited Sept. 11, 2006).

[^74]: *Id.*

[^75]: *Id.*

[^76]: *Id.*

[^77]: *Id.*

[^78]: *Id.*

[^79]: *See* National Taxpayer Advocate 2006 Annual Report to Congress,
    Most Serious Problem: *Limited English Proficient (LEP) Taxpayers:
    Language and Cultural Barriers to Tax Compliance* 333 -- 354.

[^80]: Exec. Order No. 13166, 65 Fed. Reg. 50121 (Aug. 11, 2000).

[^81]: Department of Justice Guidance to Federal Financial Assistance
    Recipients Regarding Title VI Prohibition Against National Origin
    Discrimination Affecting Limited English Proficient Persons, 67 Fed.
    Reg. 117 (Jun. 18, 2002).

[^82]: IRS, *Multilingual Initiative Customer Base Report FY 2006* 70
    (Feb. 2006). Form 2688, which is listed as a vital document for
    translation, is now obsolete and superseded by Form 4868.

[^83]: IRS, *Multilingual Initiative Customer Base Report FY 2006* 70
    (Feb. 2006).

[^84]: U.S. Census Bureau, *2005 American Community Survey,* Table
    B16001, Language Spoken at Home by Ability to Speak English for the
    Population 5 Years and Older.

[^85]: IRS, *Multilingual Initiative Customer Base Report FY 2006* 19
    (Feb. 2006).

[^86]: IRS, *Multilingual Initiative Customer Base Report FY 2006* 70
    (Feb. 2006).

[^87]: IRS, *Multilingual Initiative Customer Base Report FY 2006* 60
    (Feb. 2006).

[^88]: *Id.* The IRS designated these documents as vital, but has not
    yet translated these documents. In lieu of translating Notice CP-90,
    the IRS added a statement informing the taxpayer where (telephone
    number) he or she can obtain assistance in Spanish.

[^89]: IRS, *Multilingual Initiative Customer Base Report FY 2006* 71-77
    (Feb. 2006).

[^90]: The Statutory Notice of Deficiency is required by IRC § 6212 when
    the IRS determines there is a deficiency, which is generally the
    excess of the amount the IRS contends is the correct tax over the
    amount the taxpayer showed on the return. Meeting prescribed
    timeframes is important because per IRC § 6213 the taxpayer has 90
    days from the date of the letter to file a petition in Tax Court
    challenging the proposed tax deficiency (or 150 days if addressed to
    a person who resides outside the United States). Failing to meet
    these statutory guidelines would require the taxpayer to first pay
    the tax and file a claim for a refund before litigating the issue.

[^91]: CP 2000 is a notice that informs the taxpayer of a proposed
    change to tax liability because of income that is not identifiable
    or apparently not fully reported on the return. It may also include
    credits and deductions that appear overstated. If the taxpayer's
    response does not resolve the issue, there is no response, or the
    notice is undeliverable, a Statutory Notice under IRC § 6212 will be
    issued. The taxpayer would then fall under the prescribed timeframes
    for IRC § 6213.

[^92]: This notice informs taxpayer that IRS intends to issue a levy
    against any federal payments due the taxpayer, such as SSA benefits
    or OPM retirement benefits, because the taxpayer still has a balance
    due on his or her tax account. If the taxpayer does not agree with
    the proposed action, the taxpayer has the right to file a Collection
    Due Process (CDP) hearing request. The request for a CDP hearing
    must be filed within 30 days of the notice for full CDP rights.

[^93]: This notice, as required under IRC §§ 6330 and 6331, informs a
    taxpayer that the IRS intends to levy on his or her property or
    rights to property 30 days after the date of the letter unless the
    taxpayer pays, makes arrangements to pay or files for a CDP hearing,
    if available. Examples of property include bank accounts, wages,
    commissions, business assets, cars and other income and assets.

[^94]: IRS, *Multilingual Initiative Customer Base Report FY 2006* 70
    (Feb. 2006).

[^95]: *See* IRS News Release, *IRS Updates Tax Gap Estimates,*
    IR-2006-28 (Feb. 14, 2006) (accompanying charts).

[^96]: *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).

[^97]: IRS Small Business/Self Employed Division response to Taxpayer
    Advocate Service Information Request (Sept. 5, 2006).

[^98]: "Pigford cases" are known by many names: USDA Black Farmers
    Settlement Claims, USDA Settlement, Black or African-American Farmer
    Settlement, Pigford v. Veneman or Glickman, Farmer Debt Forgiveness,
    or Pigford cases. As background, these cases arose as a result of a
    nationwide class action suit in which the plaintiffs, many of whom
    were African-American farmers, alleged race-based discrimination on
    the part of the United States Department of Agriculture (USDA). The
    plaintiffs prevailed, and many were awarded \$50,000 and
    debt-relief, if applicable. The USDA also made a \$12,500 tax
    payment on behalf of each plaintiff, which was sent directly to the
    IRS. The tax problems of these claimant/taxpayers are rooted in the
    tax consequences of debt relief, the \$50,000 cash award to the
    plaintiff, and the \$12,500 estimated tax payment on behalf of the
    plaintiff to the IRS, as well as how these items were reported to
    the IRS.

[^99]: IRC § 7803(c)(2)(A)(i)-(iv).

[^100]: TAS Quality Review Database. TAS quality is scored as a weighted
    percentage of the number of standards correct over the number of
    standards applicable in the aggregate.

[^101]: Due to differences in the time of measurement and methodology,
    annual case receipts reported in the GAO report differ slightly from
    official TAS case totals. However, the totals differ by less than
    one percent; and both sets of numbers show a 43 percent increase in
    TAS cases over the past two years.

[^102]: 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.