U.S. GOVERNMENT PRINTING OFFICE

51–199 CC WASHINGTON : 1998

RECOMMENDATIONS OF THE NATIONAL COMMISSION ON RESTRUCTURING THE IRS TO EXPAND

ELECTRONIC FILING OF TAX RETURNS

HEARING

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES

ONE HUNDRED FIFTH CONGRESS

FIRST SESSION

SEPTEMBER 9, 1997

Serial 105–40

Printed for the use of the Committee on Ways and Means

(
ii

COMMITTEE ON WAYS AND MEANS

BILL ARCHER, Texas, Chairman

PHILIP M. CRANE, Illinois

BILL THOMAS, California

E. CLAY SHAW, JR., Florida

NANCY L. JOHNSON, Connecticut

JIM BUNNING, Kentucky

AMO HOUGHTON, New York

WALLY HERGER, California

JIM MCCRERY, Louisiana

DAVE CAMP, Michigan

JIM RAMSTAD, Minnesota

JIM NUSSLE, Iowa

SAM JOHNSON, Texas

JENNIFER DUNN, Washington

MAC COLLINS, Georgia

ROB PORTMAN, Ohio

PHILIP S. ENGLISH, Pennsylvania

JOHN ENSIGN, Nevada

JON CHRISTENSEN, Nebraska

WES WATKINS, Oklahoma

J.D. HAYWORTH, Arizona

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

CHARLES B. RANGEL, New York

FORTNEY PETE STARK, California

ROBERT T. MATSUI, California

BARBARA B. KENNELLY, Connecticut

WILLIAM J. COYNE, Pennsylvania

SANDER M. LEVIN, Michigan

BENJAMIN L. CARDIN, Maryland

JIM MCDERMOTT, Washington

GERALD D. KLECZKA, Wisconsin

JOHN LEWIS, Georgia

RICHARD E. NEAL, Massachusetts

MICHAEL R. MCNULTY, New York

WILLIAM J. JEFFERSON, Louisiana

JOHN S. TANNER, Tennessee

XAVIER BECERRA, California

KAREN L. THURMAN, Florida

A.L. SINGLETON, Chief of Staff

JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON OVERSIGHT

NANCY L. JOHNSON, Connecticut, Chairman

ROB PORTMAN, Ohio

JIM RAMSTAD, Minnesota

JENNIFER DUNN, Washington

PHILIP S. ENGLISH, Pennsylvania

WES WATKINS, Oklahoma

JERRY WELLER, Illinois

KENNY HULSHOF, Missouri

WILLIAM J. COYNE, Pennsylvania

GERALD D. KLECZKA, Wisconsin

MICHAEL R. MCNULTY, New York

JOHN S. TANNER, Tennessee

KAREN L. THURMAN, Florida

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records

of the Committee on Ways and Means are also published in electronic form. The printed

hearing record remains the official version. Because electronic submissions are used to

prepare both printed and electronic versions of the hearing record, the process of converting

between various electronic formats may introduce unintentional errors or omissions. Such occurrences are inherent in the current publication process and should diminish as the process

is further refined.
iii

C O N T E N T S

Page

Advisory of September 2, 1997, announcing the hearing ..................................... 2

WITNESSES

Internal Revenue Service, Hon. Michael P. Dolan, Acting Commissioner,

accompanied by Terry Lutes, Acting Assistant Commissioner, Electronic

Tax Administration .............................................................................................. 7

U.S. Department of the Treasury, Lawrence H. Summers, Deputy Secretary,

as presented by Hon. Donald C. Lubick, Acting Assistant Secretary, Tax

Policy ..................................................................................................................... 24

American Payroll Association, Carolyn Kelley ...................................................... 113

H&R Block Tax Services, Inc., Thomas L. Zimmerman ....................................... 60

Intuit, Inc., Larry Wolfe .......................................................................................... 66

Kachina Group, Robert J. Carver ........................................................................... 82

National Association of Computerized Tax Processors, Joseph W. Langer ........ 76

National Association of Enrolled Agents, Joseph F. Lane ................................... 95

National Society of Accountants, Roger Harris ..................................................... 86

SUBMISSIONS FOR THE RECORD

American Bankers Association, statement ............................................................ 134

American Society for Payroll Management, New York, NY, Clark G. Case,

letter ...................................................................................................................... 136

Bograd, Harriet, New York, NY, statement .......................................................... 140

National Council of Nonprofit Associations, Ann Mitchell Sackey, statement ... 142

National Treasury Employees Union, Robert M. Tobias, statement ................... 144
(1)

RECOMMENDATIONS OF THE NATIONAL

COMMISSION ON RESTRUCTURING THE IRS

TO EXPAND ELECTRONIC FILING OF TAX

RETURNS

TUESDAY, SEPTEMBER 9, 1997

HOUSE OF REPRESENTATIVES,

COMMITTEE ON WAYS AND MEANS,

SUBCOMMITTEE ON OVERSIGHT,

Washington, DC.

The Subcommittee met, pursuant to call, at 10 a.m. in room

1100, Longworth House Office Building, Hon. Nancy L. Johnson

(Chairman of the Subcommittee) presiding.

[The advisory announcing the hearing follows:]
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ADVISORY

FROM THE COMMITTEE ON WAYS AND MEANS

SUBCOMMITTEE ON OVERSIGHT

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601

September 2, 1997

No. OV–7

Johnson Announces Hearing on the

Recommendations of the National Commission on

Restructuring the IRS to Expand Electronic

Filing of Tax Returns

Congresswoman Nancy L. Johnson (R–CT), Chairman, Subcommittee on Oversight of the Committee on Ways and Means, today announced that the Subcommittee will hold the second in a series of hearings to examine the June 25, 1997, report

of the National Commission on Restructuring the Internal Revenue Service (IRS).

The hearing, focusing on the Commission’s recommendations to expand electronic

filing of tax and information returns, will take place on Tuesday, September 9, 1997,

in the main Committee hearing room, 1100 Longworth House Office Building, beginning at 10:00 a.m.

Oral testimony at this hearing will be from invited witnesses only. Witnesses will

include officials from the U.S. Department of the Treasury and the IRS, representatives from practitioner organizations, and stakeholders who play important roles in

tax and information return filing. However, any individual or organization not

scheduled for an oral appearance may submit a written statement for consideration

by the Subcommittee and for inclusion in the printed record of the hearing.

BACKGROUND:

The IRS presently receives approximately 205 million tax returns each year. The

largest workload associated with processing these returns involves the nearly 120

million individual tax returns that are received during the tax filing season from

January 1 to April 15. The IRS uses 10 service centers in different regions of the

country to process income tax returns. During processing, tax data from each return

is manually entered into IRS computers by seasonal employees hired temporarily

during the filing season.

During the 1997 tax filing season, the IRS received approximately 20 million individual tax returns electronically. Of the 100 million individual returns that were

submitted in paper format, approximately 70 million exist in electronic format prior

to submission to the IRS. Tax practitioners prepare approximately 60 million returns per year, almost all of which are prepared using tax preparation software. Another 10 million returns are self-prepared by taxpayers using tax preparation software on personal computers. The majority of these electronically prepared returns

are printed out and sent to the IRS in paper format, after which they are reconverted to digital form through the manual data capture process.

This digital-to-paper-to-digital conversion creates inefficiencies that add to the

cost of processing paper returns. For example, the error rate for the manual data

entry process is approximately 20 percent, half of which is attributable to the IRS,

and half to errors in taxpayer data. Because electronically filed returns are usually

prepared using computer software programs with built in accuracy checks, undergo
3

pre-screening by the IRS, and experience no key punch errors, electronic returns

have an error rate of less than one percent. In addition, the IRS paper returns processing function still uses outmoded equipment that experiences significant downtime and slower operator productivity. If the returns prepared in electronic format

were transmitted directly to the IRS, these redundancies and inefficiencies could be

avoided.

The Commission concluded that to develop a successful electronic filing program,

the IRS must put into place a comprehensive plan to remove barriers, increase benefits, and broaden the appeal of electronic filing to all segments of the taxpayer and

practitioner population. The Commission recommended that the IRS, Congress, and

the Administration establish a goal that 80 percent of all tax returns should be filed

electronically within 10 years, and that IRS’s leadership should be held accountable

for accomplishing that goal.

The Commission’s recommendations are embodied in H.R. 2292, which was introduced on July 30th by Reps. Rob Portman (R–OH) and Ben Cardin (D–MD). The

specific provisions in the bill relating to electronic filing include: (1) a mandate for

the IRS, within 180 days, to implement a plan to eliminate barriers, provide incentives, and use competitive market forces to increase electronic filing over the next

10 years; (2) a mandate for the IRS, within 180 days, to develop procedures for the

payment of incentives to qualified transmitters of electronic returns; (3) extension

of the filing deadline to May 15th for taxpayers who file their returns electronically;

and (4) amendments to the Internal Revenue Code to facilitate paperless electronic

filing.

In announcing the hearing, Chairman Johnson stated: ‘‘A comprehensive strategy

to encourage electronic filing of tax returns holds significant potential not only to

make the IRS returns processing function more efficient, but also to greatly benefit

taxpayers. Errors would be reduced, in turn, reducing the number of notices that

are triggered by errors in the manual data entry process. In addition, taxpayers who

file their returns electronically would receive confirmation from the IRS that their

return was received.’’

FOCUS OF THE HEARING:

The Subcommittee will examine the Commission’s recommendations for expanding electronic filing and is seeking comment on other actions which could be taken

to help achieve the goal of receiving 80 percent of tax returns electronically within

10 years. It will also examine the plans that are currently being developed by the

Treasury and IRS to expand electronic filing, including the draft Request for Proposals (RFP) on Electronic Tax Administration which will be issued by the IRS in midSeptember. This RFP will solicit proposals from practitioner groups and other stakeholders regarding the establishment of strategic partnerships with the IRS to facilitate the expansion of electronic filing.

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS:

Any person or organization wishing to submit a written statement for the printed

record of the hearing should submit at least six (6) single-space legal-size copies of

their statement, along with an IBM compatible 3.5-inch diskette in ASCII DOS Text

or WordPerfect 5.1 format only, with their name, address, and hearing date noted

on a label, by the close of business, Tuesday, September 23, 1997, to A.L. Singleton,

Chief of Staff, Committee on Ways and Means, U.S. House of Representatives, 1102

Longworth House Office Building, Washington, D.C. 20515. If those filing written

statements wish to have their statements distributed to the press and interested

public at the hearing, they may deliver 200 additional copies for this purpose to the

Subcommittee on Oversight office, room 1136 Longworth House Office Building, at

least one hour before the hearing begins.

FORMATTING REQUIREMENTS:

Each statement presented for printing to the Committee by a witness, any written statement

or exhibit submitted for the printed record or any written comments in response to a request

for written comments must conform to the guidelines listed below. Any statement or exhibit not
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in compliance with these guidelines will not be printed, but will be maintained in the Committee

files for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space

on legal-size paper and may not exceed a total of 10 pages including attachments. At the same

time written statements are submitted to the Committee, witnesses are now requested to submit

their statements on an IBM compatible 3.5-inch diskette in ASCII DOS Text or WordPerfect

5.1 format. Witnesses are advised that the Committee will rely on electronic submissions for

printing the official hearing record.

2. Copies of whole documents submitted as exhibit material will not be accepted for printing.

Instead, exhibit material should be referenced and quoted or paraphrased. All exhibit material

not meeting these specifications will be maintained in the Committee files for review and use

by the Committee.

3. A witness appearing at a public hearing, or submitting a statement for the record of a public hearing, or submitting written comments in response to a published request for comments

by the Committee, must include on his statement or submission a list of all clients, persons,

or organizations on whose behalf the witness appears.

4. A supplemental sheet must accompany each statement listing the name, full address, a

telephone number where the witness or the designated representative may be reached and a

topical outline or summary of the comments and recommendations in the full statement. This

supplemental sheet will not be included in the printed record.

The above restrictions and limitations apply only to material being submitted for printing.

Statements and exhibits or supplementary material submitted solely for distribution to the

Members, the press and the public during the course of a public hearing may be submitted in

other forms.

Note: All Committee advisories and news releases are available on the World

Wide Web at ‘HTTP://WWW.HOUSE.GOV/WAYSlMEANS/’.

The Committee seeks to make its facilities accessible to persons with disabilities.

If you are in need of special accommodations, please call 202–225–1721 or 202–226–

3411 TTD/TTY in advance of the event (four business days notice is requested).

Questions with regard to special accommodation needs in general (including availability of Committee materials in alternative formats) may be directed to the Committee as noted above.

of hearings to examine the recommendations of the National ComChairman JOHNSON. Good morning. This is the second in a series

f mission on Restructuring the IRS. Our focus today will be on electronic filing of tax and information returns.

Each year during the tax filing season, the IRS faces a monumental task. Day after day, from February through mid-April,

trucks pull into the 10 IRS Service Centers around the country, delivering 100 million or more individual paper returns. Thousands

of temporary workers are hired to open stacks of envelopes, sort returns and checks, and assist in the process of manually entering

the information from each return into IRS computers—a process

which is both costly and prone to error.

Of the 100 million individual returns submitted on paper this

year, 70 million existed in electronic form before they were printed

out and mailed to the IRS. Tax practitioners prepare about 60 million returns per year, almost all of which are prepared on computers using tax preparation software. Another 10 million returns are

self-prepared by taxpayers on their personal computers using tax

preparation software.

Significant benefits would be derived both by taxpayers and the

IRS if we could figure out an effective strategy for getting all the
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returns that are prepared each year in an electronic form transmitted to the IRS in electronic form.

Most importantly, taxpayers would be protected from all the

problems caused by the errors made as data is entered manually

into IRS computers by temporary employees, because hundreds of

thousands of computer notices are generated each year as a result

of the 20-percent error rate in the manual data entry process. In

addition, all taxpayers who file electronic returns would receive

confirmations that their returns are received and accepted by the

IRS. Clearly, electronic filing would save big money for the Federal

Government and big problems for taxpayers. For the IRS the benefits are obvious—lower costs and fewer errors.

The Commission concluded that to develop a successful electronic

filing program, the IRS must put into place a comprehensive plan

to remove barriers, increase benefits, and broaden the appeal of

electronic filing to all segments of the taxpayer and practitioner

population. Among other things, the Commission recommended

that the IRS, Congress, and the administration should establish a

goal that 80 percent of all tax returns should be filed electronically

within 10 years, and IRS’ leadership should be accountable for accomplishing that goal.

We will hear from Assistant Treasury Secretary, Donald Lubick,

and Acting IRS Commissioner, Michael Dolan, regarding the administration’s plans for Electronic Tax Administration, and how

those plans relate to the Commission’s recommendations. We will

also hear from tax practitioners and other stakeholders who play

important roles in tax and information return filing. Hopefully, by

the end of the hearing we will have a better idea of the steps that

must be taken to expand the appeal of electronic filing.

I would now like to recognize my Ranking Member, Bill Coyne,

for his opening statement.

Mr. COYNE. Thank you, Madam Chairman. We will have the opportunity on the Subcommittee on Oversight today to review various recommendations for improving and enhancing electronic filing of returns.

During the 1997 tax return filing season approximately 120 million individual tax returns were filed; 20 million of those were filed

electronically and 100 million were filed on paper. Unfortunately,

electronic filing has increased only gradually in recent years with

the bulk of the increase coming from TeleFile and PC returns.

Much more can be done and now is the time to do it. Electronic

tax return filing needs to be promoted by the IRS. The public needs

to understand the advantages of filing error-free electronic returns

directly with the IRS. Also, taxpayers need to be assured that electronic filing does not increase the likelihood of audit or other contact by the IRS.

The tax preparer community can also help in promoting and facilitating electronic filing. In fact, in many ways tax preparers have

been the prime promoters of electronic filing. For example, many

tax preparation firms and accountants have been providing electronic filing free of charge.

Importantly, the IRS’ blueprint for modernization is in progress

and on track. Next week as part of the blueprint implementation

plan the IRS will issue a request for comments on electronic tax
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administration to solicit from tax practitioners ideas and joint IRS/

private sector strategies for expansion of electronic filing. We

should hear about some of their ideas at today’s hearing. I am

pleased that there is strong bipartisan support for legislation to enhance electronic tax return filing. I look forward to our review of

proposals to authorize the IRS to promote and advertise the benefits of electronic filing, and to allow the acceptance of taxpayer signatures and other tax documents in electronic form.

I commend the Subcommittee Chairman for holding today’s hear- ing and look forward to working together with her and other Members of the Subcommittee on these issues in a bipartisan manner.

Thank you. Chairman JOHNSON. The Subcommittee will recess while we

vote. We will try to keep it to 5 to 7 minutes. We will just go over

and get right back and start with Mr. Dolan. [Recess.]

Chairman JOHNSON. The hearing will reconvene. Other Members who have opening statements may submit them for the record. [The opening statements follow:]

Statement of Hon. Rob Portman, a Representative in Congress from the State of Ohio; and Cochairman, National Commission on Restructuring

the Internal Revenue Service

Greatly increased electronic filing is an important component of the overall effort to revamp the IRS and improve taxpayer service. Because it reduces costs and complications for each, it’s a classic win-win situation for IRS and the taxpayer. Currently, there is at least a 20 percent error rate on the approximately 120 mil- lion paper 1040 returns. Half of that error rate comes from the IRS—often when

employees inadvertently misinput numbers. When forms are electronically filed with

the IRS, there is less than a 1% error rate. By reducing unnecessary errors and notices, electronic filing can prevent downstream costs and headaches for taxpayers

and the IRS.

Increased electronic filing will also save the IRS money—some experts (including witnesses before the Subcommittee today) believe it costs the IRS about $7 to process a paper return, and less than $1 to process an electronic return. It makes returns easier for the IRS to process, speeding refunds for taxpayers and allowing the

IRS to spend less time and money shuffling paper. The IRS Restructuring and Reform Act requires the IRS to develop and imple- ment a strategic marketing plan to make paperless filing the preferred, most convenient and cost-efficient form of filing for 80 percent of taxpayers within the next

ten years. Our legislation provides tangible incentives—not mandates—to make

electronic filing so easy that taxpayers will not want to file paper forms. The new

management structure created by this legislation will provide the accountability,

continuity and expertise that are needed to ensure that this electronic filing plan

is successfully implemented. By reducing errors and speeding return processing, electronic filing has the poten- tial to vastly improve customer service. In the long run, it has the potential to

produce a smaller, more efficient and less intrusive IRS. It’s an important step in

substantially alleviating the frustrations so many taxpayers experience with the

current system.

Statement of Hon. Jim Ramstad, a Representative in Congress from the

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State of Minnesota

Madame Chairman, thank you for holding this important hearing on the recommendations of the National Commission on Restructuring the IRS regarding electronic filing.

I also want to commend our colleagues Mr. Portman and Mr. Cardin for their efforts to translate the Commission’s recommendations into legislative form by introducing H.R. 2292. This legislation has already stimulated a healthy debate about

how we can improve efficiency and customer service at the IRS.
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Clearly, more widespread use of electronic filing will increase efficiency, decrease

human errors, and save somewhere between five and seven dollars per return. A

completely paperless system would multiply efficiency, accuracy and cost savings.

Sometimes the greatest obstacle to progress is the fear of the unknown, so I hope

we will be able to effectively educate taxpayers about how electronic filing will benefit them, as well as their government.

Again, Madame Chairman, thanks for your leadership in holding this hearing. I

look forward to the continuing examination of IRS restructuring recommendations

over the coming weeks.

Tax Policy, U.S. Department of Treasury.

Chairman JOHNSON. Mr. Lubick, Acting Assistant Secretary for

f

Mr. LUBICK. Madam Chairman, I would like to ask that Mr.

Dolan testify first. I think we have coordinated our testimony

and——

Chairman JOHNSON. OK, thank you. I was just going in the order

on my list.

Mr. Dolan.

STATEMENT OF HON. MICHAEL P. DOLAN, ACTING COMMISSIONER, INTERNAL REVENUE SERVICE; ACCOMPANIED BY

TERRY LUTES, ACTING ASSISTANT COMMISSIONER, ELECTRONIC TAX ADMINISTRATION

Mr. DOLAN. Thank you, Madam Chairman. It is a pleasure to be

back with the Subcommittee this morning, particularly on a topic

like this. I have with me at the table, Terry Lutes, who is making

his first appearance before the Subcommittee. Terry has been acting as our Assistant Commissioner at our newly created Electronic

Tax Administration organization, so between the two of us we hope

to be responsive to questions you might have later.

And with your permission, Madam Chairman, I ask that my

longer statement be accepted in the record, and I will maybe just

make a few remarks.

I mentioned that it is a pleasure to be here because I think this

is one subject around which there is considerable alignment, both

with respect to the Subcommittee’s interest, the work of the Restructuring Commission, and many of the witnesses that follow us.

I think there are perhaps some differences in pace and spectrum,

but largely there is a tremendous conversion and set of interest in

moving forward in the Electronic Tax Administration, specifically

the electronic filing arena.

What I would like to do this morning is cover a couple of different areas. One is to, as sort of an extension of prior conversations we have had about this, give the Subcommittee a picture of

how we are approaching the entire umbrella of Electronic Tax Administration; talk a little bit then about some of the products we

already have online. Some of those products are products that we

have engaged the Subcommittee on in the past, and gotten your

suggestions to improve.

Third, I will talk a little bit about what we hope taxpayers will

experience next filing season as an extension of the electronic program as we have in place; and then I will discuss what we really

are quite excited about, which is a major new opportunity to expand the partnering and the whole Electronic Tax Administration.
8

Finally, I will also respond to your question, that we comment on

some of the specific proposals made by the Restructuring Commission.

I do not think, based on both your statement, Madam Chairman,

and Mr. Coyne’s, that there is much disagreement that this is a

business that government, and specifically the Internal Revenue

Service, needs to be in. The Electronic Tax Administration process

produces an outcome that is both faster and cheaper. That is measured both by the impacts on the customer, the taxpayer, as well as

on the government at large.

Clearly, the quality of interaction, in addition to it being faster

and cheaper, the quality is vastly enhanced based on the statistics

that both of you cited in your opening statements; and based on

what we also know to be the taxpayer’s ultimate desire in this

process—which is, get closure and know that there is closure. The

quality of that interaction when done electronically is one that facilitates that much better than the historical paper processes.

And last, we are clearly in a world today where our customers

do not differentiate their customer expectations when dealing with

a government entity versus a financial services industry. So essentially what customers are superimposing on us, where we can like

it or not, is an expectation that we offer a quality of interaction,

a quality of products and services that are analogous to what they

have experienced in dealing with their credit card companies,

banks, insurance companies, financial institutions.

I think what we already have on the docket are some things that

have begun to make the right advances in the right areas, and

some of these I will not regale you with all the rats and the stats.

I think, however, you are quite familiar that our electronic filing

product is one, that again this last year made 19-percent improvement over the prior year in terms of the people that participated

in it. Somewhere between 14 and 15 million people will have filed

the conventional electronic file return this year; 366,000 of them

though have done it using their individual PCs, which is an opening that we hope to continue to be able to exploit. In addition to

the very fertile marketplace of those 70 percent that are today done

on computers, and the high percent that are done by practitioners,

we also want the window of an individual preparer of a tax return,

based on a software package, to be able to come at us through the

electronic filing process.

I think that the TeleFile product is one that has only been in the

second year of operation. That is a product that clearly speaks to

one specific segment, the 1040–EZ filer. That is a segment though

that we found reacted quite nicely to the product, based on its ease.

It is a product that I think some of you know. Almost 5 million people participated in TeleFile last year. Essentially an 8-minute telephone call allows people to totally satisfy their tax obligation. At

the end of that transaction on a telephone it allows people to know,

by virtue of a code that we give them, that their return has been

accepted. They have the closure and the certitude that they have

told us and that is so important to them.

I have a couple of attachments in my prepared testimony and a

couple of charts over here on the side, which reflect the general

progress in both the overall TeleFile and in the overall ELF and
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TeleFile. I think those of you who served on this Subcommittee

over a period of time, know that the dip in our progress is, in large

part, a function of us collectively deciding that we had to respond

to what were some pretty significant questions about some types of

fraud to which the system was at risk a couple of years ago. And

so, in large part, the dip you see in 1995 was a function of a series

of changes we made to mitigate some of those risks. We are hopeful

that the trend that is reflected in the two subsequent years is a

trend that we cannot only sustain at the incremental level, but I

think we share the interest of doing some geometric increases there

wherever possible.

Electronic business returns are something that we came to after

our initial foray and the individual return filing. To date, we have

had some reasonably good experience with bringing the 941, the

employer’s quarterly tax return, into the electronic process. This

year we have piloted, again taking the smallest businesses with the

less complex kinds of transactions, in a 10-State area with putting

a TeleFile product in front of them as well, and to date we have

had 50,000 returns that have been filed using that TeleFile process, with the customer reaction being exactly the same as it was

on the individual side. In excess of 99 percent of the people who

have used that have said to us, ‘‘I want that product. I like that

product. It is an improvement over the way I used to do business

with you.’’

Based on the experience we have had in this pilot in the 10-State

area we will actually operationalize it and go nationwide with it

next year, again creating an opportunity for the smaller businesses

to do those quarterly tax transactions on the telephone, rather than

using the process of returns and coupons as in the past.

The fifth arena that is frequently not talked about in the same

breath as electronic filing, but is equally crucial to us, is what we

have been able to produce in our Web site. We call it our Digital

Daily. It is indeed the process by which we created an electronic

window or door, or access to the population at large. The last filing

season 117 million people came through that digital door, often in

search of a technical tax law answer. They would have otherwise

wanted to call us, or walk into an office, or do something more arduous to find the answer.

Also notably, 6 million times during the filing season, that Digital Daily—our home page—was the source for a copy of a form or

a copy of a publication. Somebody, presumably at their kitchen

table on a Sunday or Monday, or the night before filing, could access the IRS Web site instead of having to traipse off to find that

form or publication.

So we think that that represents the nugget of what will still be

a considerable opportunity to leverage more fully in this Electronic

Tax Administration business.

One facet that we experimented with last year, and we again expect to be able to expand on this experiment, is we began to take

e-mail messages back from taxpayers. Last year in a relatively controlled environment, we invited people to ask their technical tax

questions on e-mail. And of course, that again creates a flexibility

as to when and where we respond to those. That takes some of the

contention out of the business hours. Somebody might either be
10

trying to get to a walk-in counter, or get to our toll-free number.

So again, the whole ability to leverage the advance of technology

on the Web is one that we think is a considerable and important

part of our future.

Something on which this Subcommittee had an awful lot of involvement with us, and on which many of you gave some counsel

both to me directly, and us collectively, was the whole EFTPS process. There was, of course, a fair amount of legitimate skepticism.

As that electronic tax payment system was first introduced there

were many who were concerned about the extent to which both the

users and the custodians of that process were ready at the time

that it went in place. I am pleased to report though that I think

the early experience from that is also a harbinger of some very

good potential with respect to making payments electronically.

As you know, we worried about the extent to which people

would—those in the mandated category—would indeed be enrolled

on time, and 96 percent of the 1.1 million people who were ‘‘mandated,’’ are indeed enrolled. In addition to the 96 percent that are

enrolled there are some 500,000 people who are voluntarily in the

process because of either the sense it makes to them, or some appeal to using the system that they have identified in the process.

We have at this point in the year accepted a half trillion dollars

electronically through the combination of the new EFTPS and the

phaseout of the old TaxLink process. That represents about 46 percent of all deposits that have been made this year. The error rate

that is being run right now is one-quarter of 1 percent on those

transactions. So I think there are an awful lot of people who were

vigorous in their participation with us, interested in getting this off

and getting it off right. We took an awful lot of input, not only from

the Members of the Congress but from small business. There were

many, many constituencies interested in this thing working right.

And I think as an opening volley it looks like it does work right;

it looks like it is an opportunity for us to leverage on, as I said,

other electronic payment processes.

One last area is an area also that this Subcommittee has been

quite interested in, and that is the whole business of how do we

bring greater effectiveness to telephone access to the Internal Revenue Service. In the past the way we might have thought about that

is, you need more bodies to answer more calls. While that is some

part of the solution, the other thing that we have been experimenting with, and have what we think are some reasonably nice early

results, is the ability to find the kinds of questions and those kinds

of inquiries that the taxpayer can assist himself to a conclusion.

They may not require personal interaction in an office or over the

telephone. And we have put in place something that we call a Telephone Routing Interactive System, through which people can do

such things as call the IRS and set up an installment agreement

in response to a notice or a bill that they have gotten from us.

They can obtain, for example, most current payoff balance, if

they are interested in sending us a check or sending us a payment

that pays off their account. If they are interested in the status of

their refund, either because they are just curious, or because there

is some financial transaction that is pending receipt of that refund,

they can also get that information.
11

If they desire to get a copy either of their tax return or a transcript of their account to be used in a transaction, such as a mortgage or student loan application, they can also get that under that

interactive system. This is something that this year we took 2.9

million calls on, and it is not operational across the organization

yet, but we look forward to being able to make it operational systemwide very soon. That is in addition to 48 million of what we

would have called our more classic kinds of computer-assisted calls

that come in through our TeleTax system today.

As much as we are proud of what has happened, it is building

the pattern that reflects the kind of incremental, but strong

growth, in these products. It is clear to us, and has been for some

time, that what we really want to do is leverage this; not incrementally but exponentially if at all possible. And that is what inspired

us a better part of a year ago to create what we have now created

in our Electronic Tax Administration, the Assistant

Commissionership. In so doing we thought we needed to create

focus within the organization that really was responsible for

leveraging the technology, but more importantly was to be the exclusive spot for which we could stimulate the partnering required

to do this and do it right.

The key premise of how we proceed on a forward going basis I

think mirrors the Restructuring Commission’s recommendation;

that is, it has to be done in partnership. There are huge enablers

created by structuring the partnerships with the software preparers, with the practitioner community, with the various constituencies.

What we have done in order to create a structure for that

though, is in addition to creating an organization, we have recently

had the good fortune of selecting a leader for that organization.

Some of you have met and worked with Bob Barr, formerly with

Intuit. Bob happens to be here in the audience today and is trying

to get himself relocated from San Diego. But we have in Bob somebody who brings considerable experience from both sides of the

ledger, both experience in the business of electronic commerce and

the creation of software, and working with the government. He also

has the added benefit of having been a tax administrator for the

State of South Carolina, and has been one of our earliest partners

in making the electronic filing project a Federal and State product.

What we will do though as a way of building on this premise, the

partnership, is this. Last week, on August 27, we put an announcement in the Commerce Business Daily that said we intended on

September 15, as Mr. Coyne mentioned, to release a draft RFP.

Some question why we issued the draft versus the permanent RFP.

One of the things we have learned as we have looked at the modernization blueprint life, what we realize is when you put these

things out in draft, you continue to dialog with industry in a very

positive way.

So on September 15 we will put a draft RFP out to industry,

which in large part is designed to take all comers. It is designed

to say to the constituencies that we have been partnering with, and

we know are acutely interested, as well as every other potential

player out there, these are our goals. Our goals are to significantly

expand the volumes of receipts through the Electronic Tax Admin-
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istration process. And it says we want your ideas; your ideas of not

only the technologies associated with Electronic Tax Administration, but the incentives, the quid pro quos, the impediments, the

issues that that constituency thinks can be addressed and overcome for the ultimate benefit of the taxpayer/consumer’s ease of filing with us electronically.

So we are putting a considerable stock in the ability of that request for proposal—at first the draft and then subsequently the formal RFP—is at least the most organized and structured way we

have ever created to get what we know is a very rich burst of feedback from those industry groups. We are quite optimistic about the

extent to which the kinds of responses that it evokes will deal with

the hard chestnuts; will deal with the issues about signature alternatives and authentication strategies; will deal with the capacity to

truly make these products paperless instead of today’s half in/half

out world; will deal with fraud detection and prevention, something

in the past that we thought we perhaps had to own the total laboring. I think the industries have said to us in a lot of formal and

informal ways, that they know they belong in that business with

us, and we expect that the RFP will also produce new ideas about

how to share the responsibility for mitigating risk of fraud.

Last, one of the areas that the industries have been quite vocal

with us in the past, is how do we relate to them as a group of players. And one of the things we are asking in the RFP is for people

to come back and talk about the ground rules that ought to apply

to the regulation, small ‘‘r’’ perhaps, of the industries that will participate with us in electronic commerce. So I think collectively the

potential that is resonant in the RFP to take us to the places that

we all say we want to go in this whole electronic arena, is very considerable.

Now, in addition though to minding the results of the RFP, there

is more. My testimony makes the point.

The RFP is not designed to be some theoretical exercise that

says, tell us what we will do in the year 2000, and bump. What

the RFP is designed to do is say, our objectives are to translate the

industry’s feedback into substantial return growths in 1999, namely tax year 1998 returns filed in 1999. So it is a very proximate

set, very actionable set of recommendations that we want from industry; all the while also cognizant of the fact that the overall modernization blueprint and the capacity to leverage a link to that

later on, will give us additional opportunities. But the invitation

that we have extended to the industry today is not one to come

back about theoretical things to do in the year 2000 plus, but something to do with tax year 1998 returns that were received in calendar year 1999.

Now, in advance of that, there are some things we can do in the

current structure, and we will do them. I made mention of a couple

of them. I will not spend a lot of time on them. I already mentioned

that we are going to expand the 941 TeleFile in the business community. We are going to take on a couple of additional forms in the

next year in the regular ELF product that practitioners have—one

is, in order to be able to claim the adoption credit, and the other

is to claim the motor fuel excise tax credit.
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Beyond that we are looking very hard at the ability to expand

the current universe of TeleFilers. Today it is limited to the EZ

filer. We think we are going to be able to do some things for sure

next year; that we will bring in additional EZ filers that this year

might not have played, but beyond that we are looking at ways of

expanding beyond the EZ market into the potential 1040–A market, as ways of bringing more taxpayers into using this easiest

form of transaction with us.

We are looking at the entire range of forms and schedules that

today are not included. Some of those are ones that I think Don

Lubick will at least make a reference in his testimony that we may

need congressional help to make changes and code provisions that

today might require schedules or certifications, or things which are

not readily adaptable to an electronic submission. There are a huge

number of those; there are some of those that we will bring back

no doubt to this Subcommittee, and ask for your help and sponsorship in implementing. But we are going to look at the whole universe of things that today cannot be included, and look very carefully for opportunities to even bring more in next year.

And last, with an eye toward 1999 and some of the other opportunities we are going to have with the RFP, we are working very

closely with the FMS, the Financial Management Service, for ways

of increasing the opportunity for people who today file balance-due

returns. For the most part, the electronic filing product, whether

it is the TeleFile or the regular ELF product is a product used by

somebody who is a refund filer. In very large part, the

attractiveness is the speed of the refund; the accuracy of the refund.

What we are very aggressively involved with right now, as I say

with FMS and Treasury, are initiatives that will create payment

options. We will, for example, do a takeoff of today’s ACH debit capacity that exists in the EFTPS system; make that an easier process for an individual, and create opportunities and incentives for

somebody who files a balance-due return to be equally interested

in using electronic filing as a process, and perhaps have the benefit

of sending us paper 1 day, and warehousing and triggering their

ACH debit perhaps on another date.

The last arena that I know this Subcommittee has been very interested in, and one that is for us at the end of the day a substantial, if not a show stopper—certainly show and center—and that is

the whole ability to get to an alternative signature. And we are

very optimistic that by the time we confront the tax year 1998 filing season in 1999 we will have the alternatives for signatures and

the ability to capture W–2 information electronically; and, have the

ability to truly produce a paperless outcome. That, in large part is

the feedback that we have gotten both from the practitioner community and individuals. If you call this an electronic process it

must truly be an electronic process. You cannot have these trailing

paper tentacles that we have today. And again, I say it looks to us

very optimistic that we can achieve that.

One of the things that I think—Mr. Coyne and maybe Madam

Chairman, you as well—said in your comments, and it is a place

that we got some feedback from this Subcommittee when I appeared—I think when we talked about the filing season, and in
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connection with EFTPS—you all said to us, you may know something about tax administration. You probably do not know as much

as you should about marketing, and about advancing products. I

know in the context of the Restructuring Commission’s work, there

was clearly a finding that, with respect to some of the products

that were placed online we acted more like government bureaucrats than we did people trying to intelligently introduce a product

to our customer base.

One of the things that we are quite excited about this coming filing season, is we have used our communications contractor to help

us develop, not only some products, but some approaches to introducing these electronic products in a way more professional and

more effective than we have in the past.

Just last week we brought in the practitioner groups and other

constituencies, and exposed them to what our contractors had

helped us put together. We received some pretty enthusiastic responses from them and some good suggestions as well. But I am

hoping that with the upcoming filing season we will also be able

to put a bump on these kinds of numbers by virtue of doing a better job of bringing the product to the customer on the basis that

the customer wants to get it. We hope to explain its attributes in

terms that are relevant to the customer, not in terms that are relevant to perhaps a government agency or a bureaucrat.

Let me spend just the last couple of minutes on specific reactions

to some parts of the report from the National Commission of Restructuring. I think it is pretty self-evident that the general thrust

of that report is one that not only we endorse, but we embrace enthusiastically with respect to the desire to increase this entire area.

There are three or four areas though that we at a minimum

would want to be circumspect about. The first one is not really

such an area. The first one recommends that there be such a thing

called the Electronic Tax Administration Advisory Group. On the

face of it that is a good idea because it stands for the proposition

of having people in this together with you. The only thing that I

would want this Subcommittee to appreciate is, we do not think

that that statutory call is necessarily the only answer to those

kinds of partnerships.

Clearly today, we have a very active set of relationships with

what we think is the spectrum of groups. We also use the Commission’s Advisory Group and a liaison group to do that. So the notion

of making sure that we create a group that creates a value as opposed to being a group for group’s sake, is probably where we

would be somewhat careful in that provision.

The second one would be one in which there has been some fair

amount of debate, both within the confines of restructuring and

elsewhere about incentive payments. This is something that I think

is a considerably dicier proposition than some have thought it to

be. I think what we would hope to persuade the Subcommittee is

that, this is a very valid area to explore. It is a very interesting

area to explore, but it is one that probably is best explored in the

context of the request for proposal that we have out there. So that

people who respond to us, say to us, Yes, incentives are critical in

this regard or not in some other regard. Because I think the thing

that we would not want to do is intersperse incentives in a way
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that artificially affects the way that these products are received or

acted on by the marketplace. The third area that is of some interest to us is the whole rearrangement or potential rearrangement of the filing dates. Again, it

is clear from the work of the Restructuring Commission that the

idea was to create incentives for people to file electronically. And

while on the face of this proposal it has the potential of doing that,

it also has the potential of creating a level of confusion or complexity that again we think ought to be evaluated very carefully. Because among the things that, sort of are constant in our current

system is, most people relate to April 15 as a pivotal date. Sometimes they do not relate to it quite as pivotally as we would hope

they would, but nonetheless, April 15 is a date in large part that

is synonymous with meeting a tax obligation. And so to the extent

that we were to significantly affect that dynamic, at a minimum

our caution—my caution—would be that we do it very carefully and

very intelligently, so as to not produce a series of unintended consequences.

I will wrap this up by saying that, clearly I have not attempted to say the last word on any of the restructuring proposals. I know

Don will have additional comments in this area. I personally appreciate the kind of support that we have gotten, not only from you,

Madam Chairman, but from the Subcommittee at large, in this

area. It is an area where I have consistently felt more collegiality

and support than I have any kind of contention or antagonism. We

look forward to your continued support, and quite frankly, your

ideas, and your urgings for us, because we think collectively this

is probably one of the best metaphors the taxpayers will hold out

to both you and us with respect to treating them as customers and

meeting the needs they have. And so with that, I will be obviously

available for your questions.

[The prepared statement and attachments follow:]

Statement of Hon. Michael P. Dolan, Acting Commissioner, Internal

Revenue Service

Madame Chairman and Distinguished Members of the Subcommittee:

I appreciate the opportunity to appear before you today to discuss the Service’s

progress in and plans for Electronic Tax Administration as well as how those relate

to recommendations made by the Commission on Restructuring the Internal Revenue Service. For some time, Electronic Tax Administration has been an issue of

prime concern in our discussions with the IRS Management Board. With me today

is Terry Lutes, Acting Assistant Commissioner, Electronic Tax Administration.

I. INTRODUCTION

While most of the previous dialogue, as well as the majority of the Commission’s

recommendations, has focused on our electronic filing program, I would like to talk

about electronic filing in the larger context of what we are defining as Electronic

Tax Administration. Electronic Tax Administration (ETA) is an umbrella term we

are using to describe the two-way electronic information exchanges the IRS has with

the taxpaying public, tax practitioners, employers, and other government organizations. Electronic transactions included in our vision for ETA include tax returns, information returns, payments, correspondence, and government exchange. Since the

beginning of this year, we have taken some significant strides within the IRS to

make this vision for ETA a reality.

Like many large financial services organizations, the IRS is in the midst of fundamental change. Even though we continue to process information, increasingly that

information comes to the IRS in electronic form instead of on paper. We, along with

the Administration, believe that the continued growth of electronic transactions is

of strategic importance to the future of the IRS. Our efforts to provide higher qual-
16

ity, faster, and more efficient services to the public depend in large part on the exchange of information and tax return data in electronic form. Our programs encompass more than just electronic filing of tax returns; they are a broader effort to provide a wide array of electronic service delivery options to the public. At the same

time we expand options and access, we must assure that we maintain the privacy

and security of taxpayers’ sensitive financial information. Today, I would like to speak to you briefly about some of the strategic challenges and opportunities confronting the IRS in its Electronic Tax Administration programs. I plan to do that by discussing our results for ETA programs from the past

year, outlining our plans for the future, and responding directly to your questions

concerning the Restructuring Commission’s recommendations in the area of Electronic Tax Administration.

II. RECENT RESULTS

As the rest of the financial world has moved toward more electronic transactions,

the Service has been doing likewise. IRS efforts to offer more service options to taxpayers and practitioners that do not rely on paper have helped increase the number

of electronic transactions and decrease the volume of paper-based transactions. Results from this most recent filing season include the following:

• Our electronic filing (ELF) system allows individual taxpayers to file tax returns electronically through using an IRS-approved electronic return originator

(ERO). More than 14 million taxpayers used this program in 1997, a 19% increase

over 1996. Although most of these taxpayers relied on an ERO for the tax preparation, 366,000 of these returns were initiated by taxpayers using tax preparation software on personal computers. More than 4.3 million of these taxpayers who filed

electronically also took advantage of the opportunity to simultaneously file their

state tax return. Electronic filing provides significant benefits to the taxpayer and

the IRS. The error rate for electronically filed returns this year was less than 1 percent. This means that taxpayers participating in electronic filing were much less

likely to get a notice from the IRS as a result of mistakes typically associated with

paper filing. The other advantage is that when the return is accepted electronically,

the taxpayer received an acknowledgment that the return was filed and accepted.

• This year more than 4.7 million taxpayers eligible to file 1040EZ returns took

advantage of the opportunity to file their returns using a simple telephone call to

our TeleFile system. This was a 65% increase over 1996. Attachment 1 illustrates

the significant growth of this program since its nationwide roll out in 1996. Surveys

of users of TeleFile show that they are extremely satisfied; 99% like the system and

would use it again. The error rate for TeleFile returns is also less than 1 percent

and the system is one of the finalists for the 1997 ‘‘Innovations in American Government’’ award program sponsored by the Ford Foundation.

• Attachment 2 shows the growth pattern of ELF and TeleFile combined over the

past five years. Except for the dip which occurred in the initial year of our Revenue

Protection Strategy, our growth has been steady and one of every six individual tax

returns was filed electronically in 1997.

• We are also aggressively pursuing getting more business returns electronically.

In 1997, we are on track to receive electronically almost 500,000 Forms 941, Employer’s Quarterly Federal Tax Return, in addition to the 1.6 million we will receive

through our magnetic tape program. This spring we began a pilot program to allow

the smallest businesses to file their Form 941s using TeleFile. The pilot has been

extremely successful with more than 50,000 taxpayers using the system during the

second quarter with an error rate of less than 1 percent and a 99% customer satisfaction rate. The IRS intends to roll out this system nationwide in the first quarter

of 1998.

• Thus far this year, more than a half a trillion dollars have been deposited electronically using our Electronic Federal Tax Payment System (EFTPS) and the older

Taxlink system rather than using paper coupons. This represents 46% of the total

dollars collected. Of the taxpayers mandated to use EFTPS, 1.1 million, 96% of the

total, have enrolled as shown in Attachment 3. More than 500,000 taxpayers not

covered by the mandate have also already enrolled and this number is growing. The

current error rate for these electronic transactions is .21%. Attachment 4 shows the

growth in the percentage of tax dollars collected electronically.

• The Digital Daily, our award-winning home page on the World Wide Web experienced more than 117 million hits this past filing season which included the

downloading of more than six million forms and publications. As you know, this

service is available 24 hours a day and taxpayers can get access to needed information in the comfort of their home or business upon demand. Additionally, this past

filing season we began testing the use of the Internet for E-mail customer service
17

inquiries and responses. The initial feedback on this service has been extremely

positive and we will offer this service nationwide next year.

The IRS has also expanded the use of technology to increase telephone access to

services for taxpayers.

• Thus far this fiscal year, we have had 2.9 million calls completed through our

Telephone Routing Interactive System (TRIS) which provides for resolution of certain customer inquiries without human intervention. Currently taxpayers can use

the system for services such as setting up an installment agreement or obtaining

payoff information for a balance due account, determining the status of a refund and

ordering an account transcript or copy of their return. Additionally, 48 million taxpayers accessed our older Teletax system this year and received information such

as answers to a wide range of basic tax law questions and refund inquiries.

III. PLANS FOR THE FUTURE

We are extremely encouraged by our success with electronic filing systems up to

this point. But, to be frank, taxpayers’ use of the ELF and Telefile systems has not

grown as rapidly as we had hoped and the potential uses of technology have grown

far beyond our original concepts. As a result, we are formulating a broader strategy

for electronic service delivery that builds our services through partnership with private industry.

To provide a focus to our plans in this area, this past year the IRS established

an Electronic Tax Administration (ETA) organization devoted solely to the operation

and enhancement of ETA. As you know, we recently announced the selection of Bob

Barr as the first permanent Assistant Commissioner to head this organization. Bob

will join us in October from his position as a Vice President for Intuit Corporation,

where he worked extensively on Federal and State electronic filing programs. Bob

also has prior experience in tax administration as he previously served with the

South Carolina State Tax Commission and on the IRS Commissioner’s Advisory

Group and the Information Returns Program Advisory Committee (IRPAC). We are

excited about the impact Bob’s extensive program knowledge, private and public sector experience, and business savvy will have on our ability to move the program forward.

This is consistent with our efforts to strike strategic partnerships with the private

sector outlined in the Modernization Blueprint and the hiring of a prime integration

contractor. The IRS is also seeking private, public, and not-for-profit sector assistance to increase electronic transaction volumes in the next several years. We believe

that we can best address critical issues for ETA such as authentication, fraud detection and prevention, third-party ground rules governing participation in the electronic filing programs, and accepting all forms and schedules by using a structured

process to seek and evaluate proposals from outside the IRS. To put these partnerships in place, the IRS placed a notice in the Commerce Business Daily dated August 27, 1997, announcing that the IRS will issue a draft Request for Proposals

(RFP) on September 15, 1997. This RFP is being issued in draft form at this time

so that external ETA partners can provide input into the final procurement, resulting in maximum responses to the RFP from outside the IRS. We are structuring

this RFP in a manner that solicits easy to implement proposals which can impact

the 1999 filing season. In addition, it will solicit long term partnerships which will

help the IRS design systems and programs in a manner which will maximize taxpayer and return preparer use.

While we are excited about the possible results of the RFP, we are continuing to

move ahead with efforts to enhance and expand our successful electronic programs

where it clearly makes sense.

• We will expand our E-mail customer service capacity and additional services

will be provided through TRIS. New TRIS services will include automated determination of the status of payments. If additional funding to combat EITC fraud is

received as expected, TRIS will also provide for releases of refunds involving invalid

social security numbers.

• We intend to roll out 941 Telefile nationwide in 1998 and are projecting that

more than one million returns will be filed through the system in the first year.

• While significant portions of our programming resources have been committed

to Century Date Change and implementation of tax law changes, we will be able

to accept two additional forms, those involving adoption credits and motor fuel excise taxes, as attachments for ELF returns. Additionally, returns where either the

taxpayer or a dependent has an Individual Taxpayer Identification Number (ITIN)

or Adoption Taxpayer Identification Number (ATIN) will be accepted by ELF for the

first time.
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• We are in the process of initiating a complete analysis of all forms and sched- ules not currently accepted through the ELF system to identify all of the issues related to each to determine the steps we need to take in order to accept them without

diminishing the accuracy rate for ELF returns or increasing refund fraud. We expect to use the results of this analysis, along with the proposals resulting from the

RFP, to develop during fiscal year 1998 a comprehensive plan for accepting all forms

and schedules. • We are in the process of completing a thorough analysis of the extent to which we can broaden the range of 1040 returns accepted through TeleFile without diminishing taxpayer satisfaction due to the increased complexity of the telephone interaction. This effort will lead to expansion of the number of taxpayers eligible to file

returns through TeleFile for the 1999 filing season.

• We are actively working with the Financial Management Service and the private sector to develop payment alternatives which would be cost effective for the

government and give taxpayers a choice in how to make tax payments. By working

closely with the Department and the Financial Management Service, we are developing plans which, beginning in 1999, will allow taxpayers filing balance due electronic returns to pay using an Automated Clearing House (ACH) debit payment as

part of the electronic return. We will be looking at all ACH credit and debit options

including home banking and telephone payment systems, as well as working with

credit card companies under the legislation contained in the Taxpayer Relief Act of

1997 (P.L. 105–34) to determine the potential for payment of federal taxes by credit

card.

• Most significantly, plans are now under development which we believe will lead

us to an alternative electronic signature for ELF returns in 1999. This would eliminate the most frequent criticism of the program—that the system has not up to this

point been paperless. Feedback from the practitioners’ community has been that

this alone will significantly increase the willingness of tax preparers to file returns

electronically.

We have listened to feedback from external stakeholders and consultants that we

need to do a better job of introducing taxpayers and tax practitioners to the benefits

of electronic transactions. Thus, for the upcoming filing season and the longer term,

the IRS is going to increase its efforts to inform and educate taxpayers and practitioners about the benefits of electronic filing. Despite the recent successes in increasing electronic filing volumes, we believe that taxpayers and tax practitioners

have to better understand the benefits of filing electronically compared to filing on

paper. To that end, we are working with an outside marketing firm to develop a

strategy for increasing public awareness and use of electronic filing options for this

upcoming filing season. Just last week, we provided a preview of this new electronic

filing marketing strategy for tax year 1997 to practitioner and industry groups. Preliminary responses to our efforts to promote the benefits of electronic filing in concert with the practitioner community have been quite positive. While we are still

finalizing this strategy, we are confident that it is going to be a substantive improvement to our past communications efforts. At the same time, we are conducting

a comprehensive market research study to enable us to better understand taxpayer

needs and concerns related to electronic tax administration. This will allow us to

focus our long term marketing efforts as well as to assist us in modifying current

electronic products and developing future ones that meet taxpayer needs.

IV. IRS PERSPECTIVE ON COMMISSION RECOMMENDATIONS

As you can see, many of the steps we have underway are consistent with the recommendations contained in the Final Report of the National Commission on Restructuring the IRS.

Since the Commission made a significant number of recommendations relative to

electronic tax administration, I am not going to try to address all of them individually in this testimony although we will be happy to address any questions you

have. However, I do want to comment on several of them which I have not directly

addressed in outlining our plans for the future. Additionally, I want to discuss legislative proposals relative to ETA that we have been assisting the Department in developing.

First, the Commission recommended that an Electronic Tax Administration Advisory Group, consisting of external stakeholders, be formed to advise the IRS on ETA

programs and plans. We have no objection to this proposal and are developing plans

that would enable us to establish such a group under the Federal Advisory Committee Act. However, I want to emphasize that the electronic filing program would not

be where it is today if we did not have regular interaction with the stakeholders

and give careful consideration to their concerns. There would be no ELF program
19

if it were not for the software companies, electronic return originators and transmitters. We have almost daily informal communications, our current Electronic Tax Administration executives have been regular participants in meetings of the various

trade organizations and, where appropriate, we have convened forums of industry

representatives to address common issues. Additionally, the Commissioner’s Advisory Group and the Commissioner’s Liaison Group have frequently provided advice

on ETA matters. In establishing a separate advisory group for ETA, we want to

make certain that it is value added, not merely a duplication of existing external

stakeholder groups.

Second, much discussion has occurred relative to the Commission proposal for

payment of incentives to third parties for electronic returns. We believe that this

is an option well worth considering and our RFP will provide a mechanism for evaluating such proposals. We are, however, opposed to such payments being legislatively required. We need to determine the level of savings for electronically received

returns compared to paper. We need to let the market determine (though the RFP)

what level and kind of reimbursement third party service providers require, and

then determine whether using savings from increased volumes of electronic filing to

reimburse third parties is in the best interest of the government. We believe that

the RFP process is the best tool for answering these questions and the market research will help us better understand the potential for payments to increase the volume of electronic returns. One additional point that must be made is that any requirement to make payments out of the IRS budget for those 19 million returns currently received through ELF or TeleFile would essentially cause us to make a commensurate decrease in effort in customer service or compliance programs. Our RFP

process is being designed to ensure that we only pay for the additional volume of

returns received.

Next I would like to point out that we have a number of concerns about the proposed realignment of due dates for electronic returns. While this proposal might result in some increase in the use of electronic filing, it would also add new complexity

in one area of taxation where there is no confusion—the fact that tax returns are

due on April 15. It would also add complexity to the administration of the tax law

which always comes with a cost. Finally, I would like to reinforce the Department’s

assessment that the cost of delayed receipt of payments on balance due returns

would be significant.

VI. CONCLUSION

I have not attempted to specifically address every recommendation the Restructuring Commission presented on ETA. However, I believe that the progress we have

made in increasing the volume of electronic transactions as well as the range of

electronic services available for taxpayers, along with the enhancements we have

under development, show that we are in agreement with the general direction of,

and the emphasis placed on electronic services by the Commission even if we disagree with some of the specific proposals. The continued growth of electronic transactions is of strategic importance to the future of the IRS. It is our intent to work

with the Congress and the other interested groups to assure that we provide taxpayers with electronic tax administration options that are secure, easy to use, and

that provide for levels of accuracy that minimize the need for taxpayer interaction

with the IRS to resolve problems.

Madame Chairman, I want to thank you and the Subcommittee for your continued support and for the insight that led you to emphasize the important of electronic tax administration by making this your initial hearing regarding the Final

Report of the Commission. I will be happy to answer any questions you may have.
f

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Chairman JOHNSON. Thank you, Mr. Dolan. In your testimony

and toward the end of your opening remarks, you do begin to address the Commission proposals. First of all, let me say it is extremely helpful to have you go through and share with us the efforts that the Department is making and the new initiatives, and

where you are with electronic filing; that is very useful, and it is

gratifying to know that the majority of the mandated filers have

now registered, and we will watch that process with you with great

interest.

I am pleased that we did relieve the penalties, because there are

problems yet to be ironed out, as people actually start paying

through this system, and recognizing that it is not just withholding

taxes, but it is all taxes. So, we will be interested in working with

you or following with you the progress of that program. And I appreciate the overview that you have given us very much.
24

In addressing the Commission’s recommendations, you discuss

the Advisory Group proposal, and the use that you have made of

advisory groups and of regular interaction with stakeholders.

Is then the bottom line that you oppose establishing in law an

advisory group?

Mr. DOLAN. No, I think it was more, Madam Chairman, a request that, any legislative attempt to codify a partnership be one

that is cognizant of both the processes that are currently in place,

and does not establish a group for the sake of a group; one that

creates the dynamic that we will have it be. I think I personally

take the position that it is probably not necessary. To the extent

that somebody codifies it in law, my petition would be that it would

be done with an eye toward being more effective and not be a constant formality.

Chairman JOHNSON. In other words, with recognition of what has

worked for you and your experience in this area.

On the second recommendation that you discussed—excuse me,

I misunderstood your comments, Mr. Lubick.

I know my staff had discussed with you the order in which people were going to testify, so we have the order down there, but

when your comments were made I thought you meant that Mr.

Dolan was going to present everybody’s proposals, and then that all

of you were going to take part in the questioning.

Mr. LUBICK. I will not trespass on your time very much.

Chairman JOHNSON. Now, you would like to comment, and would

Mr. Lutes like to comment as well?

Mr. LUBICK. I wonder if I might just take a couple of minutes——

Chairman JOHNSON. You certainly may.

Mr. LUBICK [continuing]. And we can answer questions jointly.

STATEMENT OF LAWRENCE H. SUMMERS, DEPUTY SECRETARY, AS PRESENTED BY HON. DONALD C. LUBICK,

ACTING ASSISTANT SECRETARY, TAX POLICY, U.S.

DEPARTMENT OF THE TREASURY

Mr. LUBICK. As you know I am the pinch-hitter today for Deputy

Secretary Summers, who is chairing an international conference

out of the country, and he has prepared a written statement, which

I ask be included in the record. And I will just spend a couple of

minutes dealing primarily with the legislative aspects that have

been raised.

[The prepared statement of Secretary Summers follows:]

Statement of Hon. Lawrence H. Summers, Deputy Secretary, U.S.

Department of the Treasury

I am pleased to be able to submit testimony today on the subject of electronic tax

administration (ETA). I understand that Deputy Commissioner, and currently Acting Commissioner, of the Internal Revenue Service, Michael Dolan, and Acting Assistant Secretary for Tax Policy, Donald C. Lubick, will be appearing before you to

testify in more detail on current efforts underway at the IRS in this area.

I would like to focus my comments on three areas. First, I would like to describe

our overall strategy for increasing the level of electronic filing and reporting. Second, I will discuss legislation introduced yesterday by Congressman Coyne to give

us the tools we need to further improve our system of electronic tax administration.

Finally, I will comment briefly on other legislation that has been proposed.
25

I. OUR STRATEGY FOR ELECTRONIC TAX ADMINISTRATION

Since Secretary Rubin and I announced a sharp turn in our approach to mod- ernization of the IRS, we have dramatically strengthened leadership and increased

oversight of the IRS. Our goal has been to promote continuity, accountability and

increased access to outside public and private sector expertise.

As you know, we have identified a new Commissioner for the IRS with a back- ground in information technology. We have in place a new Chief Information Officer,

Art Gross, who has assembled a new team to modernize the information architecture of the Service. Next month, a new Assistant Commissioner for Electronic Tax

Administration will assume his duties. All in all, we have put new leadership in

place with knowledge about information technology. At the same time, we have significantly expanded our partnership with industry. We are in the process of identifying a new prime contractor for information technology. Next week, we will release a draft Request for Proposals (RFP) for comment

from a variety of electronic tax administration partners. After making necessary

changes, we expect to issue the RFP in final format by the end of the year. Our

new IRS Management Board, the successor to the Modernization Management

Board (MMB), as well as the new Advisory Board, which the President has created

by Executive Order, will bring outside expertise to the administration of our system

of taxation.

While we are committed to deep and significant structural reform, we are not waiting for these deeper changes to take place to improve the level and quality of

electronic tax administration.

Madame Chairman, we believe—in common with many members of this body— that electronic transactions are an indispensable part of building the IRS of the future. Electronic tax administration may offer many advantages to taxpayers and the

government compared with traditional paper processing. It can reduce costs and errors. It speeds up the process of tax administration. It expedites refunds. For most

Americans who have access to computers, it will be generally more efficient and economical than paper-based methods.

Over the last two years, we have begun a process to markedly improve the quality and level of electronic service for taxpayers. We have seen increases in the use of

existing electronic products and we are taking steps that will expand and enhance

those products while at the same planning for new products and services. Let me

go through a number of specific examples.

II. 1998—INVESTING IN SUCCESSFUL PROGRAMS

The IRS currently has two major programs that permit electronic filing. Of the more than 118 million individual tax returns filed this year, 14.4 million were filed

through the Electronic Filing (ELF) program, including 366,000 in which taxpayers

used a personal computer and tax preparation software to file from home through

a transmitter. An additional 4.7 million filers, eligible to file a 1040 EZ return, participated in the TeleFile program using a touch tone phone. Both of these programs

have been expanding at a steady pace. In 1997, 19% more taxpayers filed using the

ELF program than in 1996, while use of TeleFile was up 65%. TeleFile is a finalist

for the 1997 ‘‘Innovating in American Government’’ award program sponsored by the

Ford Foundation.

In 1998, we are committed to investing in and expanding these successful programs.

TeleFile

At present, for fraud control and technical reasons, taxpayers who have moved in the last year are unable to file using the TeleFile program. Therefore, for 1998 we

have developed a methodology which will allow us to update our TeleFile address

directory, making approximately six million more taxpayers eligible to use the system.

Second, based upon a pilot currently underway, we expect that next year 25% of the businesses required to file quarterly Form 941 returns will be able to use the

TeleFile system to file those returns with a 10 minute phone call. This group will

represent smaller businesses, a significant step in our efforts to minimize burden

for those taxpayers.

Electronic Filing (ELF)

This year almost 50% of individual taxpayers used a paid preparer to complete

their returns. Almost all returns prepared by these paid preparers are completed

using computer programs. This makes nearly 60 million taxpayers potentially eligible for the ELF program on this basis alone. Approximately eight million taxpayers
26

prepared their returns on their home computers, many with software that could

have been used to transmit the return to the IRS electronically. However, most of

these returns are still filed on paper. A primary focus over the next several years

will be to get those returns already being prepared on a computer program sent to

the Service electronically.

Next year we hope to launch a large educational campaign to inform more practitioners and taxpayers about the benefits of this program and have already awarded

a contract for design and development of this campaign.

We are also continuing with steps to assure that the ELF system ultimately will

be open to all forms and schedules. Several new forms are being added for 1998 and

the system will also be ready to accept Adoption Taxpayer Identification Numbers

(ATINs) and Individual Taxpayer Identification Numbers (ITINS).

III. 1999—PAPERLESS FILING

These are important steps. But looking forward to 1999, we have additional improvements in mind. First, we have asked the Service to undertake all possible efforts to accept an alternative signature for the ELF system for the 1999 filing season. The need to send the IRS a paper signature document is the most frequently

criticized element of the ELF program. However, the signature is a legal requirement for a tax return. The Department believes that in the electronic age, what we

need is not a traditional paper signature per se, but rather a system for authenticating that the return filed is that of the taxpayer identified on the return. The Service, in common with many other government agencies, has been using some signature alternatives for a number of years and is testing others. We believe it time to

apply the available technology to the ELF program.

In addition, in 1999 we hope to make it possible for those taxpayers filing balance

due returns to be able to authorize an electronic payment as part of their electronic

return. This will eliminate the need for paper payments and will represent a big

step forward in our quest to offer taxpayers a suite of electronic options for making

tax payments. I should add at this point that the IRS is beginning an effort to implement the legislation provided in the Taxpayer Relief Act of 1997 to accept credit

card and debit card payments.

IV. 2000 AND BEYOND—ADDING VALUE THROUGH NEW SERVICES

In the year 2000 and beyond, we will continue to enhance the ELF and TeleFile

programs and aggressively market their advantages for taxpayers. But we also plan

to add additional value to our electronic services by incorporating features such as

an electronic Power of Attorney and, when we are comfortable that such a system

can adequately protect taxpayer privacy, even on-line account access. I must note,

however, that we will not develop concrete plans for these additional services until

we see the results of the ETA Request for Proposals (RFP). This process will both

help us determine what additional services taxpayers and other stakeholders value

most and help the IRS focus its resources on those investments that will receive

widespread acceptance.

V. OUR LEGISLATION

We can and will accomplish most of our goals under current law. But to accelerate

progress in electronic filing, greater flexibility is needed. Yesterday, Representative

Coyne introduced legislation, supported by the Administration, entitled the Internal

Revenue Service Improvement Act of 1997, to further improve our system of tax collection. In coming weeks and months, I expect this proposed legislation to be widely

discussed. I would like to focus my comments today on one section of the bill, section

201, entitled Promotion of Electronic Tax Administration.

Madame Chairman, the IRS has a demonstrated need to inform the public about

its programs and activities such as electronic filing. Yet every year, the Treasury

Department appropriations specifically bar the use of appropriated funds for promoting departmental programs. This has forced the Service to rely primarily on free

public service advertising to promote the advantages of electronic services. We believe, and have been advised by stakeholders and consultants, that we need to reach

a broader audience if we are to see dramatic growth in taxpayer use of electronic

filing. Proposed subsection 6011(g) would explicitly authorize the Secretary to use

appropriated funds to promote and encourage the use of electronic filing methods.

The legislation would also authorize the use of appropriated funds to provide financial incentives for electronic filing. Our RFP will open the door for such proposals and we would like clear legislative authority to use a portion of the savings
27

gained through electronically filed returns to make incentive payments, provided the

proposals are in the best interest of the government.

Currently the tax code requires that certain statements and supporting documents, which are difficult to accept electronically, be filed as part of the return. The

legislation would permit the Secretary to prescribe alternative ways of receiving information necessary to ensure that the return is accurately filed.

The legislation would also explicitly establish that the Secretary has the authority

to establish signature requirements for electronic returns and other forms. It would

also clearly establish the legal standing of documents authenticated by means other

than the traditional paper signature. This step is necessary if we are to truly move

the maximum number of transactions to electronic media while maintaining our

ability to address civil and criminal fraud.

Finally, the legislation would also enable the Secretary to explicitly establish that

the acknowledgment of return acceptance, which is provided by both the ELF and

TeleFile systems, constitutes prima facie evidence of filing. This will establish a

clear legal basis for what we believe to be one of the major advantages of electronic

filing for the taxpayer: proof that the return was, in fact, received and accepted on

a timely basis by the IRS.

We believe these provisions will give the IRS the statutory authority it needs to

dramatically increase electronic filing.

VI. OTHER LEGISLATIVE ALTERNATIVES

We believe the approach to electronic tax administration taken by our bill, combined with the RFP and our proposed management structure, is the best one to prepare the IRS for the twenty-first century. However, we realize that the Subcommittee is also considering the legislation introduced by Congressman Portman, based

on the report of the National Commission on Restructuring the IRS.

We share the overall goals of that legislation and the objective of increasing electronic filing. A comparison of our legislation with Senator Kerrey’s and Congressman Portman’s bill will also demonstrate that we agree on many, but not all, of the

particulars. I believe that there are some key principles that should be followed in

negotiating this legislation.

First, we must not force people to file electronically. Secretary Rubin and I believe

the marketplace will work better than arbitrary targets or the equivalent of mandates. While computer access is steadily climbing, it is important to recognize that

more than half of Americans do not have computer access. Any requirement that

taxpayers file electronically would force those without a computer to use tax preparers or a public computer, for example, in a library. This would unfairly disadvantage

a large segment of our population. We must recognize that paper returns will remain important, and we must continue to support paper submissions for the foreseeable future. It would be wrong for example to require that some specified percentage

of forms be filed electronically by a certain date.

Second, we need to be realistic about adding major new burdens to the IRS. We

should avoid adding major new elements of complexity to tax administration.

Finally, as we all know, the electronic environment and the marketplace are

evolving rapidly. What works today may not work tomorrow. For this reason, it is

vital that we retain flexibility. The Congress and the Administration should agree

on objectives and overall direction; however, like the private sector, we as a government should not impose rigid targets or lock ourselves into solutions that will soon

be outdated.

These principles should guide us in looking at the specific proposals included in

the Restructuring Commission report and the legislation offered by Senator Kerrey

and Congressman Portman. As I have previously testified, there is much we agree

with in this report. And we share many of the same goals. We do, however, differ

in some specific requirements regarding electronic filing. Let me briefly discuss

some of these differences.

Portions of the proposed legislation would make major changes in the overall filing program. In my view, these could be disruptive and are unnecessary. Instead,

we need to rely on the judgment and abilities of taxpayers, government employees

and the continued strong oversight by Congress and Treasury, working in partnership with the IRS, to keep us on track.

First, the bill mandates the implementation of specific programs that have not

been tested or evaluated, may expose the system to fraud and may entail major new

costs. Madame Chairman, I do not believe that this is the best way to implement

public policies. The mandates in the bill do not meet the criteria I described above,

which I am sure we jointly share.
28

Second, H.R. 2292 would extend the filing dates for electronically filed individual, corporate and information returns. This provision would significantly increase the

complexity of the system, making it harder for taxpayers to understand and harder

for the IRS to administer. Indeed, Madame Chairman, it would devalue what may

be one of the IRS’s greatest intangible assets, the public’s knowledge that returns

are due April 15. The proposal also favors sophisticated, balance-due taxpayers over

middle and lower income filers who are owed refunds. Changing the filing date

would cost the Federal government several hundred million dollars each year in additional interest. We do not believe this is a wise use of Federal resources for the

purpose of encouraging electronic filing. The bill would also mandate a program to pay fees to transmitters (not preparers)

of electronic returns. In the absence of clear evidence that these provisions are

worth what they would cost, we believe they are ill-advised and premature. While

government may be able to structure incentives to encourage electronic filing, these

incentives should be carefully developed. Our RFP will clearly be open to such proposals, and we will pursue them if they prove to be the best, most cost-effective

method of increasing electronic filing.

Finally, the Kerrey-Portman legislation provides for new regulation of return preparers—although we note that it does not provide any funding and actually prohibits the IRS from administering examinations in order to qualify as a return preparer. While there are some clear advantages to the proposed regulations, the administrative cost of effective regulation, and enforcement of those regulations, covering everyone who prepares tax returns for a fee would be significant. We do not believe this would represent the best use of the IRS’s limited resources.

VII. CONCLUSION

In conclusion, we are making progress on increasing electronic filing. But going

forward, additional legislative authority is required. I have outlined our approach

as well as the principles that I believe will best guide legislative action in this area.

As we go forth, we look forward to working closely with members of this Subcommittee and others on our shared goal of increasing the level of electronic filing.

rent efforts underway at the IRS, and the advances that he has deMr. LUBICK. Commissioner Dolan has explained in detail the curf

scribed reflect, I believe, the first fruits of the Treasury Department’s increased concern for the revitalization for our system of tax

administration and our oversight role in that.

We have new leadership in place at the IRS with an increased

level of knowledge of information technology. Mr. Dolan has described the increased reliance on outside expertise. The management board on which I sit has been made permanent by executive

order. And in all of this, nowhere has more attention been paid

than in this area of Electronic Tax Administration, and I think it

is very encouraging to see the progress that Commissioner Dolan

has described.

There are a few matters involving legislation, and I think that,

although the improvements that have been made are significant, I

believe we share the opinion of many of the Members of this Subcommittee, that to take electronic filing to the potential that it deserves, legislation is appropriate.

There are apparently two bills on the table. Yesterday Congressmen Rangel, Coyne, Hoyer, Waxman, and Matsui introduced legislation entitled the IRS Improvement Act of 1997, and of course

Congressman Portman has introduced a bill, which is the outcome

of—and Mr. Cardin, which is the outcome of the Restructuring

Commission.

The Code currently requires that certain supporting documents

be provided on paper, and the IRS Improvement Act would give the
29

Secretary the explicit authority to prescribe alternative methods of

verification for electronic returns, and would allow electronic receipts to serve as prima facie evidence of filing. We believe the

tools in that act, in common with the legislation proposed by Congressmen Cardin and Portman, would give the IRS much needed

flexibility to adapt to the new information technologies.

We do have some differences and some concerns about aspects of

the legislation introduced by Congressmen Portman and Cardin,

and I think I can summarize them very quickly.

In particular we are concerned about mandates or their functional equivalents through specified targets, and we are afraid that

this will introduce a rigidity in an area where flexibility is really

the order of the day. We have seen such rapid developments in

technology that what appears to be truly useful today can indeed

be a burden in a relatively short time.

It is true that more Americans are gaining access to a computer

daily, but it is unlikely that in the foreseeable future all Americans

will have that access. We think there ought not to be any requirement that everyone file electronically; that would be unfair to those

without computers who choose not to pay for professional assistance. And we think that a specified target perhaps would lock us

in to areas where more flexibility would be necessary.

Another provision that is inconsistent in our view with sound tax

policy is, which the Commissioner has referred to, the extension of

the filing dates for those who file electronically. Alternative deadlines we think may well impair tax compliance and will certainly

cost revenue in favor of sophisticated taxpayers who have balances

due. Moreover, since sophisticated balance-due taxpayers might be

more likely to file electronically if the deadline were extended, postponing that deadline for electronic filers would be unfair compared

to middle- and low-income working families who are frequently in

a refund position.

And again, we probably think it is unwise to mandate incentives

for transmitters of electronic returns. We agree, however, that we

do not want to dismiss the notion of incentives, and therefore we

think it is much sounder to go the route of giving authority to develop incentives.

So in sum, while we, I think, share qualitatively most of the provisions of the bills in common, we think in a few areas that there

should be no mandates, rather authorization, more flexibility, no

dual filing dates, and no specific percentages. This is not to say

that we do not think that the work of this Subcommittee in monitoring the progress of the IRS in achieving these objectives is not

necessary; indeed we welcome it and we would like to work closely

with you, and report to you, so that you can constantly see what

progress is being made. And we think that we can work as partners more effectively on that basis.

We thank you for your interest in this, and I will attempt to join

Commissioner Dolan in answering any questions which you have.

Chairman JOHNSON. Mr. Lutes, do you have a statement also?

Mr. LUTES. No.

Chairman JOHNSON. Thank you. In your testimony you mentioned that you need to determine the level of savings for electronically received returns compared to the cost of paper returns.
30

Does the IRS have an estimate of the average cost of processing

a paper tax return, and do you accept the $7 as the average cost

of processing a paper return? And if not, how far are you from

knowing these facts?

Mr. DOLAN. I like the last question better than I do the first two,

because it is one I can answer easier.

Chairman JOHNSON. Actually, it is sort of interesting that the

IRS does not want to deal with numbers.

Mr. DOLAN. It is really more a question of having too many numbers. And part of what has been at work here—and frankly I am

embarrassed that we did not have a way to differentiate these

numbers better, even for the Restructuring Commission.

We can tell you what the front-end processing, what the difference is between keystroking something, and what the difference

is between getting a data stream. A part that has never been done

very effectively is that is clearly not the only benefit of getting an

electronic stream because there are many, many things that happen in perfecting that return, and subsequently providing taxpayer

customer service. And so our deficiency has been in really giving

a number that is anything more than this sort of simplistic up

front number.

We are in the process—have been for some time, stimulated in

large part by the interaction we have with the Restructuring Commission, of doing a cost assessment, which I believe in late September, is supposed to serve up for us at least a far better ability to

compare than we have today.

Most of the folks who look at it, strictly with respect to the comparisons we made on the front end, think that the 6 to 1 or $6, $7

savings, is a far exaggerated rate of savings. But I do not want to

sit here before you today and try to tell you it should be something

else to 1 until I get the benefit of this work in September.

Chairman JOHNSON. Thank you. We certainly do need to refine

those numbers; that is terribly important——

Mr. DOLAN. Absolutely.

Chairman JOHNSON [continuing]. And the contrast between

manually entering and transmitting is just so stark that the dollar

difference has got to be very significant just on the front end. And

if 70 million of the 120 million individual filings exist on electronic

record, at some point in the process we ought to be able to take

advantage of that, and when we do, it ought to have a very significant cost component.

So, it is imperative that we move forward because that is money

we can use on technology and so on. This is an issue that bears

a lot of analysis, scrutiny, and it is just something that we must

know.

I am going to yield to my Ranking Member to question. I am

very interested in the issue of signatures, but I think that that will

come up amongst the other Members. And so that everyone gets a

chance, I am going to yield. I am going to tell Members that we

will not break for this vote. If you will go serially so that some toward the end can go now and come back, then we can go through

the question period and keep our bearing on our time schedule.

So thank you, Mr. Dolan and Mr. Lubick, and Mr. Lutes.

Mr. Coyne.
31

Mr. COYNE. Thank you, Madam Chairman, and thank you, Mr.

Dolan and Mr. Lubick, for your testimony.

You indicated that you are going to encourage people to file electronically, and you pointed out that one method might be the personal computer. I wonder if you could outline for us what would be

available to the taxpayer—how they would file their return if they

did not have a personal computer but wanted to file electronically.

Mr. DOLAN. Today the principle alternative is obviously the use

of a practitioner, but there are a series of other alternatives, which

are, for example, are VITA sites——

Mr. COYNE. What sites?

Mr. DOLAN. I am sorry, voluntary assistance sites. Frequently

they also make available an electronic filing capacity. But that is

sort of a hit and miss proposition today. So short of somebody having and utilizing their own computer access or utilizing the services

of a prepared tax preparer, there are not many systematic alternatives for somebody to go and use either somebody else’s computer

or some other electronic form of access to the system today.

Mr. COYNE. You mentioned people who use the electronic system

to file. You are still having to ask for paperwork from them, and

you want to totally eliminate that.

I wonder if you could outline for us what are the more prevalent

requests for paper that you make of electronic filers? In other

words, what are the necessary paper files?

Mr. DOLAN. The principle information items that we today receive in paper are a signature and wage information. And I think

it is pretty clear to us that we can resolve the question of whether

you need to supply W–2 information by paper, and I think we can

solve that problem on our own.

The one that has been a little dicier and the one that the Chairman alluded to, is the extent to which we can provide an alternative to the signature, and that comes packaged a couple of different ways.

One, we want to be very clear that we have a process to authenticate the return. We do not want people violating the returns on

your behalf or my behalf, and us not being able to authenticate

who the actual initiator of the return is. We also have, in a more

narrow sense, sort of an open playingfield here with respect to our

ability in subsequent kind of enforcement actions to satisfy the judicial standards, that yes indeed, this is a return that was filed by

the person who we assert filed it.

As Mr. Lubick indicated, the administration would like to see us

pin down with certitude that there are some of these alternatives

to the written paper signature that will have the same legal force

and effect that today’s written signature does. Today, the Secretary

and the Commissioner have some discretions about authorizing alternatives, but I think what any bill passed could do is make that

unequivocal; there are alternatives that are legally defensible and

sustainable.

Mr. COYNE. On the telephone filing system, how many taxpayers

did the IRS contact to authorize them to do it that way this year?

Mr. DOLAN. Twenty-six million then, Mr. Coyne.

Mr. COYNE. And how many took advantage of it?

Mr. DOLAN. 4.7 million.
32

Mr. COYNE. How many?

Mr. DOLAN. 4.7 million.

Mr. COYNE. And what are your plans for the new tax year coming up?

Mr. DOLAN. As I mentioned before, by every matrix we have

looked at, it is one of our best received products with a 99-percent

satisfaction rate.

Two things are going to be crucial for us. One, when a person

gets an invitation or a package from us to do TeleFile, it is unique.

It does not look like the other tax packages. It has a set of unique

characteristics. So one of the things that our communications contractor has told us is, that we really ought to leverage even better

our equivalent of a direct mail ability to sort out that 26—and we

think it is probably going to be more than 26 million. So we are

going to try to increase the effectiveness of the product that is first

received to alert people that they have something that is different.

And we have a couple of different schemes that we are in the final

stages of testing that may help people anticipate this package, and

may remind them that they have gotten the package, and we hope

then would get a bigger response rate.

Second, there were a number of people last year that because

they moved between the point of their last return and their next

return, were made ineligible by the criteria that we were using to

select and invite people. We think we have some ways this year to

not lose that part of the universe, but indeed to invite many of

them into the process of using the TeleFile product as well.

So those would be the two things: First, the increased effectiveness on the message or the marketing; and, second, the expansion

of this part of the universe, that those who moved would have been

eligible last year, and hopefully would have participated by at least

the same rate that the 25 million did.

Mr. COYNE. Thank you.

Mr. PORTMAN. Thank you, Mr. Coyne, and thank you, Mr. Dolan,

for your work with the Commission with Mr. Coyne and myself,

and a year’s worth of work on this topic, electronic filing, and for

coming here today—Mr. Lubick, thank you also for being here.

What I thought I would do is, rather than talk more generally

about some of the issues you have discussed, many of which we

agree on, is get into some of the specifics of the legislation. The

charge today really is that this Subcommittee is to put together a

report on the legislation, H.R. 2292, and you have addressed some

of the issues.

I wanted to clarify the record, if I could, to start with what is

one of the issues apparently where there may be some disagreement. Incidentally, I find myself alone again with Treasury and the

IRS. This will be, I am sure, a much more amiable discussion than

the last time I found myself here. I am outnumbered today among

other things.

Mr. Lubick, you said you do not like H.R. 2292 because you

should not mandate that everyone file electronically. That is the

quote I wrote down here. Of course H.R. 2292 does not mandate

that, and I think the record needs to be clarified. This is something

we talked about for a year; Mike Dolan knows this. We went back

and forth on various iterations with the IRS, with Treasury. We
33

made a very deliberate decision not to mandate electronic filing. So,

if it is going to be mischaracterized, I think we are going to have

a hard time getting to points of agreement, even on these few

issues where we tend to disagree.

You say also in your testimony—at least your oral testimony—

that you are happy to have us monitor your progress, but we

should not set any guidelines. And you also say that there should

not be mandates to transmitters. There are no mandates to transmitters in this legislation. So let us just make that clear. What we

do provide is some incentives to transmitters that you apparently

disagree with, and that is fine, we can talk about that. But at least

we need to clarify what the legislation does.

Just briefly on the reason we came up with this—and then I

want to get some feedback, if I could, from the IRS and Treasury—

is an 80-percent goal by 10 years. Now, despite efforts over the

years to get the IRS to come up with a plan to more aggressively

pursue electronic filing, we do not have such a plan from the IRS

still. And the Commission set about its task seriously, and put together a plan with the IRS’ help that we think is a very practical

plan that makes it quite easy to get 80 percent within 10 years.

My personal view is it will happen long before 10 years. We have

seen the changes in technology already in the last year since we

have been working on this, and we will see more changes, I am

convinced. But the notion is to set a goal, because if you do not set

a goal you are less likely to get there. And certainly the experience

of the last decade would lead us down that track, but there is no

mandate on individual taxpayers; no mandate on transmitters.

There is a goal set out very firmly to the IRS to meet that 80-

percent deadline, 80 percent of individual taxpayers filing electronically.

I guess what I would ask, Mr. Dolan, is if you would give us your

response to that from the IRS point of view, number one, whether

you think that is an obtainable goal; and number two, if you would

give us some alternatives to that. In your RFP you say you are

going to ask that significant expansion of electronic filing be sort

of the underlying goal. Well, that is fine. What is significant expansion?

In your strategic plan of January of this year in 1997 we did not

get a goal on electronic filing. Again, August 15, this year, your

strategic plan for the IRS is very vague about electronic filing; the

strategic plan encourages electronic filing, and I think we agree on

that, but how do you feel about the goal and what are your alternatives to it if you do not think it is appropriate.

Mr. DOLAN. Thanks for the question. I happen, as you know, to

have the benefit of attending I think what was the last session of

the Restructuring Commission, where the group was wrestling

with how to state this, and I know there is dialog that I missed

about that. But the tension that I saw that day is the right tension.

Eighty percent, as it expresses what you and I might believe is sort

of the intuitive right place to be. The fact that it was set against

2007, I believe, on the surface you would look at that and say, I

mean what is not to believe about the reasonableness of that.

Now, to the extent that people are satisfied with that level of

analysis, then 80 percent may work. I think the part that I would
34

urge, Congressman, is that one of our problems in the past in

thinking about this in some other areas was to kind of set an aspirational goal. Now to some extent that works, if the aspirational

goal is the kind of thing that keeps you vigorous about trying new

things. But what I guess I hoped would happen was that the RFP

process would give us an opportunity to maybe place, through what

we heard in the RFP, maybe place the building blocks where you

and I could sit across the table and say, Hey, this is not about aspiration; this is not about hope for good work and luck. This is a series of building blocks that the industry has said 80 percent is too

modest or 2007 is too far off.

Mr. PORTMAN. Mr. Dolan, I am going to have to run over and

vote. I am going to actually pass along to my colleagues. But it

sounds like you and I largely agree, and the question is whether

the legislation should establish that goal. I think we have already

heard from the industry, and we have already heard from you, we

have already heard from Treasury. We know where we are. We

have reams of testimony; we are going to hear more today.

I personally believe that it is not only attainable in 10 years, but

probably in 5 years, but I think certainly 10 years is a reasonable

goal.

With that I would like to move to Ms. Dunn, and then I will be

back after voting.

Ms. DUNN. Thank you very much, Mr. Portman. And welcome,

gentlemen. It has been very interesting, this whole process. And

Mr. Dolan, we have appreciated your involvement in it.

Mr. Lubick, I have a concern about your comments. I agree with

what Mr. Portman said. I do not see the goals and objectives that

are measurable, that we have set through this proposal of 80 percent by the year 2007 as a mandate on the taxpayer. I see it as

a mandate on the agency, and the agency apparently, according to

Mr. Dolan, is happy to accept this objective. And I do not think you

do not get work done unless you do have a guideline that tells you

what needed to be done and what time.

But I really hope from Treasury that we are going to see some

coordination with what we are all trying to do to make the IRS

more efficient, and more effective and more helpful to the taxpayer.

I know that you lose power for Treasury because of the Control

Board and other areas, but I would like to think that you are going

to look at this objectively, and what can we do better for the taxpayer. I certainly give the administration credit for doing that

many areas, and I hope we can count on that hereto.

I have a couple of questions. I would like, Mr. Dolan, have you

analyzed how many jobs, how many dollars can be—jobs done away

with dollars saved, paperwork done away with, through this particular objective?

Mr. DOLAN. Ms. Dunn, the analysis that I talked about—and I

am not sure whether you were in the room when the Chairman

asked me about this—is it 6 to 1, is it 7 to 1.

I think the analysis that we will produce as a result of this product that we should have at the end of September will put us in a

better place today than what we have had in the past. Historically

what we have had, and what has actually been harvested from our

budget, as electronic receipts have gone up, we have had the com-
35

mensurate withdrawal from our budget of the dollars and staff

years that would have been associated with key entry. But beyond

that, I think if you put yourself in a world that Congressman

Portman projected of 80 million filers by a date certain, and payments made electronically, we do not have a satisfactory picture of

what the staffing and production impact would be. It would obviously be considerable. And then the discussion we want to have is

the one the Chairman talked about, which is, so what are the

choices around those? Are they choices about just recouping the

dollars totally, or are they choices about placing them in some

other aspect of customer service or compliance?

Ms. DUNN. Thank you, Mr. Dolan. I see as a primary goal of

what we are trying to do here in making the IRS more effective,

of downsizing the IRS. Are you still at 102,000 employees at the

IRS?

Mr. DOLAN. Yes, we are, Ma’am.

Ms. DUNN. And certainly making it more of an effective partner

to the taxpayer.

Let me ask you a question about the incentives to the preparers

of tax returns. I would like to know, if you are thinking about paying H&R Block and other preparers, $3 per tax return for filing

electronically. It seems to me it is a huge benefit to the taxpayer,

and that these folks, these preparers, are already out there charging taxpayers $20, $30, $40, $50, sometimes more dollars, to prepare an electronic return.

What is the thinking? I mean why would you not take this $3

per return, for example, and use it for educating the public to get

to our goal of 80 percent more quickly than we projected?

Mr. DOLAN. I think Mr. Lubick may have an answer. Let me just

say, you and I would probably get to the same page in the hymnal

pretty quickly. I do think it is something we have to look at very

carefully, as to whether we would use $3 in the way that some

have urged. And particularly I would be concerned, if I were to go

back now and pay $3 for the $20 million that I received last year.

That would be $60 million out of my budget that would have to

come at the direct expense of doing work in customer service, or

doing other activities that those $60 million would have bought. So

I do think that either that dollar amount or any other dollar

amount being applied as an incentive, is something that has to be

looked at very carefully. And Mr. Lubick, I think, may want to

comment as well.

Mr. LUBICK. Incidentally, Congresswoman Dunn, I did not mean

to imply that the legislation did mandate that taxpayers file electronically. I was simply stating that if we mandate, as you said, the

agency, that it has to reach 80 percent. It seems to me that is unwise to put in legislation. I think it is perfectly satisfactory to say,

and announce, and have this Subcommittee monitor an aspirational goal of achieving 80 percent, but circumstances change, and

I think you ought to retain the flexibility to adapt your position to

the circumstances. You may want to change that goal to more or

less.

And the same applies to the question of incentives. I think we

would favor the authorization of a program of incentives if it can

be demonstrated that it would be cost beneficial; not only taking
36

into account the cost to the Internal Revenue Service, but the cost

to taxpayers and the cost to preparers. There are costs of complying with the tax system that go beyond tax administration. They

fall on private citizens, and those have to be taken into account.

So, if we mandate the furnishing of incentives to transmitters, I

am not sure that that is the right expenditure, for reasons that

have been discussed by Mr. Dolan and suggested by you. It may

be that you would want to give incentives to the taxpayers themselves. It may be that the preparers should be given incentives. I

think we have to keep open in this, and we have to work together

as this proceeds, to be flexible and to go in the most efficient way

to accomplish our mutual and exactly congruent objectives. So I

think it is flexibility that we are urging here, and the avoidance

of rigidity. I did not mean to suggest that the legislation intended

ever—and I do not think it could—to require every taxpayer to file

electronically.

Ms. DUNN. Good, and I appreciate your comments, Mr. Lubick.

I certainly think, if anything, that Congress has proved itself very

resilient in changing goals and objectives. I do not worry that we

will find ourselves locked into something, and I would hope, as Mr.

Portman suggested, that we might reach these goals much, much

more quickly. I would certainly hope so; 10 years is a lot.

Madam Chairman, may I just have one more brief question?

Chairman JOHNSON. OK.

Ms. DUNN. I am very interested in the signature portion of the

program, and I understand California has a program where they

have tested, or are in the process of testing filings that do not include the signatures, which are going to be such an expensive part

of our program if we are not able to eliminate the personal signature.

Do we know how the California program is doing? Is there fraud

involved or is it at a point where we can evaluate it?

Mr. DOLAN. I think the short answer is we do not know much,

Ms. Dunn. I would be happy to try to find some of that. And Terry

may want to spend a minute on the relative comparisons between

the States and our experience, but the direct answer is that we do

not have much information on California’s experience at this point.

Ms. DUNN. Well, it would be a great interest to me, and I am

sure the Subcommittee. Thank you, Madam Chairman.

Chairman JOHNSON. Thank you. Mr. Cardin.

Mr. CARDIN. Thank you, Madam Chairman, and let me thank

you for your testimony. It is clear that we all share the same objective to increase the amount of electronic filing, and the legislation

that we have introduced moves us rapidly to achieve that objective.

It is interesting. Whenever you have change, people will look

back later and say, why did we ever do it the other way. And I understand that we need to educate the taxpayer, and we need to

deal with the obstacles that are currently involved to make it available for us to do more electronic filing.

The Commission’s recommendation offers a major incentive for

taxpayers to use electronic filing, by giving them an additional 30

days to file their tax returns. I understand the administration’s bill

allows the IRS to come up with financial incentives for electronic

filing. So, in one instance we are trying to be specific to offer an
37

incentive for taxpayers to take advantage of electronic filing. The

administration desires to use incentives, but wants to study and

come back, and give us some recommendations or implement some

changes.

I would hope that you could be more specific as to what type of

financial incentives you believe should be considered in order to encourage more electronic filing. Because once we get our numbers up

we will never go back, and people will start to understand the advantages, and the financial advantages to a taxpayer filing electronically.

What type of incentives would you consider?

Mr. DOLAN. I think, Mr. Cardin, we will know a lot more about

this within a couple of months when we have the responses to the

RFPs, because we will have input from a number of people in the

private sector who will presumably educate us considerably on

that. We will have a better handle on what are the costs involved,

and what are the benefits and how we might target incentives.

I think some sort of a payment would be something that we

would consider, but to whom it would be paid—whether it would

be the transmitter or the preparer, or the taxpayer—I do not know.

I think at this stage my feeling would be that the fairest of all

might be an incentive that went to taxpayers.

Mr. CARDIN. Might you also consider a different filing deadline

as an incentive?

Mr. DOLAN. Consider——

Mr. CARDIN. A different deadline for filing. Is that not one that

is on your list?

Mr. DOLAN. I would be dubious about that right now. I think it

would be somewhat disruptive of the tax administration not to

have a uniform filing date.

Mr. CARDIN. If I could just interrupt on that, because that seems

to me a little bit unusual to say, because we seem to be spreading

different deadlines in governmental agencies in order to manage

the workload more effectively. And different deadlines, it seems to

me, could give you some advantages in addition to more electronic

filing.

Mr. DOLAN. I would fear that different deadlines might, rather

than spread the work, might make the work of the IRS more difficult. For example, if many returns are filed a month later, that

is going to cause further delays in processing and audit.

Mr. CARDIN. Of course you have an automatic delay now that you

could get in filing your returns if you paid your taxes. You already

have that built into the system. I am not sure I quite understand

the concerns with a 30-day delay, when you can get a longer delay

in filing tax returns under current rules.

Let me just caution you. It would be shortsighted to fail to quickly move to accept electronic filing because of the transition cost. Ultimately, I think we all understand electronic filing is going to be

less costly, not more costly; that ultimately when the system is

more efficient it is going to be easier for the taxpayer, for the tax

preparer, and for the government. And I would hope that as we develop financial incentives for electronic filing that we do not build

into the system additional costs that are going to be difficult to

back out of.
38

As we try to spread the workload or look at other issues, I think

you raise good points. Having a different date is something that

needs to be considered in addition to just the impact it will have

on electronic filing, and I agree with your concerns there. But to

just dismiss it because it sets up a different date I think is also

wrong.

What we try to do in the bill that we filed is be specific on a financial incentive, to encourage more electronic filing. And I would

hope that you would be a little bit bolder, and come forward with

recommendations that will make it easier for the taxpayer to take

advantage of electronic filing. I have not heard enough ideas yet,

and I would hope that you would be forthcoming with additional

suggestions. Thank you, Madam Chairman.

Chairman JOHNSON. Mr. Ramstad.

Mr. RAMSTAD. Madam Chairman. As you know, Mr. Dolan, a few

months ago this Subcommittee examined the Electronic Federal

Tax Payment System, and particularly the disastrous communication effort by the IRS that I dare say really frightened many in the

small business community, and I appreciate your testimony about

the lessons learned by the IRS from the EFTPS debacle.

In looking at that experience, which many reported to me as

being heavy handed, I would ask you if there is a specific marketing plan that is more taxpayer friendly; if you have specific steps

in mind in marketing electronic filing to taxpayers.

Mr. DOLAN. Congressman, we do, and what I would maybe ask

for is the opportunity, a couple weeks hence, to brief the Subcommittee. As I mentioned in the earlier part of one of my questions, we exposed just last week the work that our communications

contractor had done with us, to some of the outside groups that will

partner with us in this marketing approach. We are in the process

of taking some of their feedback and finalizing our plans, but we

have some very specific ideas—with respect to the way media

would be used, and the way we would use, as I mentioned in the

TeleFile. TeleFile is sort of a direct mail opportunity for us of a

unique sort, and there are some changes that we are going to make

in that arena as well. And so, within a couple of weeks I would be

happy to make available to you or the Subcommittee, more broadly

what those marketing approaches will look like in the next year.

[The following was subsequently received:]

1998 Filing Season Campaign

BACKGROUND

In developing our national promotion strategy for the 1998 filing season, the Internal Revenue Service (IRS) and Treasury consulted with Emmerling-Post, our advertising agency. We reviewed the results of our TeleFile promotion in 1997 and

looked at the areas for greatest potential to help the Service meet its overall electronic filing goals.

This year’s filing season campaign will promote the use of electronic filing options,

with primary emphasis on practitioner electronic filing. We hope to build on last

year’s successes. During the past filing season, there was an increase in the number

of returns filed using electronic filing options. Not only did the number of TeleFile

returns increase, returns filed through third party providers also increased. This

growth provides a good platform for our 1998 electronic filing program.
39

OVERALL APPROACH

This year’s campaign will introduce a new name and logo for electronic filing options. In their presentation to the Service, Emmerling-Post recommended use of the

term IRS e-file to refer to our electronic filing options. E-file is a commonly used

phrase on the Internet and is also used by Revenue Canada to describe their electronic filing program.

KEY MESSAGES

• IRS e-file is the quickest way to get refunds. You receive refunds in half the

time over paper returns—even faster with Direct Deposit.

• IRS e-file returns are more accurate and reduce the chance of getting an error

letter from the IRS.

• IRS e-file options provide acknowledgment your return has been accepted.

• IRS e-file is a proven commodity. Over 19 million people like you chose an IRS

e-file option last year.

NATIONAL IRS E-FILE CAMPAIGN STRATEGY

• Develop a unified public service campaign and supporting materials with the

IRS e-file logo to increase public awareness of IRS e-file options.

• Use tax practitioners and practitioner groups as IRS e-file champions.

• Provide a promotional kit to IRS e-file third party providers. The kit will provide third parties with materials they can use to promote their IRS e-file service

to their clients and customers.

• Reinforce messages from the public service campaign in the 1040 packages.

TELEFILE STRATEGY

• Use the TeleFile booklet as a direct mail marketing tool to emphasize the benefits of filing by phone.

• Redesign the TeleFile booklet covers and logo to be more effective.

• Test the impact of supplemental post card mailings to some TeleFile booklet recipients.

IRS e-file via a Personal Computer Strategy

• Make taxpayers aware, through the tax package, magazine ads and articles and

in the software packages, that the benefits of IRS e-file are available to individuals

who prepare their tax return using a personal computer, tax preparation software

and a modem.

• Partner with software providers to promote IRS e-file options.

EXTERNAL STAKEHOLDERS

A major feature of the promotion effort is building partnerships with third party

providers and associations to enlist their active participation and promotion of IRS

e-file with their customers and members. On September 4, IRS executives met with

members of national tax practitioner organizations and industry representatives

from the Council for Economic Revenue Communication Advancement (CERCA). At

that meeting Emmerling-Post presented an overview of the practitioner IRS e-file

campaign and the kit for third party providers. The kit includes an IRS e-file logo

and stickers, a letter to clients, posters, and a decal to read ‘‘Authorized IRS e-file

provider.’’ The kit will also include copies of the public service campaign. Electronic

versions of the kit will be available to IRS field offices and practitioner associations

in October. Hard copies will be sent to Electronic Return Originators (ERO) in December.

THE PUBLIC SERVICE CAMPAIGN

A second aspect of Emmerling-Post’s recommendations is a public service campaign in radio, television and print focusing primarily on third party IRS e-file. The

messages in the materials stress fast refunds through electronic filing. These materials will be distributed to print, radio and television outlets in December to begin

appearing the last week of December.

In January, a video news release will be distributed to support the IRS e-file messages. Interviews in the media will keep the message prominent throughout the filing season.
40

FOLLOW-UP

This year’s campaign includes an evaluation component. In May, we plan to survey third party preparers, conduct an attitude and awareness survey among taxpayers and do an analysis of paid media tests. The IRS will also be conducting a

survey of taxpayers to provide the quantitative market research data for use in developing enhancements to our ETA products. The results of each of these evaluations will be used to enhance the campaign for the 1999 filing season.

refer to the communications contractor. I trust it is a different comMr. RAMSTAD. I think a collaborative effort would be helpful. You

f

munications contractor. You fired the first one.

Mr. DOLAN. Well, actually, the first one was kind of an in-house

job, Congressman, so we did not have a contractor to fire. That is

really the dialog that we had with this group before. We were trying to be marketeers.

Although, I might not use quite the language you did in terms

of debacles and other things; part of what we learned from that lesson was, we also had a number of cooks in that broth. We had

agents of the government; we had various components of the private sector. I think what we are trying to do differently on electronic filing is get everybody’s vote so that we understand our respective roles, and understand the convergence of our objectives.

Mr. RAMSTAD. Well, I appreciate that approach and that recognition of the problem. The term debacle is not mine. It came from my

constituents, members of my Small Business Advisory Committee

and others, and that is one of the most polite reactions that I

heard. So I think it is important—and I think you have recognized

that this was not a successful effort, to put it lightly, and by hiring

a communications contractor, and by doing it a different way, and

by offering to be forthcoming with the Subcommittee, and working

in a collaborative way on the approach the second time around in

marketing electronic filing, that is very, very encouraging to this

Member, and I am sure to my colleagues here, and most importantly to our bosses, the American taxpayers.

Thank you, Madam Chairman.

Chairman JOHNSON. Thank you, Mr. Ramstad.

Mr. Kleczka.

Mr. KLECZKA. Thank you, Madam Chair. I think I will pass at

this time.

Chairman JOHNSON. Ms. Thurman.

Ms. THURMAN. Thank you, Madam Chairman. In the information

you gave us—we break it down in some ways, but I am interested—who is filing electronically? Are these people that are nonitemizers, itemizers, young, old? Can you tell me who this group is

out there that is actually doing this.

Mr. LUTES. Yes. Let me try to answer that. We are currently undertaking effort to give us more robust information. We are going

through our master file and trying to do a complete profiling of the

people who actually do file electronically versus those who do not,

which will give us better information. But generally—and I think

the external stakeholders will reinforce this—the biggest population that we have tracked is the refund audience who is looking

for the fast refund. That has been the major appeal the program
41

has had. In fact our marketing strategy is going to try to emphasize that point. I do not have the percentage with me, we can get

you that, but the vast majority of the electronic returns are refund

filers.

[The following was subsequently received:]

Percent of Balance Due Returns Filed Electronically

Total 1997 ELF (Practitioner/On-Line) Returns 14,450,000

Balance Due Returns 345,000

% Balance Due Returns 2%

Total 1997 TeleFile Returns 4,694,000

Balance Due Returns 310,000

% Balance Due Returns 7%

Total 1997 Electronic Returns 19,144,000

Balance Due Returns 655,000

taxpayer who has all or the majority of their wages in some kind

% Balance Due Returns 3%

Mr. DOLAN. Which would mean also that they are largely the

f

of withholding environment. That is typically the fact pattern that

produces the highest likelihood of having a refund, which in turn

is the appeal of the quicker electronic product.

Now the TeleFile product is a little different, because the

TeleFile product is one that we are clearly aiming at entrance to

the work force, because of its nature.

It is a 1040–EZ, which means that by definition your financial

life is pretty uncomplicated, your sources of income. And so what

we are trying to do there is target what we would understand

would be the profile of a lot of entrants, which would be people who

are recently out of school; people who are genuinely entering the

labor force for the first time. We are attempting, both in our marketing and in the customization of that product, the accountance

that that is the profile that will likely be the eligible population for

the TeleFile product. And as Terry said, what we would like to be

able to do is to better differentiate the demography, so that we

know that this feature of ELF is more appealing to this particular

set of demographics than some other.

Ms. THURMAN. The other question that I am kind of curious

about—and I know it was part of the recommendations, and it

seems to be in some of the testimony that we are going to hear

later on, is on the signature issue.

What safeguards does the taxpayer have, if there is this nonsignature, if it is being done electronically? Particularly—not that I

would think that anybody would do that meaningfully or whatever,

but just this idea that you send something. Is there some kind of

protection for them if they were sent up and they did not have the

signature or did not know what had been sent to IRS? I would

think there would be a concern.

Mr. DOLAN. Clearly there is, and I am going to ask Terry to supplement my answer, but as I mentioned earlier, authentication is

really our crucial interest here, both for the sake of the taxpayer

and for the system. And that is not just so we can recognize the

signature, it is because of the very point you make. We want to be

certain that when this transmission comes to us labeled as a filing,
42

or a payment, or a request, from a specific taxpayer, that it indeed

is what it purports to be.

Now there are a variety of combinations today of technology that

are being used. Some are being used in less volatile and confidential arenas than ours, and others being used on the other end of

the spectrum, where it is highly confidential. And I think what we

expect to be able to produce is some combination of things like personal identification numbers, and combinations of data that might

possibly relate to a prior return, or might possibly relate to some

component that would be known to only the individual. So you

combine those things in a way that you have a reasonably high

level of certitude; that this really is an authentic verification. And

as I say, we do not have the answer today but we are virtually certain that the work that is out there, both done by others and the

work done by us, will put us in that position with respect to the

tax returns that we file, tax year 1998 returns.

Mr. LUTES. One thing I would add is, is that we probably will

not have one solution, one replacement for the paper signature, because the level of risk depends upon the type transaction. The level

of risk in a 1040 refund return is very different than the risk in

submitting information returns, which is simply providing information to us. So what our process is—and we are working with other

government agencies who are also tackling the same problem—is

to associate the level of authentication with the level of risk, associated with the particular submission to the service. And what the

administration’s bill has asked for is maximum flexibility for the

service and the Department. As technology changes, as we move

down this road, to be able to implement those technologies that authenticate at the appropriate level of risk, while at the same time

obviously enabling us to make certain that the information on the

return is correct.

Chairman JOHNSON. Thank you, Ms. Thurman. Mr. English.

Mr. ENGLISH. Thank you, Madam Chair. I have a couple of questions, but having listened to the testimony from this panel, I would

like to make a comment that I hope you will take back to the

Treasury.

In the IRS strategic plan through fiscal year 2002, which came

out in the middle of last month, little was said about electronic filing and no quantitative goals have been set. I realize in the past

the IRS has set quantitative goals, like in 1993, and has not been

able to achieve them. But what troubles me is the idea of establishing a goal of 80-percent electronic filing in 10 years. This is something that from the perspective of people out in the real world, like

in my district, is a glacial pace.

Now they have had to respond to a scale of change that is much

quicker, and I think, given the dollars involved, and that we can

save literally hundreds of million dollars every year if people move

into electronic filing, then it seems somehow fundamental that we

should find a way of getting done and do it very promptly. Lay

some specifics out, and debate them if you want. Consider incentives, consider sanctions if necessary, but we need to move people

into electronic filing at a time when we are moving toward a balanced budget, and hundreds of millions of dollars could be much

better used, than by pursuing the paper trail in the IRS.
43

1See proposal two in the Commissioner’s January 10, 1995, legislative package, ‘‘IRS Legisla- tive Initiatives for Administration’s Budget.’’

Let me move to my specific questions. Has the IRS Chief Counsel expressed an opinion on whether the IRS has an authority to go

paperless? That is, accept returns without a signature document as

has been discussed in the Commission recommendation. And would

you need additional statutory authority to waive the signature requirement, Mr. Dolan?

Mr. DOLAN. Thank you for the question. I made a brief reference to this earlier. I do believe that the Chief Counsel’s opinion is, that

there is today discretion—and I believe it is both in the hands of

the Commissioner and the Secretary. The Secretary is delegated, so

the Commissioner has the ability to accept alternative forms. The question that is more equivocal is whether or not it would

not be more helpful to have a explicit provision that would make

certain that when such a reality found its way into the courts or

found its way into challenges that herefore have not been made——

Mr. ENGLISH. But has he issued an opinion indicating that a statutory change is not necessary?

Mr. DOLAN. No, I think the opinion that we have—and I would

like to get back to you make sure that I tell you this correctly. I

think the opinion that we have is one that suggests that the Commissioner currently has the authority to authorize various forms of

a signature alternative. And what I think the legislation would

seek, or what we might have a mutual interest in, is——

Mr. ENGLISH. Would you be able to provide the Subcommittee with that opinion?

Mr. DOLAN. I certainly will.

Mr. ENGLISH. Thank you. [The following was subsequently received:]

Electronic Signatures

This responds to your request for our views on whether current law permits the Service to accept electronic signatures. This memorandum also addresses certain additional issues that will be present if the Service accepts electronic signatures. The

Service wants to use electronic signatures, instead of traditional pen-to-paper signatures, to authenticate and verify electronically filed returns and supporting documents. The Commissioner is considering the need for legislation.1

ISSUES

1. Does the Commissioner have authority to accept electronic signatures to au- thenticate and verify returns and supporting documents under sections 6061, 6062,

6063, 6064, and 6065 of the Internal Revenue Code of 1986?

2. Will the electronic signature technologies satisfy the ‘‘subscription’’ and ‘‘writ- ten declaration’’ requirements of section 7206(1) or the ‘‘written’’ or ‘‘writing’’ requirements of section 6103?

3. Will courts accept electronic signatures as evidence to identify, authenticate, and verify returns and supporting documents?

CONCLUSIONS

1. The Commissioner has authority to accept electronic signatures on electroni- cally filed tax returns and supporting documents. The Commissioner may promulgate regulations that authorize electronic signatures sufficient to authenticate and

verify electronically filed returns and supporting documents. The Commissioner

should accept only signatures that reliably authenticate and verify a return as that

of the filer and do not place an unreasonable burden on taxpayers. 2. Existing signature technologies likely satisfy the ‘‘subscription’’ and ‘‘written declaration’’ requirements of section 7206(1), although new technologies that use
44

2 Current Section 6011(e)(1) prohibits the Service from requiring any income tax return of an

individual, estate, or trust to be other than on a paper form furnished by the Service. Despite

the Service’s broad authority to prescribe the verification or define what constitutes a signature,

legislation would be required to mandate electronic filing for individuals, estates or trusts.

oral statements may not satisfy the written declaration requirement. However, even

if the written declaration requirement is not met, persons who willfully file incorrect

returns could be prosecuted under other statutes that do not require written declarations. The Commissioner has authority to prescribe regulations that provide for

alternatives to the traditional pen-to-paper writing media subject to one caveat—an

oral statement cannot be used to satisfy the writing requirement. 3. Courts will accept technologically reliable electronic signatures as evidence to identify, authenticate, and verify returns and supporting documents.

DISCUSSION

I. Electronic Signatures

A. Authentication and Verification

Section 6001 requires that taxpayers adequately document tax liability. The Serv- ice prescribes returns and supporting documents to verify tax claims. Reflecting the

state of ‘‘writing’’ through most of the twentieth century, returns and supporting

documents were paper. Taxpayers used traditional pen-to-paper signatures to authenticate and verify these documents. A goal of the Tax Systems Modernization (TSM) initiative is to convert paper fil- ings to more efficient, electronic filings.2 To date, the Service has required separate

paper signatures and declarations to authenticate and verify returns and supporting

documents filed under the electronic filing (ELF) programs. The Service retained the

traditional pen-to-paper signature and declaration, in part, because of uncertainty

about whether existing statutes permit ‘‘alternative’’ electronic signatures and declarations. As discussed below, we conclude that under existing statutory authority,

the Commissioner may prescribe regulations under which electronic signatures can

be used to authenticate and verify electronically filed returns and supporting documents.

B. Statutes

Section 6061 states that, except as otherwise provided by sections 6062 and 6063, relating to corporation and partnership returns respectively, any return, statement

or other document required under the internal revenue laws or regulations shall be

signed in accordance with forms or regulations prescribed by the Secretary. Section 6062 provides that the return of a corporation with respect to income shall

be signed by the president, vice president, etc., or other officer duly authorized so

to act. Additionally, section 6062 provides that the fact that an individual’s name

is signed on the return shall be prima facie evidence that such individual is authorized to sign the return on behalf of the corporation. Section 6063 provides that the return of a partnership shall be signed by any one of the partners. Additionally, section 6063 provides that the fact that an individual’s

name is signed on the return shall be prima facie evidence that such individual is

authorized to sign the return on behalf of the partnership. Section 6064 provides that the fact that an individual’s name is signed to a re- turn, statement, or other document shall be prima facie evidence for all purposes

that the return, statement, or other document was actually signed by such individual.

Section 6065 provides that, except as otherwise provided by the Secretary, any re- turn, declaration, statement, or other document required to be made by the Code

or regulations shall contain or be verified by a written declaration that it is made

under penalties of perjury.

C. Legislative History

The current authentication and verification requirements in the Code originated

in the first modern tax statutes. The Revenue Act of 1909 imposed an income tax

on corporations, joint stock companies or associations organized for profit. Section

38 of the Revenue Act of 1909, ch. 6, 36 Stat. 112, 114 (1909), required that ‘‘a true

and accurate return under oath or affirmation ... shall be made’’ by the taxpayer.

The subsequent Revenue Acts imposed a similar oath or affirmation requirement for

attestation on other filers.

The Internal Revenue Code of 1939, ch. 2, 53 Stat. 1 (1939), continued to impose

the oath or affirmation requirement for all filers. Section 51(a) of the 1939 Code required individuals to ‘‘make under oath a return’’; section 52(a) required that ‘‘the

[corporation’s] return shall be sworn to’’ by two of the corporation’s officers; section

187 stated that ‘‘the [partnership’s] return shall be sworn to by any one of the part-
45

3The Code and Treasury regulations require that a tax return be signed for two purposes.

The purpose in section 6061 and section 1.6061–1 of the Treasury regulations is the authentication of the return as that made by the signer. See Receipt of Tax Data in Machine Useable Form,

GCM 33879 (Supp.), I–3149 (Aug. 8, 1968) at 2, stating that the objective in requiring signatures on returns is to identify a return as the return of the taxpayer. Under section 1.6065–

1 of the Treasury regulations, the purpose of the signature is to verify the truth, correctness,

and completeness of the return.

There is a sufficient body of case law with respect to section 6061 holding that a tax return

must be signed to be a valid tax return and thus an unsigned tax return is not a ‘‘return’’ for

purposes of the Code. See Dixon v. Commissioner, 28 T.C. 338 (1957); Reaves v. Commissioner,

295 F.2d 336 (5th Cir. 1961); and Vaira v. Commissioner, 444 F.2d 770 (3d Cir. 1971).

ners’’; section 821(a) stated that executors of domestic estates ‘‘shall make a return

under oath’’; section 864(a) stated that executors of foreign estates ‘‘shall make a

return under oath’’; and section 1006(a) required that gift donors ‘‘make a return

under oath.’’

Section 136(a) of the Revenue Act of 1942, ch. 619, 56 Stat. 798, 836 (1942),

amended section 51 of the 1939 Code by deleting the requirement that returns of

individuals be made under oath and substituting the requirement that individuals

attest by written declaration that the return is made under the penalties of perjury.

The Senate Committee Report indicates that the change was made because the oath

requirement ‘‘causes considerable annoyance and inconvenience to taxpayers in that

their returns must be sworn to before a notary public or other similar officer.’’ See

S. Rep. No. 1631, 77th Cong., 2d Sess. 5 (1942), 1942–2 C.B. 507. The 1939 Code

retained the requirement that a return be made under oath by corporations, partnerships, fiduciaries, executors of estates, and donors of gifts. By 1954, Congress

had largely replaced verification by oath with verification by signed declaration. The 1954 Code made a number of changes. Section 6062 changed the corporate filing requirements (a) to allow one of the described corporate officers to sign a corporate tax return (instead of requiring two officers to sign), (b) to allow the corporation to designate an officer not specified by statute to sign a tax return, and (c) to

provide that a person’s signed name is prima facie evidence that the person is authorized to sign. Section 6063 changed the partnership filing requirements to provide that a partner’s signature on a return is prima facie evidence that the partner

is authorized to sign for the partnership. Section 6064 contained no material change

from preceding law. The predecessor of section 6065 required all returns (except

those made by individuals) to be made under oath but permitted the Secretary to

allow by regulation a return to be made by a declaration under penalty of perjury

instead of by oath. Section 6065 reversed the regulatory presumption to favor declarations over oaths. Current section 6065 requires all returns to be made under

penalties of perjury, except the Secretary may by regulation permit a return to be

made without such declaration or the Secretary may exercise his or her authority

to require verification by oath. Section 6065 gives the Secretary very broad interpretative authority to prescribe the form of verification. The legislative history indicates that Congress intended to

allow the Secretary to accept less than a written perjury declaration as a form of

verification. ‘‘Under section 6065, all returns, etc., are to be made under penalties

of perjury, except that the Secretary may permit them to be made without such declaration ...’’ H.R. Rep. No. 1337, 83rd Cong., 2d Sess., A400 (1954); S. Rep. No. 1622,

83rd Cong., 2d Sess., 567 (1954). Administratively, the Service has required a signature to authenticate a return since the first revenue acts. The original verification, by oath or swearing, included

a signature. The signature requirement is now codified in section 6061.3

Neither the Code nor the legislative history defines signature. 1 U.S.C. section 1 provides that ‘‘in determining the meaning of any Act of Congress, unless the context indicates otherwise, signature includes a mark when the person making the

same intended it as such.’’ Further, the generally accepted legal definition of signature is very broad: ‘‘[t]he act of putting one’s name at the end of an instrument to

attest its validity; the name thus written. A signature may be written by hand,

printed, stamped, typewritten, engraved, photographed, or cut from one instrument

and attached to another, and a signature lithographed on an instrument by a party

is sufficient for the purpose of signing it; it being immaterial with what kind of in- strument a signature is made.’’ (Emphasis added.) See Black’s Law Dictionary, 1381–82 (6th ed. 1990). Nothing in the Code or regulations suggests a narrower definition. The common law definition is broad enough to encompass electronic signatures.

D. Regulatory Authority In determining the Commissioner’s authority to accept electronic signatures to authenticate and verify returns and supporting documents, it is necessary to review
46

4 In fact, the Service currently accepts alternative (facsimile) signatures where specific authenticating safeguards are present. See, e.g., Rev. Rul. 68–500, 1968–2 C.B. 575; Rev. Rul. 82–29,

1982–1 C.B. 200; section 1.6695–1(b)(4)(iii) of the Income Tax Regulations. Additionally, Temporary Regulation section 1.6061–2T authorized signing of returns by voice signatures for certain taxpayers filing 1992 and 1993 calendar year returns.

the standards for review of such authority. Treasury regulations issued pursuant to

the Secretary’s general authority to prescribe ‘‘all needful rules and regulations for

the enforcement’’ of the internal revenue laws are considered interpretive regulations. Section 7805(a). The Supreme Court has established the standard of review

for interpretive regulations. The basic rule is that if the intent of Congress is clear,

the agency must give effect to the unambiguously expressed intent of Congress.

Where Congress has implicitly left a statutory gap (to be filled with an interpretive regulation), the standard of review is whether the regulation is a ‘‘reasonable interpretation’’ of the statute. See Chevron U.S.A., Inc. v. National Resources Defense

Council, Inc., 467 U.S. 837 (1984).

In describing the standard to be used in reviewing an Executive department’s con- struction of a statutory scheme, the Court in Chevron stated:

If this choice represents a reasonable accommodation of conflicting policies that were committed to the agency’s care by the statute, we should not disturb it unless

it appears from the statute or its legislative history that the accommodation is not

one that Congress could have sanctioned. Chevron, 467 U.S. at 844, citing United States v. Shimer, 367 U.S. 374, 382–383

(1961). While Chevron undoubtedly stands for the principle that deference is to be paid to an administrative agency’s construction of a statute that it is authorized to

administer, the opinion stands equally for the proposition that such deference is not

unlimited. First, there must be statutory silence or ambiguity on the point in question to trigger such deference. Second, a court will defer to only statutory interpretations that are reasonable in light of Congressional intent. When sections 6061 through 6065 were enacted, there existed no technology for signing a return other than a person manually signing his or her name or placing

an authorized mark on a paper. The Service has required pen-to-paper signatures

with attestations since 1909. The statutory provisions have remained substantially

unchanged since 1954, but Congress has not explicitly defined what constitutes a

signature for these purposes. Sections 6061, 6062, 6063, 6064, and 6065 do not prohibit the Commissioner from

defining what constitutes an acceptable signature. In light of the statutory framework and legislative history, a regulation may prescribe the form of signature for

electronically filed returns.4

If the validity of regulations authorizing electronic signatures were challenged, a court would closely scrutinize the circumstances surrounding the adoption of the

regulations. The fact that the regulations were promulgated long after enactment

of the controlling statutes would heighten the degree of scrutiny. In light of the legislative history, a court might find that an alternative form of signature is unreasonable or arbitrary if the technology is not reliable or if the regulation imposes an

unreasonable burden on taxpayers due to increased cost or difficulty of use. For example, a court would be more likely to invalidate a regulation mandating a particular form of signature, as opposed to providing an optional form of signature, because

a mandated form imposes a definite burden. However, provided that the Commissioner promulgates regulations prescribing only signatures that reliably authenticate and verify the return as that of the filer and do not place an unreasonable

burden on taxpayers, we believe that regulations that authorize electronic signatures for authentication and verification purposes would be upheld as a valid exercise of the Commissioner’s authority to prescribe regulations.

II. Definition of ‘‘written’’ under sections 7206(1) and 6103

A. Section 7206(1)

Most of the criminal tax provisions in the Code (except section 7206(1)) do not

focus specifically on the requirement of a signature or a written declaration. However, it is often necessary in criminal tax cases to ‘‘tie’’ a tax return to the taxpayer

under investigation. In situations where an electronic tax return would consist of

an electronic transmission and a signature, ‘‘tying’’ the computer-based transmission

to a taxpayer may require additional evidence not necessary with paper returns.

Section 7206 of the Code makes it a felony for any person to ‘‘willfully make and

subscribe any return, statement, or other document, which contains or is verified by

a written declaration that it is made under the penalties of perjury, and which he

does not believe to be true and correct as to every material matter.’’ (Emphasis

added.)
47

5The Regulations have required that certain applications for the inspection of tax information be made in writing since 1914.

In our view, the ‘‘subscribe’’ requirement can be satisfied by the traditional signa- ture made by ink on paper, or by any of the new signature alternative technologies. With regard to the section 7206 ‘‘written declaration’’ requirement, an issue exists as to whether the numerous new technologies will meet the ‘‘written declaration’’

requirement. The term ‘‘written’’ has acquired a broader definition than traditional

pen and ink. See 1 U.S.C. section 1, Fed R. Evid. 1001. In our view, existing elec- tronic signature technologies should be sufficient to satisfy the written declaration

requirement. However, as other technologies are developed and implemented—such

as technologies that use oral declarations that are transcribed to writing—there is

a point at which the written declaration requirement no longer will be satisfied.

Nevertheless, even if such technologies are insufficient to satisfy the written declaration requirement, other criminal statutes that address false statements or false

claims—and which do not require a written declarations—could be used to prosecute

taxpayers who willfully file incorrect returns. See, e.g., 18 U.S.C. section 287, 1001.

B. Section 6103

The terms ‘‘written,’’ ‘‘written request,’’ and ‘‘writing’’ are used numerous times throughout section 6103.5 There is no definition of writing in section 6103. Simi- larly, there is no legislative history to the 1976 Tax Reform Act, which substantially

revised section 6103, explaining the meaning of the terms ‘‘written’’ or ‘‘writing.’’ The legislative history to the 1976 Tax Reform Act indicates that, to the extent practical, all disclosures of tax information are to be made in documentary form in

order to protect the privacy of the taxpayer and to protect IRS personnel making

the disclosure from subsequent charges that information was improperly disclosed.

S. Rep. No. 938, 94th Cong. 2d Sess. 343 (1976), 1976–3 C.B. (Vol. 3) 381. The purpose of the written request requirement appears to be the same. The initial written

request helps maintain accountability in the IRS and agencies that are the recipients of tax information.

The only court to address the ‘‘writing’’ issue in the section 6103 context held that an oral consent was clearly not a ‘‘written request for or consent to ... disclosure’’

as that term is used in section 6103(c). Huckaby v. Internal Revenue Service, 794

F.2d 1041 (5th Cir. 1986). The Fifth Circuit noted that the purpose of the written

form was to assure the taxpayer’s clear assent before return information is disclosed. The court also noted that oral requests like the one at issue in that case

were subject to misinterpretation. The Service has not, for disclosure purposes, interpreted the requirement for a

written consent to limit written requests to traditional writing media, i.e., pen-topaper. For example, the Service currently accepts photocopies and facsimile copies

of section 6103(c) disclosure consents.

Under section 6103(q), there is authority to prescribe regulations as are necessary to carry out the provisions of section 6103. Section 6103(p)(1) provides that requests

for the inspection or disclosure of tax information shall be made in such manner

and at such time and place as shall be prescribed by the Service. Section 6103(c)

also provides for implementing regulations to prescribe requirements and conditions

to the disclosure of tax information pursuant to a written consent.

We believe that the crux of section 6103’s writing requirement is to ensure that disclosures are fully documented, as opposed to purely oral. As such, given the regulatory authority under section 6103 and the purposes which the writing requirements in the statute appear to serve, there is authority to administratively develop

alternatives to the traditional pen-to-paper writing media subject to one caveat—an

oral statement cannot be used to satisfy the writing requirement. Having said that broad authority exists to administratively define writing in sec- tion 6103, it is equally clear that, in evaluating alternative forms of writing, the

Service should carefully consider the ultimate issues of identification, reliability,

and retrievability (for evidentiary purposes) of electronically transmitted requests or

consents. For example, technologies that utilize transcription may blur the oral/written distinction. Also, coding and identification number technology raise potential

custody and security issues. Counsel will address such issues as the Service makes

business decisions on specific technologies.

III. Evidentiary Use of Electronic Signatures

Electronic signatures are subject to the same evidentiary standards that generally govern computer generated, stored, and retrieved data. The Service has an established history with its computer system. Courts have consistently taken testimony

about the information that the system contains (or does not contain) in evaluating

the weight of computer evidence.
48

A. Admissibility Alternative signatures will be created, transmitted, and stored electronically. For litigation purposes, the evidence will typically be a printout of the electronically

stored signature. The admissibility into evidence of alternative signature printouts

will be determined by the same evidentiary standards that generally govern the admissibility of computer printouts. Computer-generated evidence has been accepted

by the courts for many years. Transport Indemnity Co. v. Seib, 178 Neb. 253, 132

N.W. 253 (1965). In general, under Fed. R. Evid. 901(a), ‘‘authentication or identification as a precedent to admissibility is satisfied by evidence sufficient to support

a finding that the matter in question is what its proponent claims.’’ This can be satisfied by a variety of means. Authentication of alternative signatures is likely to involve Fed. R. Evid. 901(b)(9) evidence regarding the ‘‘process or system used to

produce a result and showing that the process or system produces an accurate result.’’ Courts customarily take testimony as to the information that the IRS computer system contains (or does not contain) as proof of filing or nonfiling. United

States v. Faris, 517 F.2d 226 (7th Cir. 1975); Fed. R. Evid. 901(a)(7). Most common

objections could be easily overcome in today’s jurisprudence. Section 6064 provides that an individual’s name signed to a document is prima

facie evidence that the document was signed by that person, but additional evidence is necessary to establish the validity of the signature. In the final analysis, the conclusion of validity will turn upon the weight of all the evidence. Additional supporting evidence may come from a variety of sources. Occasionally, the taxpayer will admit the validity of the signature if called to testify under oath.

More often, the taxpayer will admit the validity of the signature at the time the

examination was initiated (‘‘Is this your return and signature?’’). The admission of

a party opponent would be admissible and persuasive. Fed. R. Evid. 801(d)(2). Circumstantial evidence from the Service’s records may also be very persuasive. Fed. R. Evid. 401, 406. Evidence of other signatures of the taxpayer may be admitted and utilized. Fed. R. Evid. 901(b)(2). In some cases, it may be necessary to secure the testimony of an expert witness to assist the trier of fact in reaching a conclusion.

B. ‘‘Best Evidence’’ Rule and Other Objections Challenges under Fed. R. Evid. 1002, the ‘‘best evidence rule,’’ are typically satis- fied by reference to Fed. R. Evid. 1001(3), which defines computer printouts as originals, and to section 6103(p)(2) of the Code, which specifically allows the Service to

use reproductions of returns. Hearsay objections may be raised to the extent the underlying computer data was input, analyzed, or rearranged by Service personnel.

Most such objections are overcome, under Fed. R. Evid. 803(6), by the hearsay exception for business records. The party opposing the introduction of public records

has the burden of establishing that the records are not reliable. Ellis v. International Playtex, Inc., 745 F.2d 292, 302 (4th Cir. 1984). Generally, resort to the

hearsay exception will not be necessary since the typical evidentiary use of a tax

return is a nonhearsay use, i.e., the return constitutes a statement of the opponent

and is admitted not for the truth of matters asserted therein.

C. Probative Value—Scientific Evidence

Even though it is nearly certain that the printout of an alternative signature will

be admissible under the Federal Rules of Evidence, the key issue is whether the

court will accept that printout as the signature of a particular taxpayer. That is,

can the Service establish a link between the admitted data and the person to prove

that the particular person prepared and filed the particular document? To some extent, this question is part of the preliminary inquiry of admissibility. Fed. R. Evid.

901. However, since authentication is a preliminary question with a low threshold

(see Fed. R. Evid. 104), a court might admit the signature but reserve the ultimate

issue of whether that signature is the signature of the particular person. This latter

question is one of identification.

Section 6064 provides that an individual’s name signed to a document is prima

facie evidence that the document was signed by that person. See also Fed. R. Evid.

902(10) concerning self-authentication. Regulations under section 6064 could apply

the same presumption to alternative signatures. Even so, expert testimony may be

necessary to establish an alternative signature as that of a particular person. The

Federal Rules of Evidence do not provide for lay testimony about these alternative

methods. Scientific or technological evidence about signature evidence would be governed by Fed. R. Evid. 702. Fed. R. Evid. 702 allows for expert testimony, including

opinions on the ultimate fact question when that evidence would be helpful to the

fact-finder. The test for acceptance of this testimony is established by the recent

case of Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S.——, 125 L. Ed. 2d

469 (1993), where the Court set forth a rather low threshold for acceptance of scientific expert testimony. The Court held that scientific evidence need not have ‘‘gen-
49

eral acceptability’’ in the scientific community to be presented to a jury. The Court

held that the trial judge must preliminarily assess the threshold question of admissibility of the evidence. However, the Court held that the federal rules were intended to be applied liberally in order to encourage further development of scientific

evidence.

In setting forth the inquiries that the judge should consider in allowing evidence,

the Daubert Court cited four factors for determining the ultimate acceptability of

the evidence: (1) whether the scientific technique can be (and has been) tested, (2)

whether the theory has been subjected to peer review and publication, (3) the known

or potential rate of error in the technique, and (4) general acceptance in the scientific community. Expert testimony and opinion should certainly satisfy the

Daubert standard.

The Service should consider the Daubert factors in evaluating potential forms of

alternative signatures. In sum, technologically reliable signature alternatives could

be used in court to identify the person who signed the document.

JUDITH C. DUNN

f

ELIOT D. FIELDING

Mr. DOLAN. If you do not mind, Mr. English, can I double back

on your principle point?

Mr. ENGLISH. I would prefer to go on because I have limited

time.

Mr. DOLAN. Very good.

Mr. ENGLISH. It is my understanding that about 30 percent of all

return filers have a balance due. How do you intend to attract

balance-due filers to file electronically, given that under the current filing system—I am not sure what the motivation for a taxpayer with a balance-due return would be to file electronically.

Mr. DOLAN. Well, I think the motivations overlap to a considerable extent. Obviously, a quick refund is not one of the motivations,

but the same sense of closure, clarity, accuracy of the transaction

may be. The same benefit of a minuscule error rate or a balance

due, for a refund filer is there. And secondarily, as we mentioned

earlier, and I believe Mr. Lutes elaborated on, when we create this

ACH debit capacity for somebody, he or she does not have to worry

about writing us a check that catches up with the electronic return.

When you have the ability to both send the return electronically

and initiate a payment, potentially a payment suspended for a

later date, if he or she decides to file before April 15, the additional

motivation may be there. There will be the incentives of an accurate return, a high quality transaction, and knowing that there is

closure will help motivate.

Mr. ENGLISH. Thank you, Mr. Dolan. Mr. Lubick, it is always a

pleasure to see you here, and we appreciate your testimony.

Again, I want to reemphasize, I think it is very difficult for us

to go back to the real world, to the districts we represent, and tell

them that it is very difficult somehow for the Treasury and the IRS

over 10 years to move to a system which saves hundreds of million

dollars a year that could be better allocated to other things or could

simply shrink the deficit, and I thank you.

Chairman JOHNSON. Thank you, Mr. English.

Mr. Kleczka.

Mr. KLECZKA. Thank you, Madam Chairman.

Commissioner Dolan, a couple of quick questions. One of the

problems that we have to find a resolution for is the electronic sig-
50

nature question. However, I note that the TeleFilers have grown to

about 5 million per year, and I assume that the bulk of the people

who use that method are in a refund situation. Now, there is no

signature accompanying the TeleFile filing. Why has that not been

a problem up to now, and why do we foresee such a grave problem

in the regular electronic filing with no signature?

Mr. DOLAN. It goes back a little bit to the answer that Terry gave

a moment ago. There is an authentication process used in TeleFile.

Mr. KLECZKA. The number that is given to the tax filer.

Mr. DOLAN. First of all, you start with a very defined parameter.

Unlike the ELF world in general, we initially invite a group of people into the TeleFile relationship with us based on the attributes

of their financial life. And so there are some parameters that clearly on the front end defines that population in a way that mitigates

risk on the front end. Secondarily, we use a process of authentication; while it is not the written signature, that additionally takes

that risk and mitigates it further.

Mr. KLECZKA. I missed the last point.

Mr. DOLAN. By virtue of using the PIN interaction with other

data, we take the risk that has already been limited by having a

define and confine universe, and limit it still further, which is a

slightly different technique than you would have if you said, any

member of the 120 million filers can choose to file electronically. In

those cases there will be different standards for wanting to be certain that we can authenticate that this person is the person they

purport to be.

Mr. KLECZKA. Well, that is something we are going to have to

discuss further. But I think the system can be expanded. It just

makes no sense to electronically file and follow up with a piece of

paper.

Mr. DOLAN. It clearly can be expanded, and we want to do that.

Mr. KLECZKA. The other question is, how many filers use the

form 1040–PC? Is that a growing area that is getting a lot of interest?

Mr. LUTES. A little over 8 million taxpayers this past year filed

paper returns using the 1040–PC, so that is growing also as a

method of filing one’s tax returns.

Mr. KLECZKA. Yes, it is growing somewhat. Has any thought

been given by the service to provide an option to filers to submit

a floppy disk to the service. That would be an area where you could

probably utilize, for example, with an amount-due check attached.

Has there been any thought to giving filers the option of providing a floppy?

Mr. LUTES. We have not done a detailed analysis on that.

Mr. KLECZKA. How about in your thought?

Mr. DOLAN. There clearly has been thought and there has actually been a couple of experiments done in our Philadelphia Service

Center. One of the difficulties is, if you can jump that step—if you

can avoid the need to manage the receipt of disks and inventories——

Mr. KLECZKA. Another thing to handle, so electronic would still

be the preferred option.

Mr. DOLAN. Yes, absolutely. It is absolutely a step to be jumped

if you can do it.
51

Mr. LUTES. At one point you emphasized the 1040 PC filers—

that use software. They do have the ability to use that same software to transmit this return electronically.

Mr. KLECZKA. OK, thank you.

Chairman JOHNSON. Thank you very much.

Mr. Watkins.

Mr. WATKINS. Mr. Dolan and Mr. Lutes, and Mr. Lubick, I am

glad to see you back. And I reflect. I just returned from traveling

21 counties in my district for townhall meetings, and a lot of people

came up to me and said, You know, we sure would not have your

job. And I reflect a little bit about your job, and I sure would not

want your job, because even biblically it talks about tax collectors,

and I do not know if you are in a win situation out there.

But there is a great alarm out there with a lot of people. I know

Mr. English talks about electronic filing and some of the technology

moving in that direction. There are a lot of mom and pop businesses which are concerned about being forced into electronic filing,

because they are not equipped with high technology. And they are

concerned about how they are going to handle it, and many of them

are probably doing their own taxes, or trying to do their own taxes,

without having CPAs. Some of them would be using public accountants or CPAs.

So I think one of the big things in my area is trying to provide

some kind of information out there so they feel like they are not

forced into something.

Do you have anything planned, such as an educational program,

to inform some of these people?

Mr. DOLAN. Mr. Watkins, I think the point you make kind of

dovetails to an earlier part of the conversation.

Mr. WATKINS. And I apologize, I am redundant.

Mr. DOLAN. Oh, that is fine. Congressman Portman said, and

said accurately, there is no such thing on the table right now as

a mandate. But one of the things I think you heard maybe from

Mr. Lubick and I both is that, I think we all expect that the optimism expressed here, and the comment made by Mr. English about

letting us get on with this. That is where the world is going. I

think most of us in this room can sit here and intellectually accept

that is where this thing is headed. At the end of the day I think

the test for us and for us cumulatively is, can we put this product

in front of the taxpayer, the customer, in a way that they say, hey,

this works for me. This is a logical way to do my business with the

government, versus saying, the government tells you, you have to

do this.

We had a little discussion about EFTPS before and lessons

learned. One of the things that we collectively take away from that

is that the people do not like it much when somebody says, you do

it this different way. And so one of my hopes would be—I mean

people today, we would say are maybe not technologically adept. I

think the world is going to move them more and more, whether it

is through their television sets, or interaction with their banks.

And there will be a point in which some will still say, I do not want

to play that world, and for those people we ought to still have it

as easy a process as possible.
52

Mr. WATKINS. I hope you recognize there are some in the economically depressed areas which are not worried about participating in the technology world. I stop at the businesses and have a

cup of coffee with them; some are the greatest people in the world.

In addition, I know the Association of Enrolled Agents had some

testimony earlier, and they proposed a new incentive to encourage

the individual taxpayers to file electronically, modifying the statutory period for examination of an individual income tax from 36

months to 24 months if the return is filed electronically, by the due

date. There is no mismatch with the other information return programs, data that has been received by the IRS.

Do you have any immediate reaction to that suggestion?

Mr. DOLAN. First of all, I just read it shortly before the hearing,

and my reaction is, it is an interesting proposal. It is of exactly the

stripe that we would expect we would hear more of when we put

this RFP out. And it also makes the point, I think, that maybe Mr.

Lubick was making earlier. I suspect at the end of the day there

are going to be lots of incentives that people tell us exist that are

not necessarily paying somebody $3 or paying somebody $4. Part

of what we deal with, and it may be exactly the concern you raised

earlier, that is, a lot of people today say, one of my reasons that

I do not want to file electronically is that I fear that my susceptibility to audit is greater. And so maybe there is some connection

between agreeing that somebody who files electronically will have

his business or her business finished with us, by an earlier date

certain. And that might actually be a more appealing way to think

about it than the discussion we were having earlier about moving

filing dates around. Maybe there is a promise of earlier certainty

if you come to us electronically. But those are exactly the kinds of

proposals we hope to see in the RFP.

Mr. LUBICK. I would worry about that change. I think this reflects my conversation earlier with Mr. Cardin. I think the rules of

the game ought to be the same for all taxpayers, what their obligations are, when they have to satisfy them, what the period is for

reviewing it. I think electronic filing should prevail based on

market-based incentives; it is a better way to do it; it is more efficient; it is easier; it is going to be error reduced greatly. And so

I would be very reluctant to change the statutory rules that favor

one taxpayer over another. I would be reluctant to see a shortening

of the statute of limitations, which is basically what that proposal

is.

Mr. WATKINS. Thank you, Madam Chair. I do have another one,

but maybe I better ask it privately after awhile.

Chairman JOHNSON. Thank you, Mr. Watkins. I would like to follow Mr. Watkins’ question with another issue that will be raised

in follow-on testimony.

The National Association of Accountants indicates that the electronic filing compliance visitation is a significant deterrent to the

electronic filing program.

Could you explain to us how this compliance visitation works?

How the IRS handles compliance visitations for big electronic preparer filing corporations, like H&R Block? How does the IRS handle visitations for a small accounting business that files its clients’

returns electronically through a third-party transmitter? And do
53

you believe that the number of visitation checks will increase as

the growth in the number of practitioners filing electronic returns

increases? I think this is a very important issue.

Mr. LUTES. Let me address that if I could, Madam Chairman. We

initiated these visitations back a couple years ago when we were

dealing with the refund fraud issue that we worked with the Congress on, and I think those steps were necessary and I think they

made a point at that time. Since that initial year 1995 filing season

we have been gradually decreasing the number of those visits. I do

not have the 1995 number, but the number of visits between 1996

and 1997 dropped by about 40 percent, and the majority of the visits that were made this year were for cause. We received complaints from taxpayers. We saw patterns in the filings from particular offices. However, we do still conduct random educational assistance visits to attempt to spot patterns in the industry during

those visits. But again, the majority of visits that we are doing now

are for cause. And when we do the monitoring visits, we make

them more educational assistance visits; looking for questions we

can answer, trying to make them supportive of the ERO and practitioner community.

Chairman JOHNSON. Well, thank you. I also wanted to get your

reaction to the National Association of Enrolled Agents testimony

in regard to their recommendation; their belief that there are four

incentives that could ensure greater electronic filing participation

by enrolled agents.

First, permit electronic communications between the IRS offices

and practitioners on client account issues; permit alternative forms

of tax payments; permit the online submission of installment agreement requests and collection information statements; and permit

the electronic submission of powers of attorney and transcript requests.

Mr. DOLAN. Madam Chairman, those are all good ideas. The only

question is, in what sequence is that a part of what total set of initiatives. There is not a one of those that is a bad idea. They are

ones that we have had dialog with the enrolled agents. I know they

have been frustrated that we have not been able to prioritize some

of those quicker than we have. The ideas are all sound ones, and

I think we will ultimately want to look at them, as those and other

ideas come back in response to the RFP. There will have to be

some prioritization of both investment and use of our intellectual

capital to get them done, but not a one of those is a bad idea.

Chairman JOHNSON. Mr. Dolan, in terms of timeframes, I think

your RFP, being flexible, was a very good idea. On the other hand,

clearly none of the ideas you are going to get back are ideas that

we are hearing today or ideas that you have already heard.

Do you have any idea how long it will take you to evaluate those

things, and particularly in the light of Mr. Lubick’s comments,

whether or not you are really going to be able to move ahead with

flexibility as I think some of us conceive it?

Mr. DOLAN. Well, I tried—perhaps not effectively—earlier to

make that the point that the target that will be in the RFP is, tell

us what you can do, and what you think we need to do, to have

a substantial impact on the returns that are filed in 1999. So it

means, not the most immediate next filing season, but for the filing
54

season thereafter. So the trust we hope of both the ideas we get

and the nature of our responses will be targeted for——

Chairman JOHNSON. What is the response deadline?

Mr. LUTES. Well, the initial RFP that will be issued next week

is a draft. This was at the request of the industry. They wanted

the opportunity to help us craft the final product.

Chairman JOHNSON. I appreciate that.

Mr. LUTES. We anticipate, based upon all the procurement processes, it would be some time in the spring, probably late spring.

Chairman JOHNSON. So you expect it will take you 6 months.

Mr. LUTES. Yes.

Chairman JOHNSON. You will wait 6 months for the responses to

the September 15 proposal. You will allow 6 months for responses?

Mr. LUTES. No, the draft will be out there for 30 days. The industry will provide us with feedback. We will take that feedback, and

build it into a final request for proposals, that will then go out on

the street for input in the form of final proposals, which we will

then have a regular structured process to evaluate, and make the

determination to——

Chairman JOHNSON. And your spring estimate gives you about 7

months to evaluate ideas that are coming back.

Mr. LUTES. Yes. Let me expand on something Mr. Dolan said a

moment ago. We are looking for impact on the 1999 filing season.

Obviously for the 1999 filing season at that point in time I think

your concern is, we are not going to be able to build any major new

systems over that 7-month period. So what we are looking for is

ideas, and again some of the incentives that are mentioned are

things that could clearly be done; if we were to pay an incentive

for returns, that clearly could be done in that short of time.

But at the same time we are open and asking folks for longer

term proposals that, as Mike mentioned earlier, would enable us to

maybe even modify the modernization blueprint to build systems

that would involve for example some of the ideas that the NAEA

has raised around powers of attorney and so forth. But with the

limited funds we have, we have to choose which ones of those systems to spend those funds on.

Chairman JOHNSON. By what date would you have to make a decision for something to affect the 1998 filing?

Mr. LUTES. The 1998 filing season? In terms of any changes to

our systems we are well past that point. That software is in final

testing now. The software companies remember, need our final

products so they can develop their products also. So 1998 is essentially in the bag at this point.

Chairman JOHNSON. And 1999?

Mr. LUTES. For 1999, we would be looking at spring, early summer, so that we can then make the programming changes to our

existing systems to effect them for 1998.

Chairman JOHNSON. Well, I certainly would want to work with

you for you to report to us on changes that are going to be made

for the 1999 filing season early enough so that we can have input

and understand what your plans are. And I think that might help

focus your process in a timeframe that we get some real good work

done for the 1999 season.
55

Mr. DOLAN. Madam Chairman, the other points you highlight

here, is that this is not for us—this is not like going and buying

a piece of furniture or a piece of gear. This is for us a unique RFP

arrangement. Because we are basically using the sort of classic

commercial products, it is necessary to go to people and say, not

only give us your ideas, but give us some financially binding commitments. We structured this relationship with you, and a lot has

been said about how many of these returns are prepared in software, and how many are prepared by practitioners.

What we expect to see back are some fairly imaginative proposals that say, OK, I have the capability of giving you a stream of

these kinds of returns. And in return these are the kinds of interactions I would want to have, or these are kinds of crosscommitments I would like. So it is an adaptation of something that

is used typically more at the commodity level, and so it is going to

be a very interesting and exciting process I think to see what people tell us in the context of that kind of request.

Chairman JOHNSON. I think it is interesting, and I think it is an

exciting process. I do not want it to bog down so that it is the year

2000 or 2001, before we get any benefit from it.

Mr. DOLAN. Agreed.

Chairman JOHNSON. It clearly is going to have enormous economic costs and implications, as well as benefit implications for

taxpayers. I think it is really beholden upon us to move rapidly

enough, so the decisions are made in a timeframe that the changes

can be marketed well, and we get real advances by the 1999 filing

season.

Now, since I did raise a couple of additional questions myself, if

there are other questions from Members of the Subcommittee before we let our experts go, I would be happy to recognize you.

Mr. Cardin.

Mr. CARDIN. If I could just quickly—I notice that in the bill that

the administration filed that you seek explicit authority to use appropriated funds to promote and encourage the use of electronic filing. And the explanation, as I understand it, is that there annually

are prohibitions in the appropriation process to promote programs

explicitly approved by Congress.

Could you just for the record tell us how important that authority is to be granted, or whether you have sufficient authority now

to promote electronic filing.

Mr. LUBICK. Well, as I understand it we have been promoting

electronic authority through donations of time, and not using appropriated funds, relying upon public interest. As I understand it,

we now feel we can undertake legally a promotional effort, using

funds out of our appropriation, and therefore if we are to do that

type of marketing that is indicated that will be very appropriate to

the success of the transition, we need this authority.

Mr. CARDIN. Well, I would like to work with you with some language, because I think obviously we do not want to restrict our

ability to carry out policy for more electronic filings.

One other quick point. The legislation that was filed on behalf

of the Commission’s recommendation, spells out a goal, as you

pointed out, of 80-percent filings by the next 10 years; and it spells

it as a goal. It seems to me that it is appropriate for Congress to
56

spell out what it hopes will be achieved. And I am just curious as

to whether you think that is a reasonable expectation—that in 10

years that we should be able to achieve 80 percent filing electronically; or whether you have a different percentage that you would

think should be expected if the rest of the authority is given to you,

including changing some of the obstacles that are in current law.

Mr. LUBICK. Well, our record on achieving goals is such that I

am very wary of stating what I think the appropriate one should

be. Maybe Mike would like to do that. And I do not have any objection to there being a goal and to having——

Mr. CARDIN. I want to stop you. I think the record of this administration on trying to change the IRS has been good. So I would not

downplay your success.

Mr. LUBICK. I would be glad to be recognized for having outdistanced our targets, but from time to time we have been chastised for the opposite result, and maybe we are just being gun shy.

Mr. DOLAN. If I could rise to the bait a little bit here, Mr. Cardin,

I think particularly in the light of Mr. English’s comment, the last

thing I want to do is to leave this table, conveying an impression

that we are trying to play safe here. I mean I personally think that

trying to move this reality to the 80-percent world makes a heck

of a lot of sense, and over a 10-year period, all that we know

around us, seems like that is not an extraordinary or a reckless

kind of goal. And certainly for the Congress to say to the IRS, that

is our vision, that is what we would like you guys to add, and we

like your commitment to get there—all those seem like the right

sorts of conversations to have.

Now typically though, most of us when we go back and set a

goal, we expect, we are going to deploy this goal. I am going to take

this percent of the goal, and this year certain, and I want to see

how this maps out. I just do not want to light candles and say

prayers; I want to have some idea of, a followed by b, followed by

c. And what you are hearing from me is more the reservation about

thinking that when we get back some of what we are going to get

from the RFP, and we get a little better understanding of some of

the research that is being done now, I think I will be able to map

to that goal with a lot more precision than I can today. But I do

not shrink from—as I call it—the aspirational or the notional objective that that is the right place to be in that 10th year or the 9th

year.

Mr. CARDIN. I appreciate that. I think that is a good point. And

remember, this is just one part of the restructuring act, and it depends upon the entire program, I think, being implemented, and

the support that you need in order to carry out these goals, and

that obviously is hard to predict for the next 10 years. But I am

glad to see that we all can agree that 80-percent filing in 10 years

is a reasonable goal for us to set as a Nation. I think that is what

it is about. It is not just what you can accomplish; it is what we

can accomplish together. If you do not have the cooperation of Congress you are not going to be able to achieve this, and I cannot tell

you what this Congress is going to do, let alone the next Congress.

So hopefully we can set a mutual goal of at least 80-percent filing

in 10 years, and then we can make sure that we do everything we

can to see that that goal is carried out. Thank you.
57

Chairman JOHNSON. I would like to say that I think the point

that Mr. Cardin raises is a very, very important one, and one we

will discuss with you thoroughly. I am very pleased at the aggressive efforts you are making. I think the work that is going on is

truly commendable, but it is also true that in 1993, 4 years ago,

the IRS established an electronic filing goal of 80 million returns

by 2001, and that program never got clearly implemented, no clear

strategy, and no clear achievements.

And in your plan released August 15, 1997, you certainly do talk

about electronic filing, but it is a matter of encouraging it through

product development and market improvements. There are not

quantitative goals or strategic plans laid out. There are going to be

successive people out there implementing this plan, like there will

be successive Congresses in backing it up. And I think you really

ought to think about it being in your interest as well as ours, to

be a little bit more specific than simply encouraging something we

know is important to do, and is a good thing, both for the government and the taxpayers.

I think we do have a challenge before us in this regard, and

being somewhat more specific, because it has in the past focused

at least the Congress’ attention, and I think it tends to focus the

executive branch’s attention as well. So we will look forward to discussing those matters with you.

Mr. Portman.

Mr. PORTMAN. Thank you, Madam Chair. I just have a few

followups and maybe some clarifications. Again, we have talked

about the 80-percent goal. I think that is not only doable, but probably can be done sooner given your new expertise with Mr. Barr.

And I want to commend you for bringing in someone of his experience and knowledge. I think that will be a tremendous benefit to

the service.

With regard to the transmitting fee, we have gone over that

quite a bit. I think Mr. Lubick preferred that incentives for electronic filing should be market based, and we should not have additional monetary incentives. Let us just keep in mind what we are

talking about here. We have a much more expensive system now,

which is paper returns. Others have talked about it, and we have

talked about it, perhaps ad nauseam, over the last year. We want

to provide these incentives because it is good for the IRS and good

for the taxpayer.

If the paper return now costs $7, and the electronic return costs

$1, it is worth it, Mr. Lubick to have the government engage in

providing incentives. Let us say it is $2.68—what you think it is—

it is still worth it. So if we are going to talk about markets, I think

we need to talk about the taxpayer and the cost to you and to the

service.

I will also say, just to clarify what is in the legislation, we do not

say it should be $1, $2 or $3; we say fair market cost to the transmitters. I would love not to get into it now, because we have a lot

of things I would like to get into, but I would like to comment on

Mr. Lubick’s suggestion that the incentive be paid to individuals.

I think that would be a big mistake. And if the IRS could get back

to us very soon on that, as in the next week, that would be great.

In H.R. 2292 the incentive is paid to transmitters, which I think
58

is where we all come out, and not to 120 million individual taxpayers.

Let’s just quickly discuss signature requirements. We all know

there is Form 8453 that must be signed and submitted. It does not

make any sense. Those of us who visited service centers have seen

it. Most of the cost of electronic filing is associated with this signature requirement.

Mr. Lutes has said there is no one way to deal with it. Well, H.R.

2292 has one very specific way to deal with it. And I still have not

heard the Treasury Department’s opinion as to that, nor the IRS

opinion. What we say is very simple. H.R. 2292 only requires that

the taxpayer retain the signature on file. And I think it makes a

lot of sense. Seventeen States do. We talked about California earlier, and the IRS did not have any thoughts as to what the California experience is, good or bad. We have 17 States that do it. Now

Australia does it, Canada does it. The SEC does it. If the SEC can

do it maybe the IRS can consider it.

I just think it makes so much sense for you all, when you go to

those service centers and you see the hassle that the current signature requires, to have it at least on an interim basis, so you can

perfect some kind of electronic signature. It seems to make a lot

of sense. That is the specific proposal before us today. You need to

tell us specifically how you feel about that.

Finally, with regard to the extension of the filing deadline, Mr.

Lubick said it would be unfair to middle- and low-income working

families and taxpayers. I hope Treasury is not trying to inject class

warfare into electronic filing; God forbid, we have had enough of

that in the last couple of months.

Because you raised it, let us get into the fairness issue a little

bit. Is it fair if you are a refund taxpayer—which I guess is what

you are referring to when you say low- and middle-income working

families. If you are a refund taxpayer, you are able to file electronically and get your refund therefore in 2 weeks, rather than 6

weeks, but there is no comparable shift for balance-due taxpayers.

If you are going to talk about fairness, this is certainly a fairness

issue that would mitigate toward extending the filing deadline for

balance-due taxpayers, so that they could have some of that same

benefit. I mean, if we are going to talk about fairness, I think your

argument is exactly contrary to where we ought to move.

I would just say one more thing about the extension. Mr. Lutes,

in his response earlier to the questions regarding why people file

electronically, said it is because they get a refund sooner. What are

you going to do for 30 percent of the taxpayers who are balancedue filers? How are we going to meet our 80-percent goal, Mr.

Dolan, if we do not do something for the 30 percent of taxpayers

who are balance-due taxpayers. We have to do something for them.

I have heard no good ideas today except extending that deadline

for 30 days. And I understand that April 15 is sacrosanct, and it

is an important date and so on. It will remain an important date

for all but those who are willing to file electronically.

If you look at the data it shows quite clearly that this is going

to have an impact—and probably the only thing we can do, in

terms incentive for the balance-due—If we do not get to the balance-due folks, we would not have solved the problem here, because
59

there will still be those 30 percent taxpayers outstanding. They do

tend to be the most complex returns. Therefore, guess what? They

are the highest cost to the IRS. Is that correct, Mr. Dolan?

Mr. DOLAN. Sure it is, but at this point you said that you heard

no good ideas.

Mr. PORTMAN. For the balance-due taxpayer.

Mr. DOLAN. Yes, we talked about the balance-due taxpayers, and

perhaps it was when you were out. I think, creating the ACH debit

capacity will help motivate them. One of the other feedbacks for us

is, Why should I send you electronic—since I have to send you this

paper check.

Mr. PORTMAN. You have an indication that that will move a lot

of balance-due taxpayers into electronic filing?

Mr. DOLAN. I do not have a way of comparing that to the sliding

filing dates. But all I would want to stipulate is, that I agree with

you. Not only for the goal, but for good tax administration, we have

to find ways to bring that balance-due taxpayer in. I think some

combination of the ACH debit, and continuing to perfect the things

we know are good about this system. It is still a cleaner, less errorprone, more certainty-packed transaction to do that, whether you

are balance due or refund, electronically.

Mr. PORTMAN. Is it less than one-quarter of 1 percent error rate

that you are experiencing in the EFTPS for electronic filing?

Mr. DOLAN. I would like to point out that the refund taxpayer

is getting back money which the IRS has been holding all year;

that was really his. And the balance-due taxpayer—we are after all

theoretically on a pay-as-you-go system—has been holding money

from the IRS.

Mr. PORTMAN. This is a longer discussion, but what is the unfairness of allowing anyone who wants to, to have this extension if

they file electronically? Again, the benefits of electronic filing, Mr.

Lutes has said very clearly, goes to those who are refund taxpayers. It is true. If you talk to people and if you look at surveys

that is the answer. So, if we all have the same goal we need to address the balance-due taxpayer.

Mr. DOLAN. Well, I want to address the balance-due taxpayer. I

share your goal on that; we should do it. But nevertheless if there

is an accounting date when we settle accounts between taxpayers

and IRS, it seems to me that that fairness dictates that that be

uniform, whether you are refund or balance due.

Mr. PORTMAN. If you file electronically, it is for either type.

Mr. DOLAN. But it seems to me, why do you want to give a slowpay person an incentive to be slower pay?

Mr. PORTMAN. Well, if you are talking about the revenue impact

to the government we can get into that discussion.

Mr. DOLAN. That is a different question.

Mr. PORTMAN. I think strongly that the revenue impact will be

positive in the end because of the cost savings the IRS will have

because of electronic filing. So if that is your argument, not the

fairness argument, we can get into that.

Mr. DOLAN. Well, I was not getting to that, but I am not sure

that is true. I think we will have to see. But it seems to me that

the same rules of when you have to pay and what time you have
60

to be audited—all of those questions that have been raised ought

to be uniform for all taxpayers.

Mr. PORTMAN. They will be uniform. The differentiation will be

electronic versus nonelectronic, which is in the interest of the Federal Government, but certainly of Treasury and the IRS.

Mr. DOLAN. That is turning on something different from whether

you are a taxpayer or not. It turns on how you file your return. I

just do not see that as a criterion for differentiating between your

obligations.

Mr. PORTMAN. I thank the witnesses. I look forward to ongoing

dialog and for responses to some of those specific questions, because we do have a requirement at the Subcommittee to provide

this report to the Full Committee on the legislation.

Chairman JOHNSON. Thank you, Mr. Portman, and I urge you in

the strongest terms possible that you do provide specific responses

to the specific recommendations. I thought frankly that you would

do that today. You chose to give a background, an update, and responses to a couple of the major ones, but it is very important that

we get your written response to the individual recommendations of

the Commission in a timely fashion. We would appreciate that.

I want to announce that we are going to combine the last two

panels, so that Members returning from this vote will have the opportunity to hear the testimony of everyone. And then if they cannot all stay for questioning, that is unfortunate, but I am anxious

that they at least get a chance to hear the testimony of the seven

remaining invited guests. And so we will combine the last two panels and resume in about 10 minutes. Thank you.

[Recess.]

Chairman JOHNSON. If the two concluding panels will both join

us at the table, Mr. Zimmerman, Mr. Wolfe, Mr. Langer, Mr.

Carver, Mr. Harris, Mr. Lane, and Ms. Kelley.

We will start with Mr. Zimmerman, president of H&R Block Tax

Services. Welcome, and thank you for being with us.

STATEMENT OF THOMAS L. ZIMMERMAN, PRESIDENT, H&R

BLOCK TAX SERVICES, INC., KANSAS CITY, MISSOURI

Mr. ZIMMERMAN. Chairman Johnson, Ranking Member Coyne,

and Members of the Subcommittee.

Thank you for inviting us to testify. With your permission I

would like to submit my statement for the record and summarize

it briefly.

Chairman JOHNSON. All of the testimony——

Mr. ZIMMERMAN. What is that?

Chairman JOHNSON. All of the testimony will be included in the

record, and you each will have the opportunity to make the points

that you think most important to us. Thank you.

Mr. ZIMMERMAN. Thank you.

I am Tom Zimmerman, president of H&R Block Tax Services

Inc., the tax services subsidiary of H&R Block. Among our other

subsidiaries is Block Financial, which distributes Kiplinger Tax

Cut, tax preparation software.

To highlight our views, I would like to make four points.
61

First, we strongly support electronic filing. We provide the majority of the 15 million electronic returns the IRS now receives, and

are working to expand that number.

Second, the government and the private sector must work together to clear away obstacles to electronic filing that include cumbersome IRS procedures and public resistance based on inadequate

information, fears, and, in some cases, cost.

Third, the key to increasing electronic filing is massive IRS marketing, promotion and public education, which has been missing.

Taxpayers, not tax preparers, must be convinced of the advantages.

And fourth, while we support most of the Commissioner’s recommendations for electronic filing, we strongly believe that Federal

subsidies for electronic return transmitters and extending the tax

filing deadlines for electronically filed returns are unneeded and

unwise.

First, H&R Block’s role. H&R Block handles more than 18 million returns in the United States, Canada, and Australia. All of our

returns are filed electronically in Australia and over 65 percent in

Canada. In the United States, where we process returns for 1 out

of every 7 individual taxpayers, we provide 7.3 million, or about

half, of the electronic returns the IRS receives from commercial

practitioners.

To promote electronic filing, we spend $2.4 million on television

ads, have window banners in our 8,500 U.S. offices, distribute more

than 5 million brochures in English and Spanish, target direct mail

to 11.5 million prior clients, and highlight the benefits on our Web

site, on a CompuServe forum, and in our ‘‘Ask Henry’’ syndicated

newspaper column.

Electronic filing is provided free as part of the enhanced services

we offer at our 600 H&R Block Premium Offices and by some of

our franchisees. On March 1 we generally lower our electronic filing fee from $25 to $15 at our other offices.

We plan to reduce fees in steps over several years as volume increases. We will be reducing electronic filing fees by one-third for

returns we prepare in the coming tax season.

In addition, we recently concluded a 3-year agreement with

CompuServe to upgrade their system to provide capacity to transmit up to 40 million electronic returns, an investment we believe

shows our strong commitment to increased future electronic filing.

Second, government and the private sector must work together

to communicate the advantages of electronic filing and to clear

away IRS obstacles and public misunderstanding. There are a

number of advantages to filing electronically and a number of reasons taxpayers do not do so. For most of our clients, the compelling

advantage and only driving force for electronic filing is a quick refund. Because of the desire for a quick refund, over 70% of our customers file early. Despite the advantages, most taxpayers who receive refunds still do not file electronically.

In H&R Block’s case, all of our returns are prepared on computer

but only half are filed electronically. Nationally, half of all individual tax returns are prepared on computer, but only 13 percent are

filed electronically.

Reasons for the fall off vary.
62

Many clients do not have enough information or have misinformation. Some fear an increased possibility of audit, worry about

invasion of privacy, distrust computers, or are more comfortable

with the familiar ritual of a trip to the post office.

For some taxpayers cost may be a factor, although we believe

this is less than might be expected. A recent USA Today/Gallup

Poll from April 2, 1997, finds only 24 percent of paper filers cite

fees as a reason for not filing electronically. The vast majority give

other reasons.

We tested free filing over several years in about one-third of our

offices and found 60 percent of our clients preferred paper filing.

So cultural factors, misinformation, or a lack of perceived value

may be more significant barriers than cost.

IRS procedures also add difficulty to electronic filing. Cumbersome paperwork, signature requirements for electronic returns,

paperwork gluts over applications, revisions to participate in the

electronic filing program, and delayed confirmation of electronic

filer identification numbers could all be eliminated or streamlined.

The application to become an electronic filer, for example, cannot

be filed electronically.

To clear these obstacles, government and industry must work together.

My third point is that, short of mandating electronic filing, the

key to increasing electronic filing is massive IRS marketing, promotion and public education, which has been missing. The emphasis must be on persuading taxpayers and just not tax preparers.

The 1040 booklet most taxpayers receive covers many issues, but

it has never emphasized the benefits of electronic filing. We recommend that page 1 of each 1040 booklet have a large, highlighted

area asking taxpayers directly to, Please return electronically for

faster refunds, fewer errors and followup letters, no greater audit

risk, proof of filing, and lower IRS data entry costs which saves tax

dollars.

We are encouraged by plans being developed to launch an IRS

public service television campaign next year with tie-in printed materials. Congress can help by relaxing appropriations restrictions

on the use of IRS funds for paid advertising.

Which brings me to my last point. We support most of the Commission’s recommendations for electronic filing, but we strongly believe that Federal subsidies to electronic return transmitters and

extending tax filing deadlines are unneeded, unwise, and divert resources from where our focus should be.

We support the Commission’s recommendations for realistic

goals, clear strategy, private sector advice, and lower barriers to

paperless filing and payment.

But we do not believe a subsidy to electronic return transmitters

of up to $3 per return for taxpayers not charged a fee is needed

or appropriate, especially given pressures on the IRS budget.

First, market forces are already moving to lower filing fees. In

some cases electronic filing fees is already offered free, meaning

subsidies would be a windfall for some firms. And electronic filing

is up 19 percent this year without subsidy.
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Second, a subsidy of up to $3 per electronically filed return may

cost the IRS money since the average data entry costs for paper return are less according to the IRS.

Third, electronic return transmitters are ill equipped to verify

whether their customers, mostly commercial electronic return originators, are actually providing free filing, and the program would be

difficult to police.

We believe subsidies are a bad idea, but if any are provided, they

should go to taxpayers as a tax credit or to the 70,000 plus electronic return originators who have the ability to enlist their customers, not to transmitters, most of whom have no direct contact

with taxpayers.

We also do not believe it is cost effective to extend the tax filing

deadline to May 15 for electronic returns.

If the primary target is the balance-due filer, who files late in the

season and might see some advantage in slower payment, delaying

that revenue by 1 month could cost the Treasury as much as $100

million, adding to the deficit.

The taxpayer is already able to file for an automatic extension

if he needs more time, so the only incentive is the benefit of slower

payment, which increases Treasury borrowing costs. The benefit

would be greatest for large balance-due filers.

We believe the IRS should focus more productively on the 71 percent of taxpayers that get a refund and have a stronger incentive

to file electronically because they may want it quickly.

Electronic filing is growing, even without an extended season or

subsidies. We believe the key to further increases is not to lose

focus on the need for a massive IRS marketing campaign that parallels private sector advances.

We look forward to working with the Subcommittee on these

issues. We are proud of the contribution we now make, and hope

to build on it in the future. I am happy to respond to your questions.

[The prepared statement follows:]

Statement of Thomas L. Zimmerman, President, H&R Block Tax Services,

Inc., Kansas City, Missouri

Thank you for inviting us to testify on the recommendations of the IRS Restructuring Commission to increase the number of electronically filed (ELF) tax returns.

I’m Tom Zimmerman, president of H&R Block Tax Services, Inc., the tax services

subsidiary of H&R Block. Among our other subsidiaries is Block Financial, which

distributes Kiplinger TaxCut tax preparation software. I have worked in the tax

preparation industry for 24 years, starting as a tax preparer and rising to district

manager, regional director, divisional director, and executive vice president before

assuming my present position.

We strongly support electronic filing. We have worked closely over the past decade

with the IRS and more recently with the Commission to accomplish that goal. We

agree with many of the Commission’s electronic filing recommendations, but believe

that two of their recommendations—delaying tax filing deadlines and subsidizing

private-sector tax return transmitters—would misplace priorities and resources. We

do not agree that they are cost-effective ways to increase electronic filing.

H&R BLOCK’S ROLE

H&R Block handles more than 18 million returns in the United States, Canada

and Australia. All of our returns are filed electronically in Australia and over 65%

in Canada. In the U.S., where we process returns for one out of every seven individual taxpayers, we provide 7.3 million, or about half, of the electronic returns the
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IRS receives from commercial practitioners. This year, the number of electronic returns we filed increased by 15.7%.

To promote electronic filing, we spend $2.4 million on television ads, have window

banners in our 8,500 U.S. offices, distribute more than 5 million brochures in

English and Spanish, target direct mail to 11.5 million prior clients, and highlight

the benefits on our web site, on a CompuServe forum, and in our ‘‘Ask Henry’’ syndicated newspaper column.

Electronic filing is provided free as part of the enhanced service we offer at our

600 H&R Block Premium Offices and by some of our franchisees, and on March 1

we generally lower our electronic filing fee from $25 to $15 at our other offices. We

plan to reduce fees in steps over several years as volume increases.

We will be reducing electronic filing fees by a third for returns we prepare in the

coming tax season. In addition, we recently concluded a three year agreement with

CompuServe to upgrade their system to provide capacity to transmit up to 40 million electronic returns, an investment we believe shows our strong commitment to

increased future electronic filing.

FIVE ELECTRONIC FILING ADVANTAGES

Five advantages of electronic filing are clear: (1) refunds in less than half the time

of paper returns; (2) reduced follow-up IRS correspondence as social security number, math and IRS transcription errors are caught or eliminated [20%+ error rates

for paper returns vs. less than 1% for electronic returns]; (3) no greater risk of

audit; (4) proof the return has been filed; and (5) savings for the IRS with reduced

data-entry costs.

For most of our clients, however, the compelling advantage and only driving force

for electronic filing is a quick refund. Because of the desire for a quick refund, over

70% of our customers file early.

OBSTACLES TO ELECTRONIC FILING

Despite the advantages, most taxpayers who receive refunds still don’t file electronically. In H&R Block’s case, all of our returns are prepared on computer but

only half are filed electronically. Nationally, half of all individual tax returns are

prepared on computer, but only 13% are filed electronically. Reasons vary. Many clients don’t have enough information or have misinformation. Some fear an increased

possibility of audit, worry about invasion of privacy, distrust computers, or are more

comfortable with the familiar ritual of a trip to the post office.

For some taxpayers, cost may be a factor-although we believe this is less than

might be expected. A recent USA Today/Gallup poll (4/2/97) finds only 24% of paper

filers cite fees as a reason for not filing electronically while the vast majority give

other reasons. We tested free filing over several years in about a third of our offices

and found 60% of our clients still preferred paper filing. So cultural factors, misinformation, or a lack of perceived value may be more significant barriers than cost.

We continue to search for the right mix of incentives and information to enable

growing numbers of taxpayers to benefit from electronic filing.

IRS procedures also add difficulty to electronic filing. Cumbersome signature requirements (Form 8453), paperwork gluts over applications and revisions to participate in the electronic filing program (Form 8633), and delayed confirmation of electronic filer identification numbers could all be eliminated or streamlined. The application to become an electronic filer, for example, can’t be filed electronically. To

clear these obstacles, government and industry must work together.

WHERE FOCUS SHOULD BE

Short of mandating electronic filing, we believe what is most needed is a massive

IRS campaign, reinforced by the private sector, promoting and marketing electronic

filing and educating taxpayers to the advantages.

The 1040 booklet most taxpayers receive covers many issues, but it has never emphasized the benefits of electronic filing. We recommend that page one of each 1040

booklet have a large, highlighted area asking taxpayers directly to—

Please file your return electronically for—

• Faster refunds

• Fewer errors and follow-up letters

• No greater audit risk

• Proof of filing

• Lower IRS data-entry costs which saves tax dollars

See pages llllll for more information.
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On subsequent pages, there would be a strong sales pitch.

We are encouraged by plans being developed to launch an IRS public service TV campaign next year with tie-in printed materials and more information in the 1040

booklets. Past promotion of TeleFile has successfully boosted use by those who file

simple returns. The emphasis must be on persuading taxpayers, not just tax preparers.Congress can help by relaxing appropriations restrictions on the use of IRS funds for paid advertising. We are also encouraged by renewed efforts at IRS. A history of inflated estimates, attempts at strategic plans, and delays in acting on repeated recommendations all

suggest that IRS needed a spur to action. A new combination of IRS personnel

changes, Treasury oversight, Congressional criticism, and Commission efforts may

finally yield results. The problem with electronic filing has been less one of uncertain strategy than lack of resources and execution. We support the Commission’s recommendations for realistic goals, clear strategy, private-sector advice, and lower barriers to paperless filing and payment. We strongly believe, however, that federal subsidies to electronic return transmitters and extending tax filing deadlines are unneeded, unwise, and divert resources from where

our focus should be to increase electronic filing.

SUBSIDIZING ELECTRONIC RETURN TRANSMITTERS UNNEEDED

We don’t believe a subsidy to electronic return transmitters of up to $3 per return for taxpayers not charged a fee is needed or appropriate, especially given pressures

on the IRS budget. First, market forces are already moving to lower filing fees-in

some cases electronic filing is already offered free, meaning subsidies would be a

windfall for some firms. Electronic filing is up 19% this year without subsidy. Second, subsidies may undermine the incentives some preparers now have to invest

fees in electronic filing start-up costs including advertising and promotion, which

could be counterproductive. Third, a subsidy of up to $3 per electronically filed return may cost the IRS money since average data entry costs for a paper return are

less ($2.65 vs. $4.15), according to the IRS. And, fourth, electronic return transmitters are ill equipped to verify whether their customers-mostly commercial electronic

return originators-are actually providing ‘‘free’’ filing, and the program would be difficult to police.

We believe subsidies are a bad idea, but if any are provided, they should go to taxpayers as a credit or to the 70,000+ electronic return originators who have the

ability to enlist their customers, not to transmitters most of whom have no direct

contact with taxpayers. Any subsidies should also be targeted as an incentive to new

filers, not used to reward existing electronic filers.

EXTENDING TAX FILING DEADLINES UNWISE

We also don’t believe it is cost-effective to extend the tax filing deadline to May 15 for electronic returns. If the primary target is the balance-due filer of a complex

return who files late in the season and might see some advantage in slower payment, delaying that revenue by a month could cost the Treasury as much as $100

million, adding to the deficit. The taxpayer is already able to file for an automatic

extension if he needs more time (although payment in full should be made by April

15), so the only incentive is the benefit of slower payment-which increases Treasury

borrowing costs. The benefit would be greatest for large balance-due filers. New dates and a longer filing season would also add complexity, create taxpayer confusion, and, by diminishing the single focus on April 15 as the national deadline,

contribute to weakened compliance.

We believe the IRS should focus more productively on the 71% of taxpayers that get a refund and have a considerably stronger incentive to file because they may

want it quickly. They have a built-in incentive to file electronically—if we can educate them and promote the service.

Electronic filing is growing now even without an extended season or subsidies. We believe the key to further increases is not to lose focus on the need for a massive

IRS marketing campaign that parallels private-sector advances. We look forward to working with the Subcommittee on these issues. We’re proud of the contribution we now make and hope to build on it in the future.

Chairman J

Mr. Wolfe.

OHNSON. Thank you.

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STATEMENT OF LARRY WOLFE, SENIOR VICE PRESIDENT, TAX

PRODUCTS DIVISION, INTUIT, INC., SAN DIEGO, CALIFORNIA

Mr. WOLFE. Madam Chairman, Ranking Member Coyne, Representative Portman, other distinguished Members, it is an honor

to make my first appearance before this Subcommittee, and, in

fact, before any Committee of Congress.

My name is Larry Wolfe. I am a CPA and vice president of the

tax products division of Intuit, a U.S.-based software company,

which produces a variety of tax and personal finance products, including TurboTax and MacIntax, the Nation’s leading and best selling tax preparation software.

More than 14 million tax returns were prepared using Intuit

software last year. We followed closely and with great enthusiasm,

the work done by the National Commission of the Restructuring of

the IRS, led by Congressman Portman and Senator Kerrey. The

Commission got it right.

The Commission’s report on electronic filing, taken as a whole,

is an excellent and balanced set of recommendations, and it deserves Congress’ support. There is uniform agreement that electronic filing of tax returns is desired. Paper returns are expensive

to process, and while hard costs have proven difficult to determine,

the best estimates of processing costs are about $7 per return,

while truly paperless returns on the other hand cost only pennies.

So what is keeping this from happening and what can Congress

do to help achieve these goals? We believe two things need to be

done. First, we need to eliminate everything that makes electronic

filing less attractive than the current method of sending it in with

simply a postage stamp. However, this is not enough. To simply get

to the point where taxpayers see both methods as equal will not

drive substantial increases in electronic filing. We must make electronic filing the preferred method of filing tax returns.

H.R. 2292 directs the Secretary of Treasury to implement a plan

to eliminate barriers, provide incentives, and use competitive market forces to increase electronic filing. Intuit supports this directive

and encourages Congress to ensure that every barrier is removed,

and that taxpayers are incentivised to file electronically.

Specifically here are the barriers that we would like to see removed. First, eliminate the 8453 form; second, eliminate the requirement to file paper copies of W–2 forms; third, ensure that the

IRS can accept all tax returns electronically; fourth, eliminate the

need to send in a check with a balance-due return; fifth, work to

eliminate public skepticism of electronic filing. Taxpayers are uncertain about electronic filing, and need to be assured through IRS

promotional campaigns that electronic filing does not increase the

risk of audit, and is a safe efficient way to file the returns. We are

delighted that the IRS is already working on this, and we believe

that they will see benefits from that.

Finally, most taxpayers pay between $10 and $25 to electronically file their returns. This amount must be reduced to zero in

order to compete with the 32 cent stamp. The bill includes a provision that requires the Secretary to implement procedures to provide for the payments of incentives to transmitters if they make

electronic filing free for their customers.
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Collectively, these provisions are dramatic, and Intuit fully sup- ports all of them. They, however, will only make taxpayers ambivalent about whether to file on paper or electronically. In our opinion

the IRS will not see the huge increases in electronic filing that they

are looking for simply as a result of leveling the playingfield. The second step must be to make electronic filing the preferred method. We believe the following items are necessary to create a

real movement to electronic filing: The first already exists. Only electronically filed returns get an acknowledgment of receipt from the IRS. Second, allow taxpayers

who file electronically to view in a secure way certain information

about their accounts with the IRS. Third, and most important, is

to extend the filing deadline for electronic returns. This will be the

catalyst that causes taxpayers to push the file electronically button,

rather than the print button on their keyboards. We support this

filing extension because we believe it is the most significant incentive for people who have balances due.

We commend the Commission’s work, and H.R. 2292 that resulted from it. We encourage Congress to support the provisions as

a total package. As I conclude, I would be remiss if I did not mention how impressed we are with the markedly increased level of dialog, openness, and outreach by the senior Treasury and IRS officials. We have enjoyed those communications, and we believe that

they will bear much fruit in the future. Thank you very much. [The prepared statement follows:]

Statement of Larry Wolfe, Senior Vice President, Tax Products Division, Intuit, Inc., San Diego, California

Madame Chairman, Ranking Member Coyne, Representative Portman and other distinguished Members of the Committee: My name is Larry Wolfe. I am Senior

Vice-President, Tax Products Division of Intuit, Inc., a U.S. based software company

which produces a variety of tax and personal finance products including TurboTax

and MacInTax, a personal and professional tax product that is the best selling tax

preparation software in the United States. Fourteen million tax returns are prepared using our software. More generally, Intuit’s mission is to improve the way individuals and small businesses manage their financial affairs. To that end, Intuit

develops, markets and supports personal finance, small business accounting, tax

preparation and other consumer software products. We provide related supplies and

electronic financial services that enable individuals, professionals and small businesses to automate commonly performed financial tasks and better organize, understand, manage and plan their financial lives. It is an honor to appear before the

Subcommittee.

We followed closely, and with enthusiasm, the electronic filing review and rec- ommendations made by the National Commission on Restructuring the IRS (‘‘the

Commission’’) led by Senator Kerrey and Congressman Portman. The Commission

got it right. The Commission’s report on electronic filing, taken as a whole, is an

excellent and balanced set of recommendations. It deserves Congress’ support and

we hope you will see that the IRS, who are making strides of their own in the same

direction, is asked to implement it.

BENEFITS OF ELECTRONIC FILING

Chairman Johnson’s statement announcing this hearing squarely addressed why

incentives are needed. For Tax Year 1996, approximately 120 million individual tax

returns were filed. More than half, and probably as many as 60 million returns,

were prepared by paid tax preparers using a variety of tax preparation software.

In addition, at least 10 million tax returns were completed by individual self preparers who use consumer-oriented tax preparation software products such as Intuit’s.

Only a small percentage of these electronically prepared tax returns, less than 20

million, were submitted to the government in an electronic format, and, we have

been told the majority of electronically submitted tax returns are RAL’s—refund anticipation loan recipients. Collectively, most current electronic filers were receiving
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refunds. For these reasons, the number of electronically submitted returns, while increasing, is generally static when compared with the total number of returns that

could be returned in electronic format.

The Commission, the IRS and this Subcommittee have recognized that there is

an enormous financial and service benefit to the government in electronically receiving the returns currently prepared in electronic format, a number which is growing

each year. Although approximately 70 million returns (out of the 120 million returns

received by IRS) currently are prepared electronically, approximately 60 million taxpayers using PC’s, or preparers, print out their tax return on paper and mail it in.

The IRS is then required to pay approximately 8,000 full time and, more importantly, 21,000 seasonally hired workers to manually enter only 40% of the information contained in these paper returns on IRS computers. This manual handling of

paper returns delays processing and introduces new errors to the process.

The IRS figures reported regarding labor costs vary widely. Assuming all returns

take roughly equivalent time, the total process of labor and service center cost to

IRS is $7 per paper return. During the press conference releasing the Commission’s

report, Co-Chair of the Commission, Congressman Portman, emphasized that the

Commission found the $7 figure to be the best available estimate.

In addition, the Commissions Report found that the error rate for manually prepared paper returns is approximately 20%. Addressing a return with errors requires

multiple handling in data processing, and consequently the cost of each wrong return is far more than the estimated $7 average. Because electronically filed returns

usually are prepared by computer programs with built in software checks, undergo

pre-screening by the IRS, and experience no key punch errors, the Commission estimated the error rate for electronically filed returns to be less than one percent. This

low error volume will translate into a huge cost savings if electronic returns grow.

Moreover, the actual cost of inputting such returns requires aggregating labor, facility costs and computing. For example, for every 15 million additional returns obtained electronically, IRS could eliminate the cost of building and maintaining one

major service center.

As Chairman Johnson’s announcement statement accurately described and the

Commission reported, returns prepared and received electronically actually have a

significantly lower cost to process and have a higher accuracy rate than those returns that are prepared manually. The Commissions Report estimated that the cost

of processing electronic returns was at $1.15 per return, including the processing

of additional documents to authenticate the return, which costs H.R. 2292 will hopefully reduce.

INTUIT SUPPORTS COMMISSION RECOMMENDATIONS IN THE PROPOSED LEGISLATION

Specifically, we believe the following six recommendations, made by the Commission and already included in Title II of H.R. 2292, are critical and necessary:

First, the requirement to file the 8453 signature document is being dropped. A

signature alternative will be identified and enabled. This will eliminate a significant

barrier to electronic filing that remains both for returns professionally prepared and

those self prepared. Under the Telefile program, IRS already has evolved a way to

provide personal PIN numbers to taxpayers. Some method must be utilized to authenticate each return and remove the current need to require signature forms, or

mailing a paper return for matching with an electronic record. This will remove a

barrier in the current system.

Second, the bill permits a limited power of attorney permitting the taxpayer to

authorize the IRS to speak to their professional tax preparer with respect to an electronically filed individual return. This will provide an incentive for preparers to encourage electronic returns.

Third, moving towards secure account inquiry by individual taxpayers is appropriately recognized, as is the need to protect private information. This will provide

an incentive for taxpayers and encourage filing of electronic returns.

Fourth, an extension of 30 days for electronically filed returns is being offered,

and paperless payment options are being enabled. This is a major incentive to taxpayers to electronically file. In concert, the balance due filer, who today has no incentive to file electronically, will find it easier and more attractive to file electronically.

Fifth, the bill requires IRS to incorporate market incentives for electronic filing

to bring the cost of electronic filing into equality with a $.32 stamp. I will return

to this issue for some additional comments, but cost to taxpayers is a key barrier

to electronic filing.
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Finally, a strategic pe industries increased confidence that the IRS understands

the challenge, the benefits and the opportunities to make electronic filing and payment the preferred and most convenient means of filing.

COMMISSION RECOMMENDATIONS THAT INTUIT BELIEVES SHOULD BE INCLUDED IN

THE SUBCOMMITTEE’S LEGISLATION

There are four recommendations identified in the report of the National Commission on Restructuring the IRS: A Vision for a New IRS, that H.R. 2292 has not, as

yet, embraced. We would recommend that four additional issues be included prior

to passage of the bill. These include:

The first, and most critical, is the need to eliminate the requirement to file a W2

for electronically filed returns. Paper W2s are currently attached to the paper 8453

signature document when the electronic filing method is used. Eliminating the requirement to file a paper 8453 document without also eliminating the requirement

to file paper W2s will not truly provide a paperless filing. This barrier to electronic

filing must be removed.

Second, the Commission recommended expanding the range of 1040 returns that

can be filed electronically. Today, there are limitations in the electronic filing program (for example, the number of stock transactions which can be reported on an

electronically filed return) which exclude a number of 1040s from the electronic filing process. The returns excluded are typically the more complex, and therefore,

more costly to keypunch. The IRS should be required, over a reasonable period of

time, to find ways for all returns to be permitted to be electronically filed. This will

remove an unnecessary barrier to electronic filing.

Third, the extension incentive for balance due filers should be accelerated. This

is a huge incentive to a group that will not otherwise file electronically, and the

Committee should clarify the effective date of this provision.

Finally, the Commission recommended permitting the IRS to promote electronic

filing. Today, the only promotional avenue the IRS has for electronic filing is public

service announcements. These rarely run during prime time. To aggressively advance and promote electronic filing, the IRS should be authorized and funded to promote this program in magazines, newsparrier to IRS effectiveness should be removed.

INCENTIVES: A CRITICAL COMPONENT

H.R. 2292, Section 201(c) embraces a version of the Commission’s recommendation

on incentives, an issue that the Commission found is of paramount importance in

increasing the number of electronically filed returns.

From an individual taxpayers perspective, there is little or no economic incentive

to file electronically. Taxpayers are generally charged service fees ranging from $10

to $25 for electronic filing. Occasional temporary promotions of electronic filing at

lower or no cost are just that—promotions that are not likely to be continued. Therefore, a rational taxpayer will continue to choose a $.32 stamp to mail a printed return. A series of customer surveys conducted by independent third parties have stated that cost is the single greatest impediment to electronic filing. (A copy of one

such polling study, and another reported in USA Today are attached). We have

heard other companies say that cost of electronic filing is not the main issue for

their customers. We strongly disagree, and would suggest that the Committee seek

hard data if cost is not perceived to be the most important issue. We do agree cost

is not the only issue.

In fact, in the polling data, 53% of these people surveyed said economic incentives

should be used to drive up electronic filing, 40% said they didn’t have an opinion,

and only 7% opposed use of economic incentives.

An economic incentive approach is appropriate for the following reasons:

First, a proposed incentive system reduces governmental and taxpayer risk to a

minimum. IRS should only be asked to pay for tax returns it actually received in

the desired format. IRS currently acknowledges receipt for filings it receives from

third parties. Electronic filing actually results in greater certainty for taxpayers because they will have a record of actual receipt of their return by IRS. (Paper returns

do not result in such receipts.) Currently, service providers and the IRS are already

doing this exact function for millions of returns—the Commission proposed shifting

a very high cost from the individual taxpayer to a much smaller cost borne by all

taxpayers, in order to reduce total expenditures on IRS operations. The IRS has

stated that it has the ability to accept as many as 100 million electronically filed

returns annually without requiring any new systems development effort. Current

IRS standards appropriately require suitability checks of the transmitter—such as
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the technical background of the concern, credit worthiness, and necessary background checks on employees.

Second, this incentive does not require the IRS to enable Internet access. Instead,

transmitters would send their batched returns on the public telephone network

through a dedicated connection to the IRS—as they currently do for the returns IRS

already obtains electronically. As Internet security and encryption concerns are satisfied, the service providers can utilize the Internet.

Finally, it makes economic sense once all costs of manually processing paper returns are accumulated, that the IRS will still net as much as $4 per return electronically filed, even if it pays a $3 incentive fee per return, for every return, every

single year. The savings obviously would multiply if 10 million, 20 million, or more

additional returns, already in electronic format, were obtained in this manner.

It is the transmitters who have the costs, for example, of telephone lines, servers,

and staff at call centers to make electronic filing work. Intuit would be pleased with

the incentive being paid wherever it will be effective, but it is not clear how payments or credits to taxpayers will solve the cost problem of transmitters.

The Commission’s recommended incentive proposal would permit a variety of vendors to provide electronic filing free to the taxpayers. The resulting surge in ELF

should save the government substantial sums, year after year.

DRAFTING COMMENTS

We note that Section 201(c)(2)(c) appears to distinguish between preparer returns

and self-prepared returns. We see no policy reason to make such a distinction.

As a matter of drafting the numerous effective dates in the bill, we were uncertain whether Section 202 contained an effective date for corporate and individual

returns.

NO COMPETITION WITH PRIVATE SECTOR

There is one other area where the Subcommittee could clarify existing law and

practice. Intuit and other software companies, and I believe the preparer community, have no objection to IRS aggressively making their forms available on line. We

and others spend tens of millions of dollars integrating a software package that we

warrant and that responds to our customer needs. This bill should include simple

language indicating it is congressional policy to rely upon value added private concerns to continue to service this private market without government competition.

We believe such a firm policy guide would be useful, and consistent with OMB policy circulars.

DIALOGUE WITH TREASURY AND IRS

The level of dialogue, openness and outreach by senior Treasury and IRS officials

has markedly increased in the past year. We believe Congress should be made

aware of this valuable open channel between the stakeholders in the system.

CONCLUSION

While the IRS has stated they have sufficient legal authority to implement this

proposal, H.R. 2292 will provide the necessary final push. Intuit believes the House

Ways and Means Committee’s efforts are critical in assisting the IRS.
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Chairman J

Mr. Langer.

OHNSON. Thank you very much.

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STATEMENT OF JOSEPH W. LANGER, PRESIDENT, NATIONAL

ASSOCIATION OF COMPUTERIZED TAX PROCESSORS, GREEN

BAY, WISCONSIN

Mr. LANGER. Madam Chairman, Members of the Oversight Subcommittee, I appreciate the opportunity to testify on the issue of
77

electronic tax filing. The work done by the National Commission on

Restructuring the Internal Revenue Service, as well as the changes

recommended in H.R. 2292, are sweeping and appropriate, and

they address the issues facing electronic filing today.

My name is Joe Langer. I am the president of the National Association of Computerized Tax Processors, and for the last 8 years,

I have been the chair of the electronic filing committee of this association. And my profession, I am president of Nelco, Inc., an electronic filing service provider and tax form provider from Green

Bay, Wisconsin. Our products are used by over 100 companies

throughout the country; different tax preparation software companies.

Through my term as electronic filing chair, we have worked with

the IRS and State agencies to promote standards and make recommendations to simplify and enhance electronic filing. This past

year alone we submitted a paper making 22 recommendations to

the Internal Revenue Service. The NACTP as an organization continues to promote professional standards for software development,

and to promote a consistent method of automated tax filing.

Over the life of the Federal electronic filing system, the IRS has

considered various types of signature alternatives. While this consideration continues, States are enabling paperless electronic filing

systems, which either require no signature document for filing, or

require the return—to retain a copy of the electronic return.

Today the State of Montana requires no signature document at

all, and 17 States require the signature document to be prepared,

but not submitted. It is time the IRS accepts one of these alternatives.

Digital signatures using public and private keys are not fully

perfected to be implemented on a nationwide basis. Personal identification numbers are not yet developed for tax filing, and some

have recommended a separate PIN for each type of filing. Until

these systems are updated, or a new system can be made available

to all taxpayers, another alternative, such as those being implemented at the State level must be deployed.

True paperless filing will be a great benefit to electronic filing,

and promote its use over paper filing. Eliminating paper will reduce the cost to both individual and tax preparers. However, to be

truly paperless the IRS must eliminate the need for filing Form

8453. The electronic filing system must accept all forms, all schedules. In addition, all forms, including the W–2 worksheets or explanation, which are attached to an electronic return must be submitted electronically, not on paper. For the true paperless system,

electronic filing will grow substantially. The only way to accomplish

this goal is to invest in the technology for the electronic filing system.

The proposed legislation in the Commission’s report called for an

incentive to electronic filing transmitter. Our membership believes

to quickly change filing behavior and achieve the highest long-term

results, the taxpayer should receive the incentive to file electronically. However, because of the administrative ability of such an effort and the perceived inequity with paper filers, and incentivetargeted electronic filing infrastructures, those offering the service
78

will accomplish growth in electronic filing, and reduce the burden

on the professional tax preparer.

There are currently over 60,000 registered professional electronic

filers today. Only 2,500 transmit direct to the IRS. The remaining

75,000 plus use a value-added network, such as a third-party

transmitter. Third-party transmitters charge tax practitioners,

from nothing for free electronic line to $10 a return. Some include

their electronic filing costs for software development, product support and electronic transmission; in a lump sum, the software.

Most like to charge a separate fee for the returns transmitted.

An incentive proposed of $1 to $2 will not cover these costs.

Third-party transmitters will pass these incentives on to the tax

practitioner clients, and continue to compete on a basis of the products and services that they offer. Practitioners costs include these

electronic filing costs, as well as the additional processing costs for

an electronically filed return.

Because not every return can be filed electronically, and an electronic return is not paperless, the practitioner must sort returns

into paper, and electronic, and fill out forms for every electronic returns. Practitioners will welcome these incentives. However, without changes to the electronic filing system to accept all forms, and

to become entirely paperless, the tax practitioners will not fully

embrace electronic filing.

Consumers can purchase the software to prepare the return, and

file electronically. Companies today charge between $10 and $15 to

file electronically. With an incentive, the companies offering electronic—to consumers can reduce their cost for development, support and transmission. However, because there is a separate fee

charged for electronic filing, the remaining costs will be added to

the cost of the package, resulting in higher software costs.

Legislation proposes extensions for electronic file returns.

NACTP has actively recommended creating nonfinancial incentives

to promote electronic filing. Because there is no IRS data required

for an electronic filed return, we support extensions to file electronically filed returns.

In addition, allowing electronic return originators to communicate electronically, file returns will also benefit for the electronic

filer. NACTP has recommended the electronic communication of notices, delays in processing, and requests for additional information

to be sent electronically to the electronic filer. By doing this the tax

professional can quickly satisfy the request from the IRS, and

eliminate additional burden on taxpayers.

Balance-due filers have not yet been attracted to the electronic

filing system. The ability to accept credit cards, debit cards, as well

as electronic funds transfer should encourage balance-due filers.

However, the major impetus behind balance-due filing will occur

when practitioners include electronic filing as their standard method of filing all returns.

Access to a taxpayer’s account through a secure and private

method will add to the attractiveness of electronic filing. Taxpayers

can obtain answers to their questions regarding their return and

refund status, rather than calling the IRS.

During 1995 and 1996 I served on the IRS Commissioner’s Advisory Group while participating on the Commissioner’s Advisory
79

Group and many subcommittees on such broad topics as taxpayer

privacy, taxpayer service, and electronic filing. For electronic filing the occasional topic and meeting did not serve to address the serious issues facing this system. We vigorously endorse the recommendation to establish a separate Electronic Commerce Advisory Group. This group must be comprised by

the IRS, a tax practitioner and computerized processor group. It is

a blend of these inputs which will result in active and growing electronic filing. The issues must be definable and discussed openly.

The IRS just accepts these recommendations and acts on them with

the full support of the service. Electronic filing only works with a

strong relationship with external stakeholders. Today there exist an inequity between professional paper return filers and electronic return filers. Electronic return filers must go

through an application process, including fingerprinting and background checks, credit checks, and IRS suitability. Paper return filers have no such requirement.

During my tenure on the Commissioner’s Advisory Group we rec- ommended, along with the help of the director of practice, a system

of registering all tax preparers. In fact, Joe Lane has the recommendation at the back of his testimony. Our intention was to require registration of all paper and elec- tronic filers to create one process for all tax——

Chairman JOHNSON. Mr. Langer, I have to ask you to kind of

wrap up, so that we can get to more people before we have to go

vote.

Mr. LANGER. In summary, the National Association of Computerized Tax Processors actively endorses division for the new IRS,

published by the National Commission on Restructuring the IRS.

The pending legislation capitalizes these recommendations, and

seeks for a way to promote electronic filing. Through electronic filing service to the taxpayer can be greatly enhanced and the cost

of the service reduced. Thank you.

[The prepared statement follows:]

Statement of Joseph W. Langer, President, National Association of

Computerized Tax Processors, Green Bay, Wisconsin

INTRODUCTION

Madame Chairman and members of the Oversight Subcommittee, I appreciate the

opportunity to testify before this committee on the issue of Electronic Tax Filing.

The work done by the National Commission on Restructuring the Internal Revenue

Service, as well as the changes recommended in Bill H.R. 2292, are very sweeping,

and appropriately address the issues facing electronic filing today.

My name is Joseph W. Langer, and I am president of the National Association

of Computerized Tax Processors (NACTP) and for the last 8 years I have been

Chairman of the NACTP’s Committee on Electronic Tax Filing. In my profession,

I am President of Nelco, Inc., an electronic filing service provider and tax form provider based out of Green Bay, Wisconsin. Our products are used in over 100 tax

software companies throughout the country. Over my term as Electronic Filing

chair, we have worked with IRS and state agencies to promote standards and make

recommendations to simplify and enhance the electronic filing system. This past

year alone, we submitted a paper outlining 22 recommendations to the IRS.

The National Association of Computerized Tax Processors (NACTP) was founded

in 1969 as a cooperative effort of competing tax service bureaus to create standards

in tax processing and establish formal links with federal and state agencies. Over

the past 28 years, the NACTP has grown to an organization of 50 companies offering tax preparation software, electronic filing services, and tax form services. Our

organization continues to promote professional standards for software development
80

and consistent methods of tax filing. We look for ways to encourage and simplify

automated filing.

DIGITAL SIGNATURES/PAPERLESS FILING

Over the life of Federal electronic filing, the IRS has considered various types of

signature alternatives. While this consideration continues, states are enabling

paperless electronic filing systems which either require no signature document for

filing or require the return originator to retain a signed copy of an electronic return.

Today, one state (the state of Montana) requires no signature document and 17

states require the signature document to be prepared but not submitted. It is time

the IRS accepts one of these alternatives.

Digital signatures, using public and private keys, are not fully perfected to be implemented on a nationwide basis. Personal identification numbers (PIN numbers)

are not yet developed for tax filing and may require a separate PIN for each type

of filing. Until these systems are updated, or a new system can be made available

to all taxpayers, another alternative, such as those being implemented at the state

level, must be deployed.

True paperless filing will be a great benefit to electronic filing and promote its

use over paper filing. Eliminating paper will reduce costs for both individuals and

tax preparers. However, to be truly paperless, the IRS must eliminate the requirement for filing Form 8453. The electronic filing system must accept all forms and

schedules. In addition, other forms, worksheets, or explanations attached to an electronic return must be able to be submitted electronically, not on paper. With a true

paperless system, electronic filing will grow substantially. The only way to accomplish these goals is to invest in technology for the electronic filing system.

FINANCIAL INCENTIVES

The proposed legislation and the Commission’s report called for an incentive to

the electronic filing transmitter. Our membership believes to quickly change filing

behavior and achieve the highest long-term results, the taxpayer should receive the

incentive to file electronically. However, because of the administrability of this type

of effort and the perceived inequity with paper filers, an incentive targeted at the

electronic filing infrastructure will accomplish a growth in electronic submissions by

reducing the burden on the professional tax practitioner.

Practitioner ELF

There are currently over 60,000 registered professional electronic filers. Only

about 2,500 transmit directly to the IRS. The remaining 57,000 plus use a value

added network call a ‘‘third-party transmitter.’’ Third-party transmitters charge tax

practitioners from $0 (that is, free electronic filing) to $10 per return. Some bury

their electronic filing costs for software development, product support, and electronic

transmissions in a lump sum software cost. Most elect to charge a separate fee for

each return transmitted to cover these costs.

The incentive proposed of $1–$2 will not cover these costs. Because of this, thirdparty transmitters will pass on these incentives to their tax practitioner clients and

continue to compete based on the products and services they offer. Practitioner’s

costs include the electronic filing fees and the additional processing costs required

for an electronically filed return. Because not every return can be filed electronically

and an electronic return is not paperless, the practitioners sort returns into paper

and electronic and fill out paper forms for each electronic return.

Practitioners will welcome these incentives. However, without changes to the electronic filing system to accept all returns and to become entirely paperless, tax practitioners will not fully embrace electronic filing.

Online Filing (Non-Practitioner ELF)

Consumers can purchase software to prepare their tax return and file their return

electronically. Companies charge $9.95 to $14.95 to file electronically. With an incentive, companies offering electronic filing to consumers can reduce their costs for

development, support and transmission. Because a separate fee cannot be charged

for electronic filing, the remaining costs will be added to the cost of the package resulting in higher software costs.

NON-FINANCIAL INCENTIVES

The legislation proposes extensions for electronically filed returns. The NACTP

has actively recommended creating non-financial incentives to promote electronic fil-
81

ing. Because there is no IRS data entry required for an electronically filed return,

we support extensions to file for electronically filed returns.

In addition, allowing the electronic return originator to communicate on electronically filed returns will also be a benefit for the electronic filer. The NACTP has recommended the electronic communication of notices, delays in processing, and requests for additional information be sent electronically to the electronic filer. By

doing this, the tax professional can quickly satisfy the request from the IRS as well

as eliminating additional burden on the taxpayer.

Balance due filers have not yet been attracted to the electronic filing system. The

ability to accept credit or debit cards, as well as electronic funds transfer, should

encourage balance due filers. The major impetus behind balance due filing will occur

when a practitioner includes electronic filing as their standard offer.

Access to a taxpayer’s account through a secure and private method will add to

the attractiveness of electronic filing. Taxpayers can obtain answers to their questions regarding return and refund status rather than calling the IRS. This would

be another benefit for electronic filing.

ELECTRONIC COMMERCE ADVISORY GROUP

During 1995 and 1996, I served on the IRS Commissioner’s Advisory Group

(CAG). While on the CAG, I participated in many subgroups on such topics as taxpayer privacy, taxpayer service, and electronic filing. With the broad approach to

this group, no single topic received a strong focus. For electronic filing, the occasional topic and meeting did not serve to address the serious issues facing the system.

We vigorously endorse the recommendation to establish a separate Electronic

Commerce Advisory Group (ECAG). This group must be comprised of the IRS, tax

practitioner, and computerized tax processor groups. It is a blend of these inputs,

which result in an active and growing electronic filing partnership.

The issues must be definable and discussed openly. The members of the group

must be selected to contribute to the process and search for real solutions to the

electronic filing challenges. The IRS must accept these recommendations and act on

them with the full support of the Service. Electronic filing only works with a strong

relationship with external stakeholders.

REGULATING TAX PREPARERS

Today, there exists an inequity between paper return filers and electronic return

filers. Electronic return filers must go through an application process that includes

fingerprinting with background checks, credit checks, and IRS suitability processing.

Paper return filers have no such requirements. During my tenure on the Commissioner’s Advisory Group, we recommended, along with the help of the Director of

Practice, a system of registering all tax preparers. Our intention was to require registration of all paper and electronic filers to create one process that all tax preparers

could use. We would require a minimum of continuing education for all tax preparers.

The legislation envisions regulating all tax preparers under Circular 230. While

this can be the ultimate goal, many tax practitioners who are not affiliated with a

national professional organization are not looking to represent their clients before

the Internal Revenue Service. Therefore, we believe some type of registration for all

preparers is appropriate. Regulation through Circular 230 can be an ultimate goal,

but steps can be taken prior to imposing Circular 230 on all tax preparers. When

this happens, the current electronic filing application process should be eliminated.

CONCLUSION

The National Association of Computerized Tax Processors actively endorses The

Vision For A New IRS, published by the National Commission on Restructuring the

Internal Revenue Service. The pending legislation capsulizes these recommendations and seeks ways to promote electronic filing. Through electronic filing, service

to the taxpayer can be greatly enhanced and cost for the Internal Revenue Service

can be reduced. This results in a system of mutual benefit for the taxpayer, the IRS,

and the American public.

Thank you for this opportunity today.
f

82

Chairman JOHNSON. Your testimony, Mr. Harris’ testimony. So if

you will; try to notice when the light turns red and wrap it up. You

have about 6 minutes, then we can go over and vote, about 7 minutes, and hear the last two.

STATEMENT OF ROBERT J. CARVER, CONSULTANT, KACHINA

GROUP, ANNAPOLIS, MARYLAND

Mr. CARVER. I would be happy to do that. Madam Chair, I am

happy to be here today to talk a little bit about why electronic filing is important to the IRS.

My name is Robert Carver, and for 30 years I was in the service

center operations of the IRS. My last job was managing the 10

computer centers in the service centers.

The effectiveness of IRS is directly related to the quality of the

information they can get their hands on. While we are all talking

about exploding information age and all the rest of it, the IRS must

keep up with that explosion and make some sense out of it. the

way I like to describe this, is in the fifties the popular press said

that most couples had 2.5 children, and in the nineties we found

ourselves, most children have 2.5 parents, and those parents have

2.5 employers, and keep their money and so forth in 2 or 3 banks.

And the world is certainly getting more complicated.

Businesses now have independent contractors, part-time helpers,

consultants. They are multinational, they are interstate, and in the

past they were a lot easier to keep track of for the IRS.

Now the IRS expects each of these taxpayers and businesses to

send a report in once a year so that the correct amount of tax can

be determined and paid. The IRS then must validate information

on those tax returns between and among them; between the businesses, the banks, the pension funds, and the individuals filing

their return.

We expect this annual validation to be done every year, and we

expect it to be done without bothering the taxpayers, who have

sent this information in. IRS would love that same ability, but they

need information to do that. Lacking that information, they must

bother each of us to ask for more information during the processes

they go through to validate.

To get back to my enthusiasm for electronic filing however, I

would like to describe a little bit about how IRS gets the information they use. Presently the IRS only uses about 40 percent of the

data that the Internal Revenue Code desires, and we as taxpayers

pay our time and money to send into them. And this sad fact is

a result of two things that are well known.

The first is the state of the IRS computers that were designed

in the sixties; and the second is the high cost of transcribing paper

tax returns to get the information into electronic format. And I

have to add, I only see more complex information being regarded

by the IRS in the future, so this will only get worse.

When it is all said and done, there are only three ways the IRS

can get the information it needs to do its job. The first is to hire

more and more transcribers, and at the present time to change that

40-percent figure they would need at least two to three times the
83

number they presently have in today’s environment. These transcribers require typing skills, a skill that is not taught by our

schools anymore, and not utilized in the business environment, so

the pool of trained transcribers is diminishing rapidly.

The second way to get this information to the IRS is to optically

scan or image the paper tax returns. My experience with this particular technology is, that on a handwritten document the best anybody can do is about 50-percent recognition. If you want the rest

of the data you have to send it over to somebody to again, transcribe the additional amount in. The rate’s a little better on computer-generated information, but it is still nowhere near 100 percent.

The only feasible way for IRS to receive, validate, and manipulate all this data is through electronic filing. The data exists in

electronic formats in businesses, and in taxpayers’ computers, and

in other government agencies’ computers. To continue to convert

these electronic files to printed paper, send it to the IRS, who must

then transcribe or otherwise scan it back into an electronic format

is at best, time consuming and very costly.

In addition, since there will never be enough funding to hire all

the transcribers necessary, the IRS will not be able to do the job

we expect it to do. The IRS needs vast amounts of information to

do its job. We should all encourage using the most cost-effective

and data-rich system available. In my opinion, electronic filing is

the only system that satisfies that need. Thank you.

[The prepared statement follows:]

Statement of Robert J. Carver, Consultant, Kachina Group, Annapolis,

Maryland; and former Executive Officer, Service Center Operations, Internal Revenue Service

INTRODUCTION

I am pleased to address the Subcommittee today on the subject of the importance

of electronic filing to the Internal Revenue Service. My 30-year career with IRS has

been involved with the returns processing operation. I also held a position as a Revenue Officer, but the majority of my time has been spent in the ten Returns Processing Service Centers. My last position before retiring in October 1995 was that of

Executive Officer for Service Center operations. That assignment involved managing

the ten processing centers with an annual operating budget of $1.3 billion. I was

responsible for the performance of approximately 60,000 employees. In addition, I

served on the President’s Welfare Reform Commission in 1995 as the IRS representative.

At present, I am working with the Council for Electronic Revenue Communication

Advancement (CERCA), which is an organization of companies to further electronic

transmission and processing of tax information. This organization is not limited to

dealing with the IRS but involves other Federal taxing and State agencies. CERCA

is a two-year old association representing a broad cross-section of private companies

and Government agencies leading in the movement toward electronic financial services. In addition, I am presently consulting with a leading software company, a financial institution, and a major accounting firm; but, my comments today are mine

and are based on my 30 years experience with IRS and, specifically, with the experience I have had with managing the returns processing operation.

IRS MISSION AND NEEDS

IRS’ Mission is compliance; they must:

Ensure that all taxpayers file tax returns and reports, report all income, expenses,

deductions, and information correctly, pay the correct amount of taxes, penalties, and

interest for domestic and international taxpayers.

Administer social programs; i.e., earned income tax credit.

Gather and validate data for statistics of income (SOI).
84

Interact with others; i.e., third parties (banks, employers, other financial institu- tions), 50 states, other government agencies, and other countries’ government agencies.

Provide service to taxpayers using telephones, computers, and written correspond- ence. To accomplish this mission, the IRS must gather and manipulate vast amounts of information, and the future only holds promise of ever more data. This data manipulation naturally falls into two phases of data processing. • The first is accumulation and validation. • The second is manipulation/comparison.

I will concentrate on the first phase for my testimony today but, before I do, I

would like to briefly outline the several discrete information realities facing the IRS.

Taxpayer Service

Responsibilities: Receive and process 200+ million tax returns and 3+ billion information documents (for tax and statistics of income), provide customer service for tax

law questions and account questions.

Taxpayer Service Needs: The ability to research return information, third party

information, and modify (adjust) that data.

Collection

Responsibilities: Payment of all types of taxes (income, excise, pension, estate,

etc.); oversight of trust funds (FICA, SSA, etc.); validation of accounting methods

used by businesses (employee-employer relationships); enforcement of payments due

(seizures, sale, garnishment of wages and financial accounts). Collection Needs: Access to business, financial, and state data, and local property and licensing information. Access to federal, state, and local legal services, sheriffs, and other process

servers.

Examination (Audit)

Responsibilities: Ensure taxpayers use valid accounting practices for income and

tax liability determinations; identify and correct underreporting of income, bartering

transactions, and other schemes to avoid payment of taxes; evaluate foreign and domestic tax treaties to ensure compliance with U.S. laws; monitor, evaluate and correct tax treatments of businesses involved in tax exempt and pension organizations.

Examination Needs: Access to all relevant tax and financial information on taxpayers; such as, individual and business financial data bases in banks, other financial institutions, state and local tax data, international tax information held by foreign governments. Ability to coordinate enforcement actions with tax partners, foreign and domestic. Ability to apply computerized evaluation programs (artificial intelligence) to data bases, both within and outside the IRS.

Criminal Investigation

Responsibilities: Discovery and correction of fraud, willful omissions, money laundering, income from drug, gang, and other illegal operations. Criminal Investigation

Needs: Access to legal and illegal data bases. Ability to apply computerized detection

programs; such as, pattern recognition, anomaly detection, and other artificial intelligence routines to those data bases. Ability to coordinate investigation activities

with federal, state, local and foreign enforcement organizations. Ability to share information with U.S. attorneys and other judicial organizations. Ability to protect information if all parties are not legally authorized to receive such information.

Chief Counsel

Responsibilities: As the legal arm of the IRS, rules on laws and regulations, acts

as legal counsel to executives of IRS in performance of their duties. Chief Counsel

Needs: Access to legal opinions, rulings, and judgments for tax matters. Research

capabilities in data bases in federal, state, and local tax jurisdictions.

IMPORTANCE OF ELECTRONIC FILING

The reason I described the information needs of the major IRS functions was to

show how information on tax returns and other documents (that often seems more

than necessary to satisfy a taxpayer’s tax responsibility) is needed to carry out the

other responsibilities in the IRS mission.

At the present time, only about 40% of the data IRS requires and taxpayers spend

time and money providing is posted to the main IRS files. This sad fact is due to

the state of sophistication of the IRS computer system (designed in the late 1960’s)

and the costs of paying people to transcribe the data from paper returns and docu-
85

ments to usable electronic formats. The result of this shortfall in data requested versus data ultimately used is that IRS Auditors, Agents, and Officers, in the performance of their duties, often must ask taxpayers for copies of returns and documents

(copies with all the data intact).

We have watched, over the past years, as IRS tried unsuccessfully to modernize

its computer systems. It is my opinion that one of the main reasons for these stumbles is the reliance on the need to have paper tax returns and documents converted

to electronic formats. It seems that a paper return with its signature is a concept

the IRS has been unable to give up. This is changing, but at a snails pace.

At this point in time, two things are true. The availability of trained transcribers

(typists) is nearly zero; schools do not teach typing and businesses don’t hire typists.

The state of the art of electronic scanning equipment to read, interpret, and record

data from computer generated, and especially hand written, documents is less than

acceptable for the job IRS has before it.

This leaves only Electronic Filing of tax information the ‘‘Best in Class’’ option

for IRS to accomplish its mission. The state of the art of computer technology is

ready, most taxpayers are ready (more than 50% of individual tax returns are prepared by third parties using computers and most businesses use computers), and

the computer industry is ready.

TRANSITIONING FROM A PAPER-BASED DATA CAPTURE SYSTEM TO AN ELECTRONICRICH SYSTEM

As IRS, or any large organization, makes this transition, careful oversight will be

needed to ensure complete success, a success that is both effective and efficient. For

electronic filing to be cost effective for taxpayers, we must ensure the current high

costs of the manual transcription system are truly eliminated as electronic filing increases. As the need for skilled typists decreases, the costs are transferred to the

public, either by the individual entering data on a home personal computer, or by

the tax practitioner or business employee entering data on a computer. In addition,

the costs of accumulating electronic tax returns by electronic transmitters also increase. This eventuality will require some compensation or other incentive to be effective.

As the volume of electronic returns increase, the physical plant (space, machines,

etc.) the IRS needs will decrease. Oversight will be required to ensure that remaining workload doesn’t expand into the vacuum, thereby eliminating the savings.

Before I retired from the IRS, I was responsible for the operation of the 10 service

centers. Among other things, the service centers receive, perfect, and process all the

tax returns and documents received by IRS. My budget was about 26% of the total

IRS operating budget. Of that, over half was spent transcribing (converting paper

information to electronic) tax information. In today’s world, that expense can be

eliminated. If the IRS were to receive the bulk of tax information electronically, it

could use its budget for ensuring compliance with tax laws and providing service

to taxpayers.

SUMMARY

The major functions of the IRS need information on all taxpayers, third party

businesses, international, federal, state, and local taxing authorities. This information changes every year and, in some instances, almost daily. This massive undertaking is what the modernization effort should be about.

The only feasible way to enable IRS to receive, validate and manipulate this data

is through electronic filing. The data exists in electronic format in taxpayers, businesses, and governmental files. To continue to convert these electronic files to printed paper format, send to IRS, and have IRS scan, transcribe or otherwise convert

it back to electronic format is, at best, time wasting and very costly. In addition,

since there will never be enough funding to convert all the paper, the IRS will not

be able to accomplish its mission.

The IRS needs access to vast amounts of data, and we all should encourage using

the most cost effective and data rich system available. It is my opinion that the use

of electronic filing is the only way to meet that goal.

Thank you.

Chairman J

Mr. Harris.

OHNSON. Thank you very much, Mr. Carver.

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86

STATEMENT OF ROGER HARRIS, VICE CHAIRMAN, FEDERAL

TAXATION COMMITTEE, NATIONAL SOCIETY OF ACCOUNTANTS

Mr. HARRIS. Good afternoon, Madam Chairman. Thanks for the

opportunity to be back here today, speaking on electronic filing. My

name is Roger Harris, and I am vice chairman of the Federal Tax

Committee of the National Society of Accountants. NSA represents

over 16,000 independent accountants, who provide accounting,

business planning and tax preparation services, to an estimated 4

million individuals with small businesses.

According to a recent survey of our membership, nearly 90 percent of our members have and use computers for accounting and

tax preparation services. However, only 22 percent of the returns

that are eligible to be filed electronically by our members are actually filed electronically.

I also am president of Pagent Business Services. We have been

providing accounting services to small business for over 30 years.

Our 400 franchises prepare hundreds of thousands of tax returns,

and yet only 5 percent of our franchises currently file returns electronically.

I think these numbers indicate that we are the group of people

who need to be motivated if the 80-percent goal of electronic filed

tax returns is to be reached. Most of the returns that we prepare

are prepared by computer, but they are printed out on paper,

mailed in, and then ultimately put back into a computer by IRS

personnel. Clearly in the interest of saving both time and money

the IRS would rather see these returns transmitted electronically.

However, many practitioners currently refuse, for many reasons, to

embrace the electronic filing program. To make this program successful, the IRS needs to enlist the support of the practitioner community by addressing all the reasons that they are currently staying away from electronic filing.

The National Society of Accountants and Pagent Business Services both support the underlying goals of the electronic filing provision of H.R. 2292. We applaud the approach taken in the legislation of letting the marketplace become the engine for the future

growth.

I think we all learned from the EFTPS Program, that even a

good program does not work well and is not well accepted when it

is mandated. We support the measures that you have initiated,

such as the elimination of the 8453, the current signature form,

until a truly digital system can be developed. Perhaps a checkoff

box on electronic returns, enabling taxpayers to authorize the preparation of electronically filed returns to communicate with the IRS.

The regulation of all preparers of paper, electronic and information returns; and the creation of a procedure, allowing for practitioners to transmit statements and schedules to make the filing of

more difficult returns possible. These measures do in fact address

some of the concerns practitioners have.

Other measures, such as extending the deadline to May 15, will

also cause some practitioners and some taxpayers to embrace electronic filing. But it will not, in and of itself, move us near the 80-

percent goal.
87

It also creates a potential problem that we are not clear the legislation addresses, such as, on April 15 our taxpayers are faced

with the decision to file electronically by May 15 and therefore give

up their opportunity to file an extension. If this is the choice then

many of them will opt for the extension and will choose not to file

electronically, because they only have 30 days to make that decision.

We also strongly support the implementation of the Electronic

Commerce Advisory Group, consisting of representatives from the

tax practitioner, preparer, and computerized tax processor communities. We view this group as an essential component of any strategy designed to foster growth in the use of electronically filed returns. We do, however, recommend two additional ways to

strengthen the effectiveness of this group.

The first recommendation is for small business representation on

this group. The current legislation provides for the panel to receive

input solely from tax practitioners and elements of the electronic

filing industry, and none from the average small business owner.

Because our membership and our clients are both small business,

we would emphasize that small business input, in the early stages,

of any new electronic filing program would be valuable. And such

input would allow the IRS to gain insight, and perhaps avoid some

of the problems that we saw with EFTPS.

A second recommendation is that the IRS should be encouraged

to get out of the box thinking in this group. Look for ways to solve

these problems. For it to be widely accepted electronic filing must

benefit practitioners, taxpayers, and small business as well as the

IRS. Creating this type of environment requires that the ECAG be

empowered to think creatively and outside the current paradigms.

While our members recognize that electronic transmission of return will be savings to the IRS——

Chairman JOHNSON. I am sorry to interrupt you, Mr. Harris. We

only have 3 minutes left on this vote. I thought we had a little

more time left. It would be better if you wrapped up when you

came back. Save your conclusion. We will be back in about 6 or 7

minutes.

[Recess.]

Mr. HARRIS. NFA’s members recognize that the electronic transmission of returns will bring savings to the IRS, but they are also

asking what advantage would they gain by becoming electronic

transmitters. Practitioners have the ability to move large numbers

of tax return filers into the electronic world. We talk to our clients

throughout the year and have an ongoing relationship with them.

I believe a practitioner has greater influence over the client and

recommending electronic filing as the preferred method than any

marketing campaign, regardless of its focus. But practitioners are

first and foremost business men and women. Any change in their

operating procedure must have a valid business reason. If the IRS

can develop a plan for electronic filing that saves practitioners either time, money or both, practitioners can then deliver to the Internal Revenue Service millions of electronically filed returns.

The IRS should give serious consideration to adopting a multilevel marketing campaign, focusing on incentives for practitioners
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as well as individuals. In this way the goal of 80 percent I believe

can easily be reached in 10 years.

While H.R. 2292 moves in a significant direction toward an improved electronic environment, more needs to be done to address

the many reasons practitioners are reluctant to file electronically,

such as registration procedures for return originators and electronic filing compliance visitation. These problems that impede

practitioners’ use of electronic methods must be worked out in a

way that is mutually satisfactory to both the IRS and the practitioner community.

In conclusion, I would like to emphasize NSA support for the proposed improvements in the electronic filing program. Over the next

10 years we will encounter opportunities that we cannot even envision today. By thinking creatively and working in partnership with

the IRS, we hope to contribute to the development of an electronic

filing program that is mutually beneficial to all parties involved.

We thank you for the opportunity to be here today, and look forward to answering any questions that you may have.

[The prepared statement follows:]

Statement of Roger Harris, Vice Chairman, Federal Taxation Committee,

National Society of Accountants

The National Society of Accountants (NSA) is pleased to testify on H.R. 2292, The

Internal Revenue Service Restructuring and Reform Act of 1997. NSA commends

Representative Rob Portman and Benjamin Cardin for introducing H.R. 2292. The

legislation, modeled on the recommendations found in the report of the National

Commission on Restructuring the IRS, greatly elevates the prospects for modernization, improvement in agency efficiency, and enhancement of taxpayer services.

The National Society of Accountants is an individual membership organization

representing approximately 16,000 practicing accountants located throughout the

United States. NSA members are for the most part either sole practitioners or partners in moderately-sized public accounting firms who provide accounting, tax return

preparation, representation before the Internal Revenue Service, tax planning, financial planning and managerial advisory services to an estimated four million individual and small business clients. The members of NSA are pledged to a strict code

of professional ethics and rules of professional conduct. As our members serve a sizable small business constituency, NSA is in a unique position to address the impact

of electronic filing both upon tax practitioners as well as individual taxpayers.

ELECTRONIC FILING

Overview of Electronic Filing

The National Society supports the underlying goals of the electronic filing provisions of H.R. 2292. Most practitioners use a computer to prepare tax returns; however, instead of electronically transmitting the information directly to the IRS, many

of those practitioners print out paper returns which are mailed to IRS where it is

re-keyed into another computer. One of the keys to the success of the electronic filing program is to entice the practitioner community to embrace electronic tax information transmission.

The bill, while not mandating electronic filing, sets a goal that 80 percent of all

returns filed by the year 2007 be filed electronically. Of significant note, the bill

sponsors rejected a proposal requiring preparers by the year 2004 to file returns

only electronically. By rejecting the urge to mandate the electronic filing of tax returns, Congress and the IRS are likely to avoid many of the perception problems

which have impeded implementation of the Electronic Federal Tax Deposit System

(EFTPS) over the last two years.

The EFTPS system is an excellent program and NSA supports its full implementation. Nevertheless, the fact that EFTPS is largely a mandatory system has resulted in resistance and perhaps hostility toward the program by some small business persons and practitioners. The drafters of H.R. 2292 have chosen the wiser

course of letting the market place become the engine for the future growth in the

overall electronic filing program rather than by mandating it.
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Under the legislation, the IRS is required to develop within 180 days of enactment a plan ‘‘to eliminate barriers, provide incentives, and use competitive market forces

to increase electronic filing gradually over the next 10 years...’’ To facilitate development and implementation of the plan, the bill requires the IRS to establish an Electronic Commerce Advisory Group to receive input from the private sector. The IRS

also is required to implement procedures for providing incentive payments to transmitters of electronically filed returns, incentives which would be based on the fair

market value of costs associated with electronically transmitted returns. The National Society views the overall thrust of the requirement—that the IRS develop a plan to spur growth in the use of electronic filing—as being very positive.

We hope that this plan will be responsive to many of the concerns practitioners have

had with utilization of electronic filing in the past. According to previous surveys

of our membership only about 35 percent of NSA members transmit electronic returns on behalf of their clients. In this connection, tax practitioners who prepare

complex returns are the least apt to use electronic filing. The IRS’ electronic filing

program to date has focused principally on the filing of simple returns by taxpayers

expecting a refund. H.R. 2292 clearly attempts to rectify these problems by making

significant attempts to reach out to the practitioner community. We support this

and look forward to being of assistance to the government in making the system

work as it should.

Checkoff Box and Regulation of Preparers

The National Society also is in complete support of the conceptual provisions of H.R. 2292 relative to a checkoff box on electronic returns and the initiative to regulate all preparers of paper, electronic tax, and information returns. Under the legislation’s checkoff provision, the IRS is required to establish procedures enabling taxpayers to authorize the preparer of electronically filed returns to communicate with

the IRS on matters concerning such returns. According to the National Commission report, uniform requirements of these kinds ‘‘will increase professionalism, encourage continuing education, improve ethics, and better enable the IRS to prevent unscrupulous tax preparers from operating.’’ We consider the goals meritorious and concur in them. However, in the case

of the checkoff box provision, we strongly recommend that the provision be extended

to cover all types of returns, whether filed by paper or electronically. The same principles and goals underlying the checkoff for paperless returns also apply to paper

returns.

Electronic Commerce Advisory Committee

As stated above, the legislation requires the IRS to convene an Electronic Com- merce Advisory Group (ECAG). It further requires that the panel include representatives from the ‘‘tax practitioner, preparer, and computerized tax processor communities and other representatives from the electronic filing industry.’’ We strongly

support implementation of this electronic advisory group. NSA views the group as

an essential component of any strategy designed to foster growth in the use of electronically filed tax returns.

The National Society recommends one additional way to strengthen the effectiveness of the Electronic Commerce Advisory Committee. The current legislation provides for the panel to receive input solely from tax professionals and elements of

the electronic filing industry, and none from the average taxpayer or business establishment. We suggest that the panel also include small business representation. By

including small business input at the early stages of development of any ‘‘new’’ electronic filing program, the IRS will gain additional insight and might avoid some of

the public relations mistakes the agency has made with respect to its electronic return programs, such as the implementation of EFTPS.

NSA views the ECAG as a vehicle where practitioners can work with the IRS in

developing an electronic system they can enthusiastically adopt, allowing IRS to

reach its goal of 80% electronic returns by the year 2007. While NSA’s members recognize that electronic transmission of returns will bring savings to IRS, they also

ask what advantage they would gain by becoming electronic transmitters. Practitioners have the ability to move large numbers of complex return filers into an electronic environment. A practitioner has greater influence over his client in recommending electronic filing as ‘‘the preferred method’’ of filing than any marketing

campaign regardless of its focus. But practitioners are first and foremost businessmen and women. Any change in their operating procedures must have a valid business reason. We hope the ECAG will serve as a means to develop incentives to encourage practitioners to switch to electronic means, as well as a platform for discussion and solution of remaining problem areas that inhibit practitioner participation

in electronic programs.
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Extension of the Due Date for Electronically Filed Tax Returns

For the purpose of ‘‘encouraging’’ more persons to file returns electronically, H.R.

2292 provides taxpayers with an additional month to file income tax returns if such

returns are filed electronically. This change in the due date involves electronically

filed tax returns for individuals, corporations, partnerships, and other information

returns. Payers would still be required by the legislation to provide information returns to payees by January 31.

The National Society recognizes the Restructuring Commission made the recommendation to realign the due dates in order to simplify return processing and to

foster paperless filing. NSA has not had a chance to poll our membership regarding

their position on the extension of due dates for electronically filed returns. Nevertheless, should this provision become law, NSA urges caution against granting taxpayers only a one month extension for choosing an electronic filing method at the

expense of the current automatic four-month extension available to all filers.

Procedures for Facilitating Truly Paperless Electronic Filing

For purposes of facilitating truly paperless electronic filing, H.R. 2292 requires

the IRS to develop procedures for the acceptance of digital signatures. Until the IRS

develops a method for acceptance of digital signatures, the bill mandates that the

IRS accept electronic filed returns without signatures as long as the taxpayer retains a signed copy of the original until the expiration of the applicable statute of

limitations.

The National Society supports the elimination of Form 8453, the current signature form for electronic returns. We believe this not only will help expedite the filing

process for practitioners, but will eliminate a step in such process that practitioners

have found daunting. Consequently, this would be a positive step in enhancing electronic filing.

NSA urges the IRS to closely consult with tax practitioners before implementing

any procedures under electronic filing requiring the taxpayer to retain copies of

signed returns. We are concerned that to the extent this requirement is not implemented properly and carefully, it may increase the professional liability exposure of

return preparers, thereby negating any real prospects for spurring the use of electronic filing overall.

Under the legislation, the IRS also is required to establish procedures to receive

explanatory statements or schedules in electronic form for the purpose of eliminating the need for paper statements or schedules. We believe this is a positive provision, one which is designed to facilitate the filing of complex tax returns electronically.

Availability of Credit Cards For Payment of Taxes

H.R. 2292 authorizes the IRS to accept payment of taxes by commercially acceptable means, including credit cards. While the National Society is supportive of this

provision, we do raise two issues relative to a taxpayer using a credit card to pay

taxes. This first issue concerns bankruptcy. Currently, credit card debt is treated

as an unsecured debt dischargeable in bankruptcy proceedings, while income tax liability attributable to a tax return due within three years prior to the bankruptcy

filing may not be discharged. It is conceivable that unpaid taxes charged on a credit

card would be treated differently from taxes that were simply not paid. The second

issue concerns the cost of processing the credit card payments, usually borne by the

merchant offering a credit card payment option. Although the bill prohibits passing

those costs on to taxpayers, the question remains as to who will bear the processing

costs for credit card payments of income taxes. It is NSA’s recommendation that the

protective language of the bill be very clear so that ultimately the costs not be

passed back to the taxpayer using the credit card payment option.

IRS Electronic Filer Visitations

While not contained in H.R. 2292, NSA is concerned about a practice used by the

IRS in recent years as a means to address potential fraud problems in the electronic

filing program. We realize that the Service must take steps to limit abuse of the

system. Our members have expressed concern that draconian efforts to stop fraudulent practitioners may hamper the ability of honest practitioners to conduct their

practices during busy season. This is at variance with the enhancement of the electronic program.

An example of this problem is a procedure known as an ‘‘electronic filing compliance visitation.’’ During a compliance visitation, Service personnel come into the

practitioner’s office—often unannounced—to review the signature documents and

W–2 forms the practitioner is required to keep on file and review security measures
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regarding the use of the electronic filing identification number (EFIN). After initially performing all visits unannounced, the Service improved the visitations by

scheduling appointments with practitioners where no suspicion of criminal activity

exists. The past filing season was relatively uneventful in this respect; however,

practitioners remain concerned about the electronic filing compliance checks that

have caused problems in past years. NSA understands the reasons for conducting these checks and acknowledges the need to perform them unannounced in certain circumstances. What we must emphasize is that practitioners are already ‘‘swamped’’ at the time of year the visitations

have taken place. Consequently, the intrusion must be kept to a minimum. It often

creates an unfavorable impression with tax clients who are waiting to have their

tax interview. Further, the interviews must be delayed by the practitioner who is

constrained to take time out to meet with Internal Revenue employees from Collection, Examination, and/or the Criminal Investigation Divisions. The Service achieves

the goal of completing a compliance check at the expense of another valued goal,

i.e. promoting goodwill and open communication between the Service and electronic

filers. If the House Ways and Means Committee is interested in investigating additional impediments to the growth and expansion of the electronic filing program, the

National Society recommends that the Committee review the IRS’ use of electronic

filer visitation checks. We believe that the visitation program is a significant deterrent to the electronic filing program.

THE IRS MANAGEMENT STRUCTURE

Internal Revenue Service Oversight Board

NSA knows that the House Ways and Means Committee is well aware of the na- tional press surrounding the provision found in H.R. 2292 regarding an independent

Internal Revenue Service Oversight Board. We believe an independent Oversight

Board is one of the legislation’s most important contributions to the issue of making

the IRS a more customer service oriented agency. An independent Oversight Board

has the potential of affording the IRS the opportunity to take an objective look at

the agency’s procedures and programs—as well as creating a real opportunity for

overcoming problems concerning them. The legislation calls for the establishment of a 9 member Oversight Board, two of whom are to be the Secretary of the Treasury (or the Deputy Secretary) and a

representative of the IRS employees union. Under the bill, the other 7 Board members will be appointed on the basis of their professional experience and expertise

in the areas of management of large service organizations, customer service, compliance, information technology, organization development, and the needs and concerns

of taxpayers. H.R. 2292 provides that all members of the Board may be removed

at the will of the President of the United States.

The National Society believes the independent Oversight Board will contribute to the agency’s ability to achieve a higher level of customer service. An emphasis on

customer service as part of IRS’ mission statement is what NSA believes is needed

to significantly improve the federal tax administration process. NSA’s 16,000 members and 4 million individual and small business clients salute the emphasis of H.R.

2292 on improved customer service. In connection with the Oversight Board, we

have a recommendation we believe is important.

Small Business Representation on the IRS Oversight Board

NSA believes that the frustrations of small taxpayers and small business persons

played a critical role in the reasons for formation of the IRS Restructuring Commission. All of us have heard the stories of small business people working 60 to 80

hours a week in their business. Small business persons are notorious for wearing

many hats in the firm. They are the firm’s salespeople, marketing agents, bill collectors, and service providers. At the same time, they must comply with complicated

federal tax laws and regulations. Because a small business owner is often a jackof-all-trades yet master of none, he will simply pay an assessed tax penalty rather

than take time away from the business to fight it. In many cases, a small business

person who lacks resources available to larger corporations often pays—proportionately—a greater level of tax penalties than large businesses. Large business establishments are better able to afford and contest a tax matter as opposed to the average small business person.

NSA’s membership consists of small business owners who provide accounting

services for a small business clientele. Our experience in this respect leads us to

strongly recommend that final legislation include small business representation on

the IRS Oversight Board. H.R. 2292 already mandates that large businesses be represented on the Oversight Board as reflected by a requirement that Board members
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have professional experience and expertise in the area (among others) of ‘‘management of large service organizations.’’ Small business must be provided with direct

representation on the Board as well. Small business has been described as the engine that drives our economy. Without representation on the Oversight Board by

small business, there might not be input from a key and critical constituent group.

We believe small business representation on the Oversight Board is the best way

to ensure that the needs and concerns of all taxpayers are heard.

Office of IRS Commissioner

NSA supports the establishment of a five-year appointment for the Commissioner of Internal Revenue position. We also support the provisions of the legislation giving

the Commissioner greater flexibility in the hiring, firing, and salary decisions involved with IRS’ senior management. H.R. 2292 states that the appointment of the Commissioner ‘‘shall be made on the

basis of demonstrated ability in management and without regard to political affiliation or activity.’’ The National Society supports and appreciates the legislative intent underlying this particular sentence of the legislation. The legislation strives to

ensure that any new Commissioner has the capacity and expertise to manage a

large establishment or entity—in a similar fashion to a chief executive officer (CEO)

managing and running a Fortune 500 company. Nevertheless, we believe that safeguards be built into the legislation in order for any new Commissioner to recognize

the unique needs of small taxpayers and small businesses. Thus, NSA recommends

that the final legislation (or report language) stress the need for the Commissioner

to focus on the needs of small business and meet on a regular basis with representatives of the small business community and those who serve it.

CUSTOMER SERVICE

Overview of Customer Service

One of the major objectives of the National Commission’s report and of the legisla- tion is to enhance the level of customer service provided by the IRS. The tax practitioner community is an important stakeholder relative to customer service. A great

number of taxpayers deal with the IRS through their representatives. Consequently,

they experience IRS customer services at all levels, from telephone contacts through

examinations, collections, and appeals. Based on their repeated and varied contacts

with the IRS, practitioners have a unique perspective on customer service.

The legislation emphasizes the concept of customer service over compliance. This is unlike the traditional public view that the IRS’ main mission is tax compliance,

i.e. audits and collections. While the importance of compliance obviously is clear,

NSA agrees that the service component should be the primary engine which drives

the agency’s mission. We believe that a customer service oriented mission will bring

out the best in all who deal with the tax system. This is what the public wants,

and it is what we believe IRS employees want as well. There should be improvement in all aspects of IRS’ customer service. For example,

from the public’s perspective, the front lines in IRS customer service is their principal experience when dealing with an IRS representative on the telephone. The

quality of the IRS’ telephone systems, as well as the way in which the IRS employees answer the telephone, has shown substantial improvement in recent years. Nevertheless, the IRS telephone system and customer relations process continue to cry

out for further and dramatic improvement.

The proper training of IRS employees and providing them with technology are important keys to quality customer service. The Commission’s report strives to portray

IRS employees as competent, hard-working employees who want nothing more than

to deliver the highest quality in service to the public. In order to turn around the

supertanker we call the IRS, there needs to be a change in the Service’s management structure along the principles described above. This includes better training

of IRS employees. They also need to be provided with more of the basic technology

tools of the 1990s, tools which NSA’s members often take for granted. This includes

providing employees with more fax machines, copiers, and computers. Such tools

should be at a level to take them into the next millennium.

Office of Taxpayer Advocate

The National Society commends the sponsors of H.R. 2292 for providing for certain meaningful improvements in the office of Taxpayer Advocate. We view this provision as being critical in improving IRS customer service. It must be stated at the

outset that the Service’s problem resolution program is viewed by NSA membership

as viable and deserving of high marks. Nothing should be done to diminish its availability.
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The legislation builds on the beneficial customer service provisions found in the

Taxpayer Bill of Rights II (P.L. 104–168). The Taxpayer Bill of Rights II (TBORII)

established the office of Taxpayer Advocate within the Internal Revenue Service. It

empowered the Advocate to resolve individual taxpayer problems, to analyze problems of the tax system, to propose legislative and administrative solutions to those

problems, and to report to Congress on the operations of the Advocate’s office. Moreover, TBORII gave the Advocate broad authority to take any action as permitted

by law with respect to taxpayers who would otherwise suffer a significant hardship

as the result of IRS action.

In testimony earlier this year, NSA stated that in order for the Taxpayer Advocate to be successful, he or she must possess an intimate knowledge of the functioning of the IRS. This knowledge is best gained from years of experience within the

Service. At the same time, we also stated that in order to truly be the taxpayer’s

advocate, this individual must be willing to question, publicly as well as internally,

the functioning of the very agency to which his or her career has been devoted.

NSA believes H.R. 2292 strikes the right balance in ensuring that the Taxpayer

Advocate is successful in his job within the IRS. The legislation provides that the

Taxpayer Advocate will be appointed by and report directly to the Commissioner of

Internal Revenue, with the approval of the Internal Revenue Service Oversight

Board. H.R. 2292 also provides that the Advocate must have substantial experience

representing taxpayers before the Internal Revenue Service or with taxpayer rights

issues. For a person who becomes the Advocate, but one who has worked for a significant period of time for the IRS previously, the legislation requires that the Advocate agree not to accept any employment with the IRS for at least 5 years after

ceasing to be the Taxpayer Advocate.

From a positive perspective, we believe H.R. 2292 is carefully crafted in that taxpayers are not foreclosed from benefitting from the appointment of a Taxpayer Advocate who may happen to have the experience and insight of an IRS veteran. Ironically, the IRS veteran may in fact be the person best situated to ‘‘fill the shoes’’

of the Taxpayer Advocate. By requiring that any IRS veteran interested in the Taxpayer Advocate take an oath that he or she will not work for the IRS for at least

5 years after leaving the Advocate post, the legislation has taken critical steps to

ensure that the Advocate is willing and able to report openly about potentially sensitive issues within the IRS.

H.R. 2292 broadens the scope of the Taxpayer Advocate’s annual report to identify

areas of the tax law that impose significant compliance burdens on taxpayers or the

IRS. In addition, the scope of the report must identify—in conjunction with the National Director of Appeals—the 10 most litigated issues for each category of taxpayers with recommendations for mitigating such disputes. The legislation also

makes certain improvements in the selection process, geographic allocation, and career opportunities of problem resolution officers. NSA strongly supports these improvements. We particularly support the requirement that the Advocate take steps

to ensure that local telephone numbers for the problem resolution officers be published and made available to taxpayers.

Performance Awards

H.R. 2292 requires the IRS to establish a performance management system that

covers all IRS employees, with the exception of members of the IRS Governance

Board, the Commissioner, and the Chief Counsel. As part of this performance management system, the bill generally gives the IRS flexibility in granting awards to

employees. More specifically, the legislation provides that ‘‘A cash award...may not

be based solely on tax enforcement results.’’ While this particular sentence appears

to be well intentioned, the National Society believes that the sentence could be misconstrued to authorize IRS officials to make cash awards to employees principally

on tax enforcement results.

NSA believes that the legislation’s criteria for cash awards should be redrafted

to highlight the point that customer service should be considered an important determinative factor with respect to any determination to make a cash award to an

IRS employee. Tax enforcement should be considered as only one factor in a determination of making a cash award to such employee. We believe this change in the

bill’s language is consistent with the spirit of the IRS Restructuring Commission report encouraging the IRS to place greater reliance on customer service and less on

enforcement. We believe this kind of change in the bill’s language is good for tax

compliance and for taxpayers as well.
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TAXPAYER PROTECTION RIGHTS

The National Society is very supportive of the provisions contained in Title III of H.R. 2292 which are designed to expand and protect taxpayer rights. The following

taxpayer rights measures are considered some of the more significant provisions

from the perspective of NSA’s membership.

Expansion of the Authority to Issue Taxpayer Assistance Orders

In order for a problem resolution officer (PRO) to issue a Taxpayer Assistance Order under current law, the PRO must determine whether the taxpayer is suffering or is about to suffer a significant hardship. If a significant hardship is deemed

to exist, then the PRO makes a determination as to whether the IRS action warrants being changed. The tax regulations define a significant hardship as meaning

a serious deprivation caused or about to be caused to the taxpayer as a result of

IRS administration of the tax law.

H.R. 2292 modifies the current definition of significant hardship by requiring the

Taxpayer Advocate to consider whether IRS employees followed applicable administrative guidance (including the Internal Revenue Manual); whether there is an immediate threat of adverse action; whether there has been a delay of more than 30

days in resolving taxpayer account problems; and whether the taxpayer will have

to pay significant professional fees for representation. NSA considers these to be

positive modifications which should help resolve a taxpayer’s problems in a reasonable and constructive fashion.

Offers in Compromise

The legislation provides for the IRS to develop and publish schedules of national

and local allowances to ensure that taxpayers entering into a compromise can provide for basic living expenses. While we feel this provision attempts to address a

real problem underlying the IRS collection process, we are concerned that the provision (as currently drafted) does not provide any practical relief to taxpayers.

NSA members believe that the current allowable expense standards for Offers in

Compromise and Installment Agreements are inconsistent with the real cost of living for families. Practitioners have informed NSA about their concerns that the expense standards do not adequately compensate for such factors as family size, housing and utility allowances, and the cost of car ownership. With respect to the Offer

in Compromise process, these practitioners also are concerned that IRS Revenue Officers are principally using the expense standards as strict rules as opposed to general guidance.

The National Society believes guidance should be given to IRS collection personnel

that they are authorized to make exceptions with respect to a taxpayer’s expenses

under an Offer in Compromise, particularly when a reasonable basis exists relative

to the taxpayer’s state of health or his or her ability to generate income. Further,

IRS Revenue Officers should be given the authority to weigh available options for

achieving the most desirable result. Often taxpayers who cannot negotiate an Offer

in Compromise simply file bankruptcy, causing the IRS to recover even less than

if the taxpayer’s offer had been accepted.

We also feel that there must be consistency throughout the nation for the program. The internal cultural change concerning Offers in Compromise has made this

difficult to achieve. More training and oversight are positive ways to accomplish

this. We encourage these steps.

Problems with Interest and Penalties

The bill makes a number of positive changes in the law with respect to interest

and penalties. First, the bill eliminates the differential in the interest rates for overpayments and underpayments ‘‘in a revenue neutral manner.’’ Second, the bill tolls

the application of the failure to pay penalty while a taxpayer is making payments

under an IRS installment agreement. Third, the legislation establishes procedures

for a safe harbor for taxpayers to qualify for an installment agreement should the

outstanding tax liability be under $10,000. While NSA understands that the installment agreement provision is drafted as a safe harbor, we recommend that the legislative report language be drafted to declare that the provision does not in any way

restrict other available settlement options with the IRS collection division, including

other available options to obtain an installment agreement. NSA commends the bill

sponsors for including these pro-taxpayer measures as part of the legislation.

Other Pro-Taxpayer Initiatives

H.R. 2292 includes a number of positive provisions to enable taxpayers to recover

certain costs and fees when they prevail and the position of the IRS was not sub-
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stantially justified. Other positive, pro-taxpayer provisions in the legislation include

grants for the development, expansion, or continuation of qualified low income taxpayer clinics, certain modifications with respect to the U.S. Tax Court’s jurisdiction,

and procedures for cataloguing and reviewing taxpayer complaints regarding the

misconduct of IRS employees.

Tax Penalty Reform

NSA is very supportive of the provision mandating a study by the Taxpayer Advo- cate on tax penalties by July 30, 1998. The legislation calls for the Advocate to review the administration and implementation of penalty reform recommendations

made by Congress in 1989, including legislative and administrative recommendations to simplify penalty administration and reduce taxpayer burden. NSA believes that tax penalty reform should become the next serious phase of IRS restructuring. Moreover, we strongly recommend the bill be clarified so that the Advocate is required to review the extent to which the federal government relies on

tax penalties for revenue raising purposes.

Removal of Preparer’s Social Security Number from Tax Returns

The practitioner community is becoming increasingly concerned about the require- ment that a paid preparer’s Social Security number must appear on returns. Currently, practitioners are required to include their Social Security number on every

return they prepare for a fee. Revenue Ruling 79–243 states that under Section

6109(a)(4) of the Internal Revenue Code, ‘‘any return or claim for refund prepared

by an income tax return preparer must bear the identifying number of the preparer,

the preparer’s employer, or both ...(and) that the identifying number of an individual

shall be the individual’s Social Security number.’’ Revenue Ruling 78–317 gives

some relief by stating that ‘‘an income tax return preparer is not required to sign

and affix an identification number to the taxpayers copy of a federal income tax return,’’ being required only to affix his Social Security number to the copy of the tax

return that is filed with the Internal Revenue Service.

In today’s world of instant access to volumes of sensitive information about an individual, including even credit reports accessible over the Internet, practitioners understandably are very concerned that their Social Security number could be the key

to unauthorized release of their own sensitive financial information. NSA’s members

feel that the requirement they include their Social Security number on returns violates their privacy, as it could provide a possibly unscrupulous taxpayer with the

opportunity to access certain records that otherwise would not be available. Once

the taxpayer leaves the practitioner’s office, there is no guarantee that he will immediately file the original copy of the tax return with the IRS, without first making

additional copies. There is always the possibility those copies could end up in an

undesirable location. As part of the House Ways and Means Committee’s deliberations on H.R. 2292, NSA suggests that the Committee review this requirement with

the Internal Revenue Service and recommend development of a separate system for

identifying tax practitioners.

In conclusion, the National Society of Accountants supports the legislation restructuring the Internal Revenue Service and applauds the Subcommittee for addressing the important issue of electronic filing of tax returns. Thank you for the

opportunity to contribute to this effort.

Chairman J

Mr. Lane.

OHNSON. Thank you, Mr. Harris.

f

STATEMENT OF JOSEPH F. LANE, ENROLLED AGENT,

NATIONAL ASSOCIATION OF ENROLLED AGENTS

Mr. LANE. Thank you, Madam Chairman. The NAEA testified

five times before the National Commission on Restructuring, and

provided testimony written for the record for a sixth hearing. We

support entirely the report of the Commission. We believe that

some of the most far-reaching and innovative suggestions are included in its electronic filing package. We are here today to testify

on the specifics. I think the Commission has had a dramatic impact

on forcing the Service to try to confront some of the issues and
96

problems that have been raised to them by practitioner groups and

taxpayer groups, and the data processing industry over the last

several years. I have to say, we have been critical of the Service

in the past for not providing the kind of management we would like

to see in the Electronic Tax Administration arena. I think as a direct result of the Commission, we now see things like the appointment of Bob Barr, who will be the next Assistant Commissioner for

the Electronic Tax Administration, and that is a very, very significant deviation from what their practice has been in the past, and

we applaud that. I think the Service is starting to learn its lesson,

and starting to focus on the need to broaden the amount of input

they are getting, and to be more inclusive in their decisionmaking

process. We urge them to continue that effort.

We also believe their blueprint for implementing the modernization of the data systems will take into account the views of the people represented at this table, and the other people in the practitioner community, to a far greater degree than they would have

had the Commission not been present.

Some of the discussion that happened this morning about whether or not it should be the year 1999 or 2000 before some of these

considerations get online is of concern to us as well. One of the concerns that we have about this request for proposals going out, is

the time delay it builds in just because of the process that has been

involved.

We are not talking rocket science here. There are a lot of suggestions that everybody already knows as a result of a year’s worth

of Commission testimony, that the IRS could implement tomorrow

to increase significantly the number of electronically filed returns

in the 1998 filing season. I think we ought to take a look at what

is submitted in the proposal process, and maybe the Subcommittee

could urge them to go out front a little more on some suggestions;

liberalize some of the provisions that we are talking about here

today, and have it affect next tax season.

We outline in our written statement some specific programs

which we proposed to IRS 11⁄2 years ago, which had they followed

would have resulted in about 1,800 additional practitioners from

our organization filing electronically this past filing season. I think

the Service needs to pay attention to that.

We support, without reservation, the establishment of an electronic commerce advisory group. We think that E–CAG will be the

focal point for IRS and industry communication, and help the guidance and direction of the Service in its efforts to establish a

paperless filing system.

We also think that the Commission recommendations are a continuously woven cloth. We have had some criticism today, and

some attention paid to the different pieces of whether or not

balance-due taxpayers will be attracted by it, an extension of the

filing date, and whether or not we should offer incentives. I think

each one of these things has brought out a certain percentage. In

order to get to the 80 percent, we need to attract a certain percent

of taxpayers who are motivated by different realities. And I think

the Commission’s recommendations, when they are considered as a

whole, accomplish that. It is important not to try to pick and

choose which one of these provisions you want to throw out or keep
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in. I think as an experiment it makes sense to just bring the whole

package forward, because it is, as we see it, a continuously woven

cloth.

Particularly important, I think, is an indication of some of the

testimony we had today from Treasury. It reminds me of a story

when I worked here in the IRS National Office in 1972. I had a

meeting scheduled with someone at Treasury, and I spoke to him

the day before and confirmed the meeting for 2 the next afternoon.

I had to call the following morning to talk about something, and

his secretary said to me, ‘‘Oh, he is in Red China.’’ This was about

1 month before Kissinger and everybody else had gone to China,

so it was all on the news here, and everybody was saying, ‘‘Wow,

China.’’

And I said, ‘‘Well, I guess then we will postpone the meeting

until he gets back.’’ And she said, ‘‘No, he will be back at 2 for your

meeting.’’ I said, ‘‘Wait 1 minute, he was in the office yesterday

when I spoke to him, and he is in Red China this morning, and

he will be back this afternoon?’’ And she laughed and said, ‘‘You

do not realize; I forget you do not work here. That is what we call

the IRS.’’

And I said, ‘‘Why do you call IRS Red China?’’ And they said,

‘‘Because it is big; it is huge; it is full of people, and nobody knows

what goes on over there.’’

I think it was pretty obvious this morning. Maybe we should

have a reorganization of the Treasury Department next after we

finish this reorganization of the IRS, because they are not bringing

the innovative ideas to the table that we are talking about. When

they start to say that we cannot consider incentives, and we cannot

consider extensions of the filing season, I bet you if you go back

into the memorable notes of this Subcommittee, back in the thirties

and forties, when we had a March 15 filing date, and we changed

it to April 15, you had the same testimony from the Treasury Department you had this meeting, about moving it to May 15. So I

think if you go back into your records you are going to find the

same objections.

I was really concerned about the lack of responsiveness on the

part of Treasury. I believe that the IRS people are being forced into

a situation where they have to sort of go along with that because

that is their boss, but we are not happy about that.

I think the 80-percent goal in the next 10 years is imminently

achievable. We got to the moon in less time. Why they object to

having specific goals and percentages is beyond comprehension to

me. I think in any business you cannot get anywhere without setting a firm goal and shooting for it. And if we wind up going all

the way down the track, and committing ourselves to that goal, and

we only achieve 75 percent, I do not think that is a failure; I think

that is a dramatic improvement in what we are doing.

So we support that. And quite frankly, I have to agree with

Roger. I think the 800-pound gorilla in the electronic filing is the

practitioner community. Fifty percent of your volume is with practitioners. If you incentivise the system so practitioners will get onboard with it, it will get you a long way to that 80 percent a lot

sooner than the year 2005. The best way to incentivise that system

is to turn around the attitude of practitioners.
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We polled our members. Over 90 percent of our members prepare

tax returns on computers; only 14 percent of them file electronically. The primary motivation and the primary reason why such a

limited number participate is because of the fact that they cannot

file all tax returns electronically. One of the most expensive things

for practitioners to do, and anybody that is representing a practitioner organization on this panel can confirm this today, is to run

parallel systems in their office. Most practitioners have 300 to 400

clients. They have to hire part-time people for the tax season.

These are not people that come back every year. So when you hire

someone and you teach them a process—here is how you process

a tax return and get it outside of the office—if you have to have

one system for electronically filed returns and one system for paper

returns, you are going to look out and say, Well if only 30 percent

of my returns can be filed electronically, and the other 70 percent

have to be handled on paper, I am not going to do anything electronically.

I am going to set up one system, have one uniform way of processing this stuff so it goes out the door correctly. And if IRS ever

gets around saying they will accept 100 percent, then I will consider switching over. That incentive is going to be the greatest incentive you can give, accepting all tax returns.

The way you motivate practitioners is to motivate taxpayers. And

one of the suggestions we make at the end of our testimony is the

easiest way we know to motivate taxpayers is to use the fear effect

that IRS has on everybody today to your advantage, basically by

changing the statute and saying, that if you file a timely filed return electronically, that your exposure for audit will be 24 months

instead of 36 months, I guarantee you that will motivate taxpayers

to create demand, and what practitioners will serve first before

anything else is client demand.

If a taxpayer comes in to a practitioner and says, I want this

filed electronically, because then IRS only has 24 months to audit

me instead of 36 months, you have a couple of effects right away.

First, practitioners will get onboard. Second, practitioners’ malpractice carriers will get onboard, because they will come back to

the practitioner and say, you are going to tell us why you are not

filing electronically, because we do not want the exposure for another year, if we do not have to have it unnecessarily. And the

other thing quite frankly, if you put the provision in that if the return is filed timely electronically, and there are no mismatches

with your IRP data, your information returns data, it also puts

pressure on the filers of those 1099s and W–2s to get the data

right, because they could leave themselves open to a tort claim

from the taxpayer if they gave wrong information to the Service,

and as a result it kept the statute open another year.

So you perfect your data all the way down the line, and as tax

administrators, the Treasury and the IRS should be willing to accept this, because they can argue they are getting the data in purer

form. They should be able to do a cross-reference much quicker on

the electronically filed data that they are getting from the payers

of the Information Return Program. Quite frankly, you only have

a 1-percent audit rate, so what are you giving away? You really are

not giving away much of anything.
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The other suggestion we would urge the Treasury to consider or

IRS, is to deal with the Federation of Tax Administrators, which

is right here in Washington, which represents the 43 State tax administrators that are around and have income tax programs, and

work out a unique program that allows an electronic filer to file

one tax return to satisfy a State and Federal obligation. That

would definitely attract taxpayers to lower their accounting costs.

They have less tax returns to pay for in terms of preparation costs.

I think if those two things, coupled with the fact that IRS has

to accept all tax return data, all tax schedules, and white paper

schedules, submitted electronically would boost electronic filing.

The interim recommendation in the package is a good one. That

is basically saying that if it cannot be accepted electronically, then

that schedule or paper will be treated as a workpaper that will be

maintained by the accountant and by the taxpayer.

That is a good suggestion, but it is only an interim suggestion.

It cannot be a final suggestion. If it is the final suggestion, what

IRS has done is move the documentation and filing responsibilities

of the service centers into the taxpayer’s offices and the practitioner’s offices, and there is some real concern about that from the

practitioner standpoint, in terms of client-record retention. And

from a taxpayer standpoint—I mean, I cannot tell you how many

times taxpayers call me up at work—I know my clients—and say,

can you send me a copy of last year’s tax return because I lost

mine.

So we cannot rely on taxpayers to maintain their records. And

to have sort of an open-ended liability for practitioners, you will not

get any support on that. So as an interim measure it is a good idea,

but I think basically if the IRS decides it is important enough to

have a form or schedule, and they want the information, then they

ought to be forced to take it electronically.

[The prepared statement and attachments follow:]

Statement of Joseph F. Lane, Enrolled Agent, National Association of

Enrolled Agents

Madame Chair and members of the Oversight Subcommittee, my name is Joseph

F. Lane, EA. I am an Enrolled Agent engaged in private practice in Menlo Park,

California. I am the Chairman of the Government Relations Committee of the National Association of Enrolled Agents and I am pleased to have this opportunity to

present testimony on behalf of NAEA’s over 9,000 Members on the electronic filing

provisions of H.R. 2292. NAEA receives no federal contracts or grants.

As you know, Enrolled Agents are licensed by the Treasury to represent taxpayers

before the Internal Revenue Service. Enrolled Agents were created by legislation

signed into law by President Chester Arthur in 1884 to remedy problems arising

from claims brought to the Treasury after the Civil War. We represent taxpayers

at all administrative levels of the IRS. Since we collectively work with millions of

taxpayers and small businesses each year, Enrolled Agents are truly at the front

lines of tax administration.

Representatives of NAEA testified at five public hearings conducted by the National Commission on Restructuring the IRS and we submitted written testimony

for the record for a sixth hearing. In addition, our National staff attended numerous

informal meetings with Commission staffers and Commissioners. We praise the

work done by the Commission in focusing on constructive ways of improving our tax

administration system and making the IRS more responsive to taxpayer input. Of

all the Commission’s recommendations, we believe those connected with electronic

tax administration are among the most far-reaching and innovative. If adopted, they

will revolutionize the way in which tax practitioners conduct their business in the

next decade and beyond and will have a profound effect on American taxpayers as

well.
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The major focus of the Commission report was that the IRS must become more business-like and must adopt new strategies in handling its work, particularly in

the area of electronic information systems. The Service has begun in the last year

or so some major initiatives to help them reach these objectives. As you know, in past testimony we have been critical of the Service for its lack of dynamic, innovative management in the area of electronic tax administration.

However, we think the Service deserves to be recognized when it begins to transform its decision making process by making it more inclusive. Last year’s executive

appointment of Arthur Gross to be Chief Information Officer and last month’s appointment of Bob Barr to be Assistant Commissioner of Electronic Tax Administration are solid indications that the Service has heard the complaints of taxpayers,

tax practitioners, Congress and data processing professionals and has opened up its

‘‘inner sanctum’’ to outside input. We applaud these moves and encourage many

more efforts to reach out and recruit individuals with the technical and marketing

backgrounds necessary to once again make the Service a significant force in information systems expertise. We believe the recently announced ‘‘blueprint’’ for implementing modernization of IRS data systems will take into account the views of numerous outside stakeholders

to a much more serious degree than past plans. We expect the soon to be issued

Request for Proposals seeking input from the practitioner, tax software and tax publishing industries will further the process of inviting the best minds to the table in

formulating a methodology for enhancing electronic tax administration. For the past two years, the IRS has operated a state of the art web site which makes available forms, publications, regulations, and press releases to anyone who

can access the Internet. This is an extremely important service to taxpayers and

practitioners because it is available 24 hours a day, 7 days a week. IRS is reaching out more substantively to the practitioner community for ideas on how to operate more effectively and efficiently through the Commissioner’s Advisory Group and the Information Reporting Program Advisory Committee as well as

various task forces and focus groups. We especially endorse the establishment of a

unique Electronic Commerce Advisory Group. The proposed E-CAG would serve as

a focal point for IRS-industry communication in this vital area and we believe provide the necessary guidance and direction to the Service’s efforts to move toward

the goal of a paperless filing system by 2005. Given the revitalization of IRS’ Electronic Tax Administration, we would recommend that the E-CAG be located within

the Commissioner’s office and aligned with ETA, rather than placed in Treasury. We have been heartened to hear that IRS wants to put in place as much of the

Commission’s recommendations as it can administratively. This is indicative of an

acceptance of some of the valid criticisms leveled over the past year and we commend the Service for its undefensive posture. We are concerned however that there

be no lessening of the forward momentum toward enactment of the legislative proposals advancing the Commission’s recommendations which cannot be administratively adopted without a law change. The Commission’s recommendations in the

electronic tax administration area are a continuously woven cloth. Each piece is critical to the achievement of the goal of a paperless filing system. It would not be possible to achieve the goal for instance if the IRS did not accept all tax forms and

schedules and notes via electronic media or if it could not accept alternative forms

of tax payment via electronic funds transfers or if it still insisted on actual taxpayer

signatures rather than some other validation process.

One of the most important recommendations is that paperless filing should be the

preferred and most convenient means of filing tax and information returns. The

American taxpayers, their tax practitioners and the IRS are awash in paper, a situation which simply cannot continue unless we are prepared to see a complete breakdown in tax administration, not to mention the environmental consequences of the

need for all that paper. Enrolled Agents, who are on the front lines of tax administration, are seeing the beginnings of this breakdown now. Our Members tell us that

they are contending with more errors in IRS paperwork than ever before, and it

takes a great deal of time and taxpayer money to untangle these errors. With electronic filing, the error rates can be as low as 1% versus as much as 20% for paper

returns.

The benchmarks required in the Commission report—that within the next 10

years 80% of returns be filed electronically—are realistic only if certain changes are

made to the way the Service and tax practitioners interact. I would like to share

with you some demographic information reflecting the situation of NAEA Members.

During our 1996 annual membership renewal period, we included a survey on the

back of the renewal form. More than 75% of our Members replied. Of that group,

almost all use a computer in tax preparation and the overwhelming majority have

a modem and CD–Rom. (In fact it’s pretty hard these days to find new computers
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that don’t have these items as part of the basic package.) One third of our Members

are online so they have access to the Internet and have an e-mail address. We expect those numbers to increase dramatically in the very near future. To illustrate,

two years ago, when NAEA began offering online communications to our Members,

we had only a couple of hundred Members online. Today we have more than 3,000,

ranging from our first President, Syd Schuldiner, who is in his eighties, to newly

minted EAs in their twenties and thirties.

Since the vast majority of our Members use computers to prepare tax returns, the information is already in digital format. Yet our previous surveys have indicated

that only 14% of our Members file electronically. We have been studying the reasons

for this disparity for the past two years and have formulated a strategy to effect

a change in practitioner perceptions about EF. In the course of our work we have

identified the following areas as the primary contributing causes for practitioner

nonparticipation in EF:

FORMS UNACCEPTABLE FOR ELECTRONIC FILING

Many forms are not available to be filed electronically. As one of our Members testified at the Commission’s Des Moines field hearing, she could have sent many

more tax returns in electronically if she had been able to handle the fuel excise tax

form, a form that is particularly important to her clients who are farmers. Since

it was not available electronically, she had to file paper returns. We later heard the

reason that particular form was not available was because of revenue protection

concerns. However, we were never told how widespread that problem was and were

never asked to provide assistance in correcting the problem. The Commission report neatly handles the problem of forms being unavailable for electronic filing by stating that those schedules and attachments not available in

electronic format can be retained as worksheets in the taxpayer’s files. We believe

this will be an effective interim measure until the Service can reprogram the system

to accept all forms and schedules in the near future but do not recommend this be

seen as the final answer to this problem. There are too many concerns about practitioner liability issues, multi-year file retention requirements and client records retention habits. There is also the very real possibility that this procedure will trigger

unnecessary audits because IRS will not be seeing a complete return. If the IRS

wants the data, it designs a form or schedule for it. It should be required to accept

it electronically and not shift the burden for keeping some of its records in the offices and files of practitioners and taxpayers.

LACK OF INCENTIVES FOR PREPARERS

The traditional view of most practitioners was there was no benefit to be derived

by themselves or by taxpayers by filing electronically, with the possible exception

of those clients interested in refund anticipation loans.

Indeed, their tax return processing costs were significantly increased by opting to support electronic filing because of the additional $.20 to $20.00 per return fees imposed by tax preparation software vendors for using their electronic filing option;

by the initial insistence on expensive, non-standard modems by the IRS; by the

number of tax forms the IRS would not accept electronically; and by the additional

record keeping requirements imposed by program participation. These factors coupled with the primary IRS marketing thrust of ‘‘do it because it helps us’’ failed to

elicit much response from the industry. Today, the average practitioner with two or three hundred returns must, in most cases, pay a substantial fee relative to the average cost for their services to file electronically. This additional fee is the per unit cost charged by the tax preparation

software vendor for utilizing the electronic filing option. NAEA believes that there needs to be a clear delineation between the separate

acts of preparing a tax return and submitting a tax return. No one argues that software publishers are entitled to be compensated for usage of their preparation program. But, to permit them to additionally control the method of submission is tantamount to permitting them to require that all income tax returns prepared using

their software must be mailed via Federal Express at the cost of $15.00 per package

rather than via US Mail for $.32. The current situation is akin to the early days

of franchising when you had to buy all your cups and paper goods from the franchiser at exorbitant rates relative to the true market value.

We believe the IRS standard for electronic filing submissions should be written

to an unencrypted, open document standard and that the practitioner-consumers be

given the option of utilizing whatever electronic filing transmission service they select based on market place pricing. The process already is in place to require all

tax preparation software vendors to make their program output conform to IRS
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specifications. To add the additional requirement that they provide open access to

the data file needed for electronic filing is relatively simple. The continuance of software vendors hegemony must end if electronic filing is to receive the fair test it deserves and the American taxpayers are to recognize the return on their investment

made in IRS computing power. The current bill provides incentives for preparers to submit returns electronically by requiring paid preparers to do so for all returns filed Jan 1, 2005. If we are going

to reduce the error rate and halt the sea of paper being sent to IRS, then the move

toward electronic filing incentives is praiseworthy. We would suggest that it doesn’t

go far enough and omits some details which can make a significant difference in

participation rates. We also believe that the amounts of the proposed credits are too

low to attract the support of the majority of tax practitioners who after all have average practice sizes of approximately 300 clients. For an average practice of 300 taxpayers the total credits available of $600.00 would do little to offset the tech support

necessary to resolve all EF issues.

We have found in our talks with members over the past few years that there are

many other incentives which would insure greater EF participation. We proposed

these to the IRS last year in our pilot test proposal. They are:

1. Permit electronic communication between IRS offices and practitioners on client

account issues. This would permit e-mail to be exchanged between IRS employees

and practitioners to expedite resolution of account problems. This is not available

in the vast majority of IRS offices!

2. Permit alternative forms of tax payments, including credit cards

3. Permit the online submission of the Installment Agreement request and Collection Information Statements

4. Permit the electronic submission of Powers of Attorney and Transcript Requests

Currently tax return preparers are required to list their personal Social Security

numbers for identification on tax returns they prepare. As an access to the most

confidential information, i.e., identity, credit and personal history, the Social Security number is potentially the most damaging of information to be disclosed in an

uncontrolled environment. And in fact, several cases have come to light in which

criminals lifted the SSN and used the information to create fictitious identities, acquire credit cards, and run up huge bills. The practitioners then had to hire legal

counsel to straighten out the situation. If a way can be devised to permit tax practitioners who file electronically to avoid this requirement, it would certainly be a powerful inducement to use electronic filing.

We believe if these suggestions were adopted and the IRS is required to accept

all forms and schedules electronically and the software publishers are forced to adhere to an open, unencrypted file output standard then the market forces alone will

be sufficient to drive up EF participation rates. We also believe that once these obstacles are cleared away—a compelling case could be made in the name of good government and cost effectiveness to require EF submission of returns by practitioners

who exceed a certain annual threshold in number of returns prepared.

OVERSIGHT OF ELECTRONIC FILING PREPARERS

One major IRS concern has always been the susceptibility of the electronic filing

system to fraud. This has led to problems with the way electronic filing preparers

have been treated and we have had member complaints about the means employed

by IRS EF Revenue Protection efforts. While our Members’ complaints have abated

over the last filing period about the approach some IRS offices have taken in their

revenue protection effort we have to note that in some cases the overzealousness

of some IRS employees has fermented a very serious practitioner backlash against

EF We believe that providing oversight for ALL paid preparers is an effective way

to ensure the integrity of the system. NAEA has long advocated the registration and

regulation of all paid tax preparers. IRS’ own research repeatedly has shown that

those tax practitioners regulated under Circular 230 are rarely involved in tax refund scams. An IRS study of EITC fraud done two years ago showed that 96% of

the fraudulent cases involved unregulated tax preparers. There are tens of thousands of unregulated tax preparers each filing season. Many of them are what we

call card table guys who show up in a storefront on January 1 and disappear on

April 16. What kind of accountability do you think someone like that has? And yet

they are involved in a system that collects $1.6 trillion in tax revenues annually.

Does this make sense?

While over-regulation has been a problem in many government agencies for many

years, I would argue that one of the basic rights of taxpayers is the right to have

accurate and timely information so that they can be confident that they are in com-
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pliance at all times. This includes the right to receive correct information from IRS

and it includes the right to receive accurate returns and tax information from those

who hold themselves out to the public as tax practitioners. We have the rather perverse situation in today’s tax administration system where those of us who have

made the most commitment to the tax profession: Enrolled Agents, CPAs and Attorneys, are the most regulated. While those who have not bothered to get the education necessary to stay current with the laws, have made no commitment to supporting a professional organization with established codes of ethics and standards

of practice, and have no substantial investment in a practice in terms of equipment,

libraries, etc. are completely unregulated by IRS. We require more qualifications

from barbers than we do unregulated preparers and you can recover from a bad

haircut in three weeks!

There must be a level playing field among all tax preparers. The Service should

focus as much effort on paper filers as they do electronic filers. They should make

more effort to listen to the problems their own procedures cause for EF participants

and resolve to implement changes which would ease the burden on EF supporters.

We look forward to working with Bob Barr in this effort as he is intimately aware

of the marketplace concerns and problems with the IRS management of this effort.

We accept the Commission’s recommendations as the starting point, but believe

the current bill does not go far enough in ensuring the accountability of commercial

tax preparers. For further information, we have attached the report of the IRS Commissioner’s Advisory Group (CAG) on this subject, a report completed in 1994, prior

to the outbreak of the fraudulent EITC activity in the 1995 filing season. We urge

the Committee to consider inclusion of this recommendation in the current bill.

EXTENDED FILING DATES

We are aware that the Commission staff conducted taxpayer surveys which indicated a certain percentage of taxpayers would support EF if granted extended due

dates for filing and paying taxes. Since we are in favor of increasing the number

of EF returns we would concur with this change. However, we have several reservations about just what kind of volume increase could be expected from this modification. When we polled our members, we heard many concerns raised about how this

would just provide the procrastinators with another month to get into their offices

and about what liability there would be for tax practitioners who assumed clients

could file electronically only to find in May they could not and now were faced with

a delinquent return situation. We could see some benefits for this proposal only if

the issue of IRS accepting all forms and schedules was resolved either along the

work paper route or reprogramming to accept via EF. Additional concerns raised by

our Members include the coordination of an extended filing date with filing deadlines for states and computation of estimated tax payments.

One of the reasons for extending the due date was to permit those filers of 1099s

and K–1s to complete their work. In our opinion, Congress should revisit the question of requiring all partnerships and personal service corporations to have December 31 year ends. This change was implemented as a one year revenue fix several

years back and it has caused immense problems for practitioners and taxpayers

alike ever since. It would be far preferable to require June 30 year ends for these

entities. This would insure that even on maximum extension that all K–1 data

would be available before the individual tax filing date. It would also prevent any

income shifting games since distributions would certainly fall in the taxpayer’s tax

year.

RELOCATION OF DIRECTOR OF PRACTICE TO TREASURY

Since the issue of moving the Director of Practice Office is one addressed in the

electronic filing section of the bill, we felt the need to comment on it here, due to

our prior recommendation that all practitioners who file electronically be covered

under Cir. 230 and our frequent interaction with that office. We have had experience working with the DOP’s office when it was part of Treasury and since it has

been part of the IRS. In our opinion having it within the organizational plan of IRS

works better than it did when it was headquartered at Main Treasury. The DOP

is responsible for running the Special Enrollment Examination, background checks

for the EA candidates, monitoring and auditing Continuing Professional Education

reports, and enforcing the regulations under Cir. 230. Much of the administrative

work is run out of IRS’ Detroit Computing Center. The last renewal cycle was the

smoothest we’ve ever experienced. It is our view that Detroit has performed well

and proved itself. Since most of the work involves tax administration which is the

focus of the IRS, rather than tax policy which is the focus of Treasury, then it seems
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logical that the Director of Practice should remain at IRS and not revert back to

the department.

ADDITIONAL NAEA RECOMMENDATIONS FOR LEGISLATIVE ACTION

We believe the Committee in the course of its deliberations should consider these

additional suggestions for increasing Electronic Filing:

• modify the statutory period for examination of an income tax return from 36

months to 24 months provided that the return is filed electronically by the due date

and there is no mismatch with other Information Returns Program data received

by the Service. This achieves a triple effect: first—it motivates taxpayers to have

their return filed electronically—practitioners will service client demand first above

all else; second—it motivates IRP filers to perfect their data since they could be liable to their clients should they misreport information; and third—it motivates practitioner malpractice insurers to pressure practitioners to file electronically

• eliminate the requirement for an actual taxpayer signature on a tax return and

for the submission of the Form 8453 by the EF preparer

• provide for joint Federal/State income tax filing on one return for electronic filers—this would motivate taxpayers who want to reduce their accounting costs each

year and may prove attractive to states since many now receive copies of state and

federal returns with all the attendant costs of paper handling and storage

We believe that if these changes were incorporated into this current bill that the

50% of all tax returns that are prepared by tax practitioners would rapidly be converted from paper submissions to electronic submissions well before 2005.

SUMMARY

We appreciate the opportunity to appear before you to offer our insights and views

on the Commission’s legislative recommendations. The IRS has long talked about

partnerships in tax administration with the practitioner community. The time has

come for this talk to become reality and foster true working relationships that provide for valued input and benefit to both sides. There are many hard working, dedicated employees within the IRS who share this desire for progress. We are confident

this legislation will provide the necessary framework for more successful IRS/practitioner interactions and for a more effective electronic tax administration system.

I will be happy to respond to any questions you may have.
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Chairman JOHNSON. Thank you very much, Mr. Lane. Ms. Kelley.

STATEMENT OF CAROLYN KELLEY, DIRECTOR, GOVERNMENT

AFFAIRS, AMERICAN PAYROLL ASSOCIATION

Ms. KELLEY. Thank you Madam Chair, and the Subcommittee, for the important work you have done in this area of electronic filing. I am honored to be here. The APA Reports represent more than 14,000 U.S. businesses on

issues related to payroll tax reporting, withholding and depositing.

As such, APA’s members are responsible for submitting hundreds

of millions of the more than 1.4 billion wage information and employment returns received annually by the IRS and Social Security

Administration.
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APA agrees with just about everyone here today; that electronic

filing of individual tax documents will result in lower cost and increase compliance for both the public and private sector. However,

we are here to urge Congress to aggressively broaden this goal of

expanding electronic filing, to include the filings required of U.S.

businesses. That is, the over 1.4 billion information and payroll tax

returns submitted by U.S. businesses each year.

Many of these documents do not have the complex attachments

that make automating individual tax returns difficult sometimes.

APA recommends that any strategy for increasing electronic filing

of business returns and information reports, should be developed

with the input of private sector stakeholders, and I think we have

heard that a lot here today.

Thus we believe that that creation of an Electronic Commerce

Advisory Group is a good idea, and should be monitored by Congress to ensure its recommendations are implemented when appropriate.

I am the former chair of the Information Reporting Program Advisory Committee, and a member of the Commissioner’s Advisory

Group, and I am proud of the good work we did there, but I do feel

that Congress should monitor these advisory Committees to make

sure that suggestions can be implemented where appropriate.

APA’s other recommendations for increasing electronic submission of business information and employment returns include nationwide standards should be developed for all electronic data formats, including signature alternatives and transmissions procedures.

Underscoring Mr. Cardin’s earlier comment, these standards

should be easy and inexpensive for taxpayers to implement and

use, and should be tested by both the public and the private sector

before being implemented. For instance, one of the most distressing

parts of the EFTPS implementation before the first—was IRS’ insistence that the system had been tested, when in fact not one single taxpayer had put a payment through the system about to be

mandated. Internal testing of systems is not enough. We need to

go out and test with the Nation’s tax collectors and tax preparers.

Our second recommendation is we agreed that IRS should remove electronic signature barriers to electronic, PC modem to

modem, and magnetic media filing of information and tax returns.

We support the Commission’s provision in the legislation calling for

electronic signature development.

IRS should resolve the security barriers surrounding electronic

filing of information returns specifically. IRS has stated that in no

instance has the fate of a tax claim relied on the validity of a signature on an information return. To us this means that hundreds

of millions of these documents can potentially begin to be transmitted electronically without a paper signature attachment, using a

signature alternative.

APA believes that technological solutions exist today that do this

with a PIN. And we direct you to examine the current automated

W–4 program. EFTPS uses PINs and SSA is currently starting to

develop its electronic infrastructure, using them for receipt of wage

information.
115

I share the frustrations expressed today. The fact is, we can

withdraw money everyday from our banks using PINs, so the technology must exist for us to give information, and we do not understand these barriers.

According to SSA, of the 5.5 million employers filing today, only

about 10 percent are filing either returns or information reporting

documents electronically. However, as Mr. Harris has pointed out,

50 percent of the remaining 5 million are filing on paper, which

has been created by a computer.

Because this information is already in an electronic format, it

could easily be submitted to IRS by modem. This is a tremendous

opportunity, and is being blocked by the lack of an electronic signature alternative.

Further, we are very concerned that that States are beginning to

develop methods for electronic signatures and programs to receive

tax and information returns electronically that are not standard;

they vary from State to State. We need to move to develop national

procedures and standards quickly, and hopefully the States will follow.

Another recommendation is that, new electronic procedures for

taxpayers should never be mandated under penalty. On this we

agree with the Commission and appreciate your movement in this

direction. Instead the pubic and private sector should work together to develop systems that work for businesses, and then businesses will flock to them to use the increased efficiency and the

cost savings.

Using EFTPS again, the mandate did not work as the extremely

harsh 10-percent penalty assessed for failure to use the system provoked a predictable public outcry and resistance to adopt it. Further, although U.S. businesses were mandated under penalty, the

U.S. Government was not, and when the system was not ready on

the effective date, taxpayers were set up to be penalized for reasons

out of their control.

This is crazy. We should be working together to improve tax administration in this country, and we believe that the Commission’s

recommendations go a far way to facilitate that.

I want to be clear though; we do not object to mandates, just

mandates of brandnew technology. Instead of these kinds of mandated situations new electronic processes should first be marketed

to the segments of the business community where the most savings

and increased compliance would be realized, using various incentives. Other segments will follow as they perceive the advantages,

especially if this marketing is done in partnership with the private

sector. Congress and IRS should allow realistic deadlines for compliance with new electronic requirements, and that means the system changes that the taxpayers have to go through.

IRS also should provide business with several choices of methods

to use to file information and tax returns electronically, including

magnetic media and PC modem to modem methods. For example,

electronic data interchange equipment is expensive, and available

for tax use and only a very small number of businesses. Larger

businesses are reluctant to make that kind of investment in payroll

departments, and the cost to small businesses could be prohibitive.
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Our last recommendation I think has been discussed here, so I

will skip it, and ask that you should provide the same kind of incentives to business filers as to personal filers. We want to applaud

you for the legislation’s provisions to allow businesses that file electronically an additional month to submit Form W–2 information to

SSA. This was easier done than to move the individual date because the W–2 is still going to the employee on January 31, so the

employee is not affected. But what this allows businesses to do, is

catch the mistakes, and then submit cleaner information to SSA.

It is a very good idea, and it was an innovative solution. IRS should outsource when appropriate expertise is not available

within IRS, and APA is also glad to hear Mr. Barr is coming on.

Or when working on projects inside the agency is going to delay

them. I started working on an electronic 941 4 years ago, and we

are dumfounded as to why that is taking so long. Finally, we support the Commission’s recommendations on single point filing, and we thank the Subcommittee for the opportunity to

comment today. [The prepared statement follows:]

Statement of Carolyn Kelley, Director of Government Affairs, American Payroll Association

The American Payroll Association congratulates the National Commission on Re- structuring the Internal Revenue Service on its important work and interest in expanding electronic filing of individual tax returns in the United States. The APA

represents more than 14,000 U.S. businesses on issues relating to payroll tax reporting, withholding, and depositing. According to the Service’s own calculations, more

than 70 percent of all federal revenue is collected through income tax withholding.

As such, APA’s members are the nation’s tax collectors. Moreover, payroll departments are responsible for submitting hundreds of millions of the more than 1.4 billion information returns received annually by the IRS and Social Security Administration (SSA). These include wage reporting forms (Form W–2, ‘‘Wage and Tax

Statement’’ and Form W–3, ‘‘Transmittal of Wage and Tax Statements’’), Forms

1099–MISC, ‘‘Miscellaneous Income,’’ for reporting payments made to independent

contractors, and employment tax returns, including quarterly Forms 941, ‘‘Employer’s Quarterly Federal Tax Return,’’ (covering income tax withholding and FICA

taxes), and Form 940, ‘‘Employer’s Annual Federal Unemployment Tax Return,’’ (reporting unemployment taxes).

APA agrees with the Commission that electronic filing of individual tax documents will result in lowered costs and increased compliance for both the public and

private sector. Insofar as individual tax returns are concerned, APA leaves comments to our colleagues who are expert in that area.

Instead, we urge Congress to broaden this expansion of electronic filing to include

the filings required of U.S. businesses. Any strategy for expansion of electronic submissions should include the over 1.4 billion information and payroll tax returns submitted by U.S. businesses each year. Many of these documents do not have the kind

of complicated attachments that make automating individual tax returns difficult.

APA recommends that any strategy for increasing electronic filing of business returns and information reports should be developed with the input of the private sector stakeholders. The strategy development team should include, at a minimum,

U.S. businesses, payroll service bureaus (who process, report and deposit a significant percentage of U.S. payroll taxes), the software designers who supply U.S. businesses with the software needed to stay in compliance, tax practitioners, Treasury,

IRS, the Social Security Administration (which administers some payroll taxes and

performs complex balancing processes with IRS), and the state tax administrators.

As far as a business strategy is concerned, the 180-day period stated in the proposed legislation should be expanded at least six months to allow for the development of the kind of public/private partnership necessary for success. Congress

should monitor this to ensure that public input is being acted upon where appropriate. We believe that the creation of an Electronic Commerce Advisory Group is

a good idea and should include representatives expert in the processing of business

information and tax returns and be monitored by Congress to ensure its recommendations are implemented where appropriate.
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RECOMMENDATIONS:

• IRS should work with the private sector in articulating a strategy and invite users of the tax system and software designers to lend their expertise. Any organization that does not involve the expected users of processes before building them

is setting itself up for predictable, but avoidable, failure. Only by involving the

front-end users in the design process can serious implementation problems be avoided.• The public and private sector must work together during all phases of system design, implementation, and testing. Congress should provide oversight of this process to ensure that the needs of the taxpayer are being met and should remove barriers in the Federal Advisory Committee Act and any other legislation which prevent such a process.

• Reasonable standards should be developed for all electronic data formats, signature alternatives, transmission procedures, etc. These standards should be easy and

inexpensive for the private sector to implement and use, and should be tested by

both the public and private sector before being implemented. One of the most distressing parts of EFTPS implementation was IRS’ insistence that the system had

been ‘‘tested’’ when in fact, not a single taxpayer had put a payment through the

system about to be mandated.

• IRS should remove electronic signature barriers to electronic, PC modem-tomodem, and magnetic media filing of information and tax returns and work with

the private sector and the states to ensure nationwide standards. We support the

legislation’s provision calling for electronic signature development. This standard

signature alternative should be easy and inexpensive for the private sector to implement and use, and it should be tested before rolled out.

• IRS should resolve the security barriers surrounding electronic filing of information returns.

IRS has stated that in no instance has the fate of a tax claim relied on the validity of a signature on an information return. This means that hundreds of millions

of these information reporting documents can potentially be transmitted electronically without a paper signature attachment. We thus believe that most, if not all,

of the (perceived) security problems surrounding moving information returns electronically to and from the IRS should be resolvable, without adding to the years of

delay that have already occurred. APA believes the technological solutions exist

today. IRS has to articulate requirements, work with their ‘‘stakeholders,’’ and create pilots in order to successfully implement programs.

For example, SSA already has begun receiving Forms W–2 electronically, using

a bulletin board for smaller employers and high speed bulk data transfer processes

for larger employers. It’s our understanding that the growth of SSA’s program has

been inhibited by the Service’s delay in establishing a method for electronic signatures and removing the perceived security barriers.

According to SSA, of the 5.5 million employers filing today, only about 10 percent

are filing either returns or information reporting documents electronically. However,

50 percent of the remaining five million are filing on paper created by a personal

computer. Because this information is already in an electronic format, it could easily

be submitted to the IRS by modem. This is a tremendous opportunity. It should be

pursued, not held up by lack of electronic signature methods or by concerns regarding security which may be unnecessary.

APA believes the technology exists to do this with the use of PINs. For example,

EFTPS uses PINs. We are concerned that the states are beginning to develop methods for electronic signatures and programs to receive tax and information return

documents electronically that are not standard. IRS should partner immediately

with the SSA, the state tax and employment agencies, the private sector and American National Standards Institute (ANSI) to develop national procedures and standards.

Currently, the SSA is meeting with the private sector to develop its electronic infrastructure. As digital signatures and other methods are not yet available, SSA is

examining the feasibility of a PIN system. Challenges include how to validate the

employer’s EIN and company name as it appears on the IRS’ business masterfile.

We understand that IRS is not yet ready to participate in developing a common system. We urge Congress to urge IRS to work with SSA on this project.

• After being designed, implemented, and tested in partnership with the private

sector, new electronic processes should be marketed to the segments of the business

community where the most savings and increased compliance would be realized.

Other segments will follow as they perceive the advantages.

• New electronic procedures should never be mandated under penalty. Nothing

will kill private sector cooperation more quickly than being penalized for making
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mistakes in the new electronic environment. Mistakes will be made in any new system as taxpayers are educated in new processes. (See below.) If systems work for

businesses, businesses will flock to use them to increase efficiency and lower costs.

For example, the EFTPS mandate did not work, as the extremely harsh ten-percent

penalty assessed for failure to use the system provoked the predictable public outcry

and resistance to adopt the system. Further, although U.S. businesses were mandated under penalty, the United States government was not, and when the system

wasn’t ready, taxpayers were set up to be penalized for reasons out of their control.

This is insanity. We should be working together to improve tax administration in

this country. • Congress and IRS should allow realistic deadlines for compliance with new elec- tronic requirements. From our prior testimony on the Commission’s report, we repeat the following list of time periods which must be incorporated into any successful implementation schedule:

1. The time it takes the regulatory agencies to produce regulations.

2. The time it takes to educate the business community about their obligations, especially in the case of small businesses that may not have access to information

and professional expertise available to larger businesses. After regulations, it takes

some time before taxpayers are educated about requirements, especially if regulations are complex or require significant changes to existing practices. 3. The amount of time it takes for software design and testing. Most U.S. businesses buy their tax processing software from outside vendors. If these vendors do

not have enough time to develop products, businesses pay with costly custom systems changes and/or manual or exception systems. If the business does not buy commercial software, the amount of time it takes to assess and then make changes to

existing systems must be taken into account. The more complex the regulations, the

more time businesses need to prepare for compliance.

4. The amount of time it takes to test system changes to ensure correct deposits

and/or the reporting of clean, accurate information to the government agencies.

5. The amount of time it takes for government to design of pilot programs to test

transactions and transmission among the various users before roll out.

It is important to note that these processes must be accomplished in a linear fashion and cannot be accomplished at the same time. Congress should work with the

private and public sectors to design realistic implementation schedules and then ensure that the IRS is able to build their systems, produce regulations, and train staff

on schedule.

• IRS should provide businesses with alternative methods to file information and

tax returns electronically including magnetic media and PC modem-to-modem methods.

It is important that the government provide users with alternative methods for

automated filing. For example, Electronic Data Interchange (EDI) equipment is expensive and available for tax use in only a very small number of businesses. Businesses are reluctant to make that kind of investment in payroll departments, and

the cost to small businesses could be prohibitive.

• Congress should provide businesses with incentives to file electronically.

We applaud the legislation’s provision to allow businesses that file electronically

an additional month to submit Form W–2 wage information to SSA. This will allow

businesses to discover and correct any problems before they submit wage information to SSA. This saves both the SSA and employers the expense and inefficiency

of going through the W–2c correction process.

APA recommends that similar incentives be provided to third-party processors of

electronic business filings and reporting as has been suggested for third-party processors of electronic individual returns.

• IRS should outsource when appropriate expertise is not available within IRS,

or, when working on projects inside the agency will delay critical pieces of an electronic implementation strategy.

We thank the Subcommittee for the opportunity to comment today, and I’m happy

to answer any questions you may have.

excellent testimony. It was really very helpful, and will provide a

Chairman JOHNSON. Thank you. And I thank the panel for your

f

lot of food for thought.

I would like to ask those on the panel that support a delayed

date for electronic filing to discuss why they think that will be ef-
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fective in more detail. I understand the opponent’s argument. I do

not understand as well the proponent’s argument.

Mr. Wolfe.

Mr. WOLFE. We believe that right now there are very few incentives for balance-due filers to file electronically. The extension of

the filing date would be one huge incentive for them to do that.

Chairman JOHNSON. Why is that an incentive for them to do

that, when they can just file for an extension of their due date, and

not have the month limitation?

Mr. WOLFE. Our understanding is that an extended deadline permits taxpayers to wait if they are procrastinators, for another couple of weeks before they actually filed a return. Another reason—

it is a little more complex to explain—is that if we keep an April

15 deadline for both electronic and paper filers it actually penalizes

electronic filers. Because if we allow them to electronically pay

their taxes that are due, that debit would happen on April 15. And

if they filed with paper the check would probably wait a minimum

of 1 week before it would get to their bank account. So it would

take away a barrier, to some extent, by delaying the filing date.

Chairman JOHNSON. Thank you, that is very helpful.

Mr. LANE. Could I come in on that as well?

Chairman JOHNSON. You certainly can, Mr. Lane.

Mr. LANE. I believe it not only calls for the extension of filing,

but also the payment of the tax. Is that not correct? So you have

a real savings there of someone not having to pay for the additional

30 days the balance due. So there is a real incentive for someone

then to file electronically, knowing that they will be deferring the

payment of whatever taxes would be due without penalty or interest for that 30-day period.

And obviously, as I agree with what the Intuit spokesman said,

the issue is that there were very few incentives in here to get the

30 percent of taxpayers who have balances due. Quite frankly, our

suggestion about limiting the audited exposure period would be

very attractive to balance-due taxpayers, since they are the bulk of

the people that get audited. They tend to be the more complex returns. They tend to be the people who have the higher audit rate

than the one-tenth of 1 percent of 1040–EZs or 1040–As, that get

audited.

So I think incentivising the balance-due taxpayer, which is a big

area of concern for anybody who is trying to get more people to file

electronically; that whole shortening of that audit window would

have a very very dramatic impact on those taxpayers.

Chairman JOHNSON. Are there other comments?

Mr. Langer.

Mr. LANGER. In the standard filing season some 30 million returns are filed within the last 2 weeks, so I would suggest that

even refund filers would take that extra time and file electronically

if they had another month. And it does sort of play into the day

of filing mentality that people have, but at the same time it will

be attractive to refund filers and balance-due filers as well. If they

have an additional month if they file electronically, I believe they

would take that time.

Chairman JOHNSON. Mr. Harris.
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Mr. HARRIS. I think the extended deadline is one of many reasons that we can approach these balance-due filers and encourage

them. There are a certain group of people who always want to wait

until the last minute to do everything, and giving them 30 more

days, only if they file electronically will clearly motivate that group

of people. It is not, I think, enough to get to the 80 percent, but

I think it is one of the many issues that we have to address. And

I have heard nothing but really good suggestions here today.

Chairman JOHNSON. And would you eliminate their right to ask

them for the right to file later, to defer their filing?

Mr. LANGER. I think that that is the problem. If you do not offer

them an extension on May 15 to be equal to a paper extension, you

may in fact hurt some of the incentive, in that now they are faced

with a 30-day window, and they have no options after that. So I

would like to see that they still have an option on May 15, if factors exist, that they could still get an extension beyond that.

Mr. HARRIS. I agree with that. You need to provide the provision

someplace—it may be in the Code or just in the regulations that

come out afterward. But you need to provide the opportunity on

May 15. If they are not in the position of filing a tax return at that

point, because there is a K–1 missing or whatever, that they would

be able to secure an extension, even though they are committing

to file that extension electronically; that is fine. The return will

come in electronically, but you cannot have it—if you leave it set

up the way it is now, where, either they file for an extension on

April 15, or they just do not file for the extension and assume that

they have until the May 15 filing date, and then they do not have

all the data.

Or worse, you get to a point where for some reason they cannot

file electronically. This all assumes, before you implement this,

that the IRS has to accept all returns that can now only be filed

using paper. I assume that is what the thinking of the Subcommittee is. The way the legislation is drafted, they would have to be

able to accept all tax returns. You need to provide something for

that person or you are going to kill the incentive, because they will

instead go back and get a protective extension.

Chairman JOHNSON. Thank you. Mr. Carver, what is your evaluation of the estimate that has been made, that a paper return

costs $7 for the IRS to process?

Mr. CARVER. This is a real snakepit. I have been working some

with the Commission. I spent a lot of time working in the Service

before that, trying to come up with a cost.

My budget to run the 10 service centers was about $1.3 billion

a year. Of that, about half—I am saying $700 to $800 million of

that was for the returns processing, and that is taking returns in,

stacking them and sorting them to transcribe the information in

the usual format. That includes this error loop that was discussed

earlier.

But if you have 200 million returns—the 1040s are the main cost

factor. There are business returns, the 941 returns are processed

very inexpensively because there is not much data, so most of the

cost is 1040s. If you take that $700 or $800 million, and said there

are 100 million tax returns, you are pretty close to $7 or $8 a piece

for labor costs. It does not include the capital costs of those service
121

center buildings; the capital costs of the equipment that is purchased.

The budget I have was maintenance, some power and water, and

mostly salaries. So the cost of $7 or $8 is in my mind pretty close.

The danger to IRS though, by saying $7 to $8, and have somebody

cut their budget, that is too big a risk because you do not know

what the volume of returns are coming in. You cannot close one of

those service centers if you get a 10-percent volume decline. You

have to do something like saying, OK, in 5 years, this is the plan,

this is the volume you will have, and you must close five service

centers in that period of time and be ready for it at that time. That

is why I really agree with setting goals, because it forces these capital goals to come along with it. It is a tough figure though.

Chairman JOHNSON. In other words the effect on the whole structure, the bureaucracy and its physical facilities, will be so dramatic

by the time we reach the 80 percent that it needs to be planned

for in advance.

Mr. CARVER. Yes, ma’am, carefully and in phases. Some of the

numbers we developed earlier on a failed modernization effort that

was supposed to be in place by 1996. The numbers that we were

using for service center employees; that is, the temporary people

that we hire to transcribe and so forth, those numbers are running

$20,000 to $28,000. The system that was not delivered last year

and was supposed to be, would have eliminated it.

So the numbers are much higher than that for electronic filing,

because it saves all of that work in the centers.

Chairman JOHNSON. And last, and then I will yield to my colleagues. It does seem to me that 10 years is a long time to reach

80 percent, given how may people are already doing a lot of this

that could be translated.

I think you look at the pace of technological change, and the

amount we at least know about what is currently happening, it

seems to me that our goal should be 5 years.

Mr. CARVER. I agree. I think the 10-year figure is probably going

to be good for people who do not now have computers, and cannot

see themselves ever becoming automated. That gives them enough

cushion that they be will be comfortable for the rest——

Chairman JOHNSON. Does the 20 percent not give them cushion

anyway?

Mr. CARVER. Yes, I think 5 years is good.

Chairman JOHNSON. Mr. LANE.

Mr. LANE. Can I just add something on? It seems to me—I have

been coming to these hearings for about 11⁄2 years, and I have

heard the IRS asked what it costs to process a tax return, at almost every one of those hearings. It is inconceivable to me that 11⁄2

years later we do not have a firm number on that.

GAO ought to look into it. If they cannot come up with a number

then somebody someplace has to be able to say, Here is what it

costs to process this paper return. And we have heard numbers. I

agree with Bob, you take his number and it is $7 or $8 a piece.

If you say that to IRS, they say Well, no, somebody said it was

$1.17 at the Commission hearings. And the reaction on that was,

well, where did that number come from?
122

You know, there is an answer here, and it is not that difficult

to get at. I am sure there are going to be qualifiers that go on, and

explaining what the numbers should be, but if they can’t come up

with it in 11⁄2 years, then maybe you ought to send GAO in, or ask

for a committee of volunteer auditors from our organizations; we

would be happy to provide it. But somebody ought to come up with

that number so we can know what we are talking about.

Chairman JOHNSON. I was disappointed in Mr. Lubick’s comment

this morning, about the $7 being way way high. Because when you

look at the impact on the hiring of temporary employees, I mean

known high costs investments, it is really hard to imagine that it

is not going to save an enormous amount of money, and increase

the accuracy of the whole process. This Subcommittee has spent

years on how we should help taxpayers protect themselves when

they have a difficulty with the IRS. Anything we can do to reduce

the error rate is going to be very good, not only for the taxpayers

but for the bureaucracy.

When you look at the impact that complexity has had on our tax

system, it is very discouraging. That is only going to dissolve slowly

and over time. So anything we can do to ensure accuracy of data

going into the system, protection for the taxpayer, I think this

issue of guaranteeing 24 months protection from audit instead of

36 months exposure is a very thoughtful recommendation. You are

right, that will motivate people. And you only qualify if your data

is accurate, and that that accuracy is affirmed by the IRS through

its own matching processes so you are exposed to an intense scrutiny to be sure that your data is accurate.

Frankly, I do not think we have a right to keep people in jeopardy for 3 years in today’s world, and that I think is a very

thoughtful suggestion. We appreciate your comments today. While

there are many more questions that could be asked by me, I am

going to yield to my Ranking Member, Mr. Coyne.

Mr. COYNE. Thank you, Madam Chairman. I would like to address my question to the preparers or people who are representing

preparers.

Is there any category of the 120 million filers that electronic filing is not necessary for or not desirable for, or just is the wrong

ticket for them?

Mr. HARRIS. Under the current system I think the numbers

speak for themselves. There is a great many people right now that

see no advantage in filing electronically. What we have to do is create incentives for all of those people now to find benefits in electronic filing. We see it working in the refund market. There is a

benefit to the taxpayer. There is a benefit to the preparer to build

their business.

Outside of that right now, most practitioners and most taxpayers

see absolutely no benefit in it. I think we should be able to create

benefit for all taxpayers if we really are thoughtful in thinking in

the future.

Mr. COYNE. What would our motive be for doing that? Why

would we want to do that?

Mr. HARRIS. To motivate all taxpayers?

Mr. COYNE. Yes.
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Mr. HARRIS. Well, I think clearly, whatever the savings is,

whether it is $1 or $6, I think certainly we have a more effective

system.

I think also one of the things that we have to recognize is one

of the efforts of this Commission was to offer a better service IRS,

more service oriented. I think taxpayers play a role in that. I think

if they expect answers on a timely and efficient manner, they

should always be willing to furnish information the same way. And

it is not practical to be able to ask someone to give me information

immediately when I file my tax return in a very inefficient manner.

So I think the taxpayers, if they really want good service, have a

role to play.

Mr. COYNE. And when you say save money by encouraging electronic filing, you mean save money for the Service, for the government.

Mr. HARRIS. Certainly there is a savings there. I think we have

to offer some incentive to others. Certainly it cannot cost more to

file electronically to the taxpayer. The tax practitioners must be

able to either find a way to save money or use electronic filing as

an incentive to build their practice.

One of the problems with electronic filing initially was that the

initial focus was on the refund taxpayers. IRS could input millions

of 1040–As in the time it takes to do a couple hundred thousand

complex 1040s. So what the Service did was focus on volume, which

is all the little stuff—the 5 or 6, or 15 data elements.

For example, not a single tax return I prepared last year could

be filed electronically

Mr. COYNE. Could be.

Mr. HARRIS. Could be. They did not qualify, primarily because

the type of tax returns I do tend to have more Schedule Cs or more

partnerships than are allowable. There were tolerance levels built

into the system. So really what the IRS needs to do is focus on—

to answer your first question. There is no segment of that $120

million that we would not benefit by having go in electronically.

Everybody would benefit from it. The practitioners benefit from it

because there is one path to get everything in. You get a benefit

you do not get now, which is a confirmation back IRS got it.

I think I alone support the post office on certified mail receipts.

I mean, we send everything certified, return receipt requested. I

think everybody at the table probably does the same thing. So

there are real incentives to have everything going electronically.

The bigger the returns—the more complex the data entry elements

for IRS, the more expensive it is for IRS to process that return. I

think Bob Carver could back that up. So why not emphasize on getting those tax returns first. So there are real incentives for everybody to do it.

Mr. COYNE. Mr. Zimmerman, I wanted to clarify something that

I think you said. You had offered a free electronic filing service and

only 60 percent of your clients took advantage of it, is that right?

Mr. ZIMMERMAN. Forty percent of our clients took advantage of

it, 60 percent did not. What we have to come up with is a way to

show that there is a perceived value to the clients to file electronically. They have to want to do this. There has to be a reason to

do this. Just to save the IRS money is not a good enough incentive
124

for a taxpayer. There has to be something in it for them. And I

think it is part of the education procedure.

One of the things that we find is a majority of our younger clients will take electronic filing. The older clients are much more

hesitant to file their returns electronically. That is why it is an

education procedure. That is why we suggest that the IRS mount

a massive campaign to educate the public on why it is important

to do so and what the benefits are.

People just get into the habit of mailing that tax return. They

like to take it home. They like to review it before they drop it into

the mailbox. When it is electronically filed, we push the button, it

is gone, and for all intents and purposes, they do not get another

opportunity to look at that tax return. So, again, it is just educating the general public on the benefits of electronic filing. And certainly one benefit is those returns are correct. The paper error rate

of 20 percent is reduced to less than 1 percent on electronic returns. That really gives a client peace of mind, knowing that that

return is accepted, has been received by the IRS, and it is, for all

intents and purposes, correct.

Mr. LANE. Can I add something to that? There is a tremendous—

and we talked about this before in hearings—There is a tremendous mythology among the taxpayers about their dealings with

IRS, and a sizable percentage out there will say, Well, I do not

want it to go electronically to IRS because I have a higher chance

of getting audited, that is true. We still, 25 years later, are explaining to people, if you use the label from the tax package it does not

mean you have a higher chance of audit. But they absolutely believe those three codes up there, that are basically a check digit so

IRS can save some keystrokes, actually code their return for audit,

so they throw it away.

We have this tremendous mythology built up. It is almost like

saying, as long as I have had this Ways and Means pitcher here,

a bat has not flown into the room, so that keeps bats away, and

it is crazy. But that is the logic they have. So what we have to do

is focus on educating the taxpayers, and the best thing the Service

could do would be to come out and say, We have less audits on electronically filed returns than we do on other returns, you would get

a stampede of people in to file electronically, and they need to publicize that. The problem is that the Service would be reluctant to

do that because they would think they would be putting out a fullpage ad for anybody that wanted to do a tax refund fraud scheme

to just start filing electronically.

But that is the case. Tom is right. It is an education issue with

taxpayers.

Mr. COYNE. Thank you.

Chairman JOHNSON. Mr. Portman.

Mr. PORTMAN. Thank you, Madam Chair, and thanks to all of

you for being here. I noticed in looking at the Commission testimony in preparation for this, that each one of you also has testified

before the Commission, with the exception of Mr. Wolfe and Mr.

Zimmerman, who were represented by your able senior executives.

One of them is sitting behind you, Mr. Zimmerman, who did a

great job for H&R Block. But I appreciate all the time and effort

that you have put into this.
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This is really exciting because there are very few things in the

world that are truly win-win, and this is win-win for the taxpayer

and the IRS. It is unbelievable to me that we are in this situation

where we have not made more progress, because it is so clearly a

classic win-win situation. And Joe Lane mentioned that it took us

less time to get to the moon than we are laying out for this 80-

percent filing. It took us 8 years to get to the moon, and since Joe

is surely as charismatic as John Kennedy, maybe we should shift

from 10 to 8 years.

But this is just a great example, I think, of being able to do

something that is good for the taxpayer, that also happens to help

the government and the IRS quite a bit.

Let me just ask Mr. Carver one general question, because you

have been great before this Subcommittee and the Commission on

arriving at cost data and so on. I have a more general question

though, because you did run the service centers and have real institutional knowledge of the Service.

Just personally, if you do not mind—we are off the record here,

right? Why has the IRS not moved more aggressively over the last

decade and a half in the electronic filing area? What is your personal view of that?

Mr. CARVER. I have probably a half dozen personal views. I think

the simplest reason was, the beginning of their modernization effort, the technology they envisioned was scanning and optical recognition. Every return that came in electronically removed returns

from that, and their business case and how to pay for it. I think

that was some of the beginning.

The second part of it though is, we talk about taxpayers being

reluctant to do electronic filings; revenue agents and criminal investigators who do statistics of income are having a tough time figuring out how not to have a piece of paper that somebody signed,

knowing what they were signing, with that penalty of perjury.

They just do not believe you are going to get the truth, and they

are having a tough time managing their world of audit, or statistics, or criminal investigation without paper and evidence. And

that is a smaller group, but that smaller group is at the senior levels of every organization. And it is the large car/small car syndrome, I think. I really believe that is it.

Mr. PORTMAN. One of the outcomes of successful enhanced electronic filing would be fewer temporary employees at the service

centers, and fewer service centers, I suppose.

Mr. CARVER. Yes.

Mr. PORTMAN. And I honestly do not think that is the reason we

have not moved as aggressively although one might surmise that

having more employees at the IRS might have been one of the motivations for not moving to this, because you will have a smaller

and more efficient IRS—I do not think that was the reason. I think

there are other reasons. You stated cultural reasons; the fact that

certain technologies were viewed as the preferred method. But

again, we have an opportunity here to meet all of those concerns,

and I think have benefits to the Service, the taxpayer and so on.

There are a lot of questions I would love to ask, and maybe I can

talk about them in private later. But this Subcommittee has to

come up with this report, and Ms. Johnson has asked most of the
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good questions. I think we have gotten good answers. The two key

ones are the fee and the extension, I think, that we still need a little more input on.

Let me just be clear. I think H&R Block stated its position clearly on the fee and the extension. In terms of the general notion—

let us stick with the fee for a second—of paying a fee—forget who

it is paid to—do we have agreement from the other panelists that

that would be a good incentive to put in place?

Mr. HARRIS. The payment to the practitioner or the transmitter?

Mr. PORTMAN. Yes.

Mr. HARRIS. I think there needs to be an incentive. That would

help. I mean it would certainly move some people to give them $2

or $3, or whatever the number is for each return they file electronically.

Mr. PORTMAN. In the legislation though there is no stipulation as

to the amount; it is a fair market cost.

Mr. HARRIS. I think there has to be clear incentive to the practitioner community that this is in their best interest. I do not know

what that number is. I am not even sure what that incentive is.

It could be something as out of the box as furnishing them the software at no charge to electronically file the returns, but there needs

to be incentive to move people into electronic filing.

Mr. PORTMAN. OK. Extension of deadline. I am sorry. Mr.

Carver.

Mr. CARVER. Just a quick one. The realities of those people that

work in the service centers now—the temporary employees—if you

do that same entry work, because you have to sit there and enter

every item in the software, whether it is at your home PC or

whether it is in the H&R Block office of a practitioner’s office, there

is a labor cost. And I think it is fair, that if the government is getting a much better quality product, and able to do their job better,

that they split some of the savings they are having for not doing

that labor, back with the people they are transferring the labor

costs to. That is my personal feeling about it.

Mr. LANE. Can I come in under fee issue? The fee issue, as we

have pointed out in our testimony, there are other ways to

incentivise practitioners to get involved in this. The fee is an interesting concept, and as I said, we see the package as a consistently

woven cloth. It is a toolbox, and there are 10 tools in it, and they

are all needed for different things.

The problem you have with the restriction on $2 or $3, whatever

it is, but if they cannot be charging the client for electronic filing—

The problem you have with that, is that for a small practitioner

with 200 or 300 clients, you are talking about a $600 payment, and

in exchange for taking on all of this additional processing work,

which if they are not able to charge the fee to the client, they are

going to be paying a transmitter, because they do not transmit

themselves; they are going to be paying a fee to some transmitter.

So the problem you have is the technical support, if it is not bundled into their software package—some software packages provide

the electronic filing option for no additional charge. And I think

what will happen is—we happen to support a marketplace resolution to this problem. I think what will happen is, if the IRS accepts

all forms, and incentivises it along the lines that are suggestions
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we proposed in our pilot test—let us file powers of attorney electronically, let us file transfer requests electronically, let us file balance-due returns on March 15, and not transfer the credit until

April 15. I mean there are all sorts of incentives you can build in.

The market will exist. You will get a tremendous increase in electronic filing, without the necessity of having to have the Treasury

shell out this money.

I have some concerns and our members have some concerns,

about taking away the ability to get the technical support you need

to support filing these things electronically, because they are complicated processes; they are not just pushing a button and sending

it off in many cases. Sometimes they bounce back, and then somebody has to do the work on resolving that.

That whole issue for the average firm, of $600 that they would

get back is probably not worthwhile. It would be a disincentive to

the practitioner. But as we see it; there are some cases it is going

to be an incentive, so we did not object to it, but I think we have

some problems the way it was worked.

Mr. PORTMAN. It is part of the woven fabric, plus over time those

fee structures will adjust to take that into account.

Mr. LANE. Exactly. The marketplace will determine what the

pricing structure will be.

Mr. PORTMAN. My time is up. Just on the extension, and Mr.

Zimmerman, I understand you are opposed to the fee and opposed

to the extension. Let me just ask a general question on the extension.

As part of this woven fabric as Joe said, because it is a combination of many different incentives, is there any objection specifically

to the extension as part of this series of incentives?

If I have a moment, Mr. Zimmerman, I will let you speak, subject

to the Chair’s cutting me off because my time is up, as to your concerns on the extension.

Chairman JOHNSON. You can respond.

Mr. PORTMAN. Your concerns on the extension, and again, I

thank you all for your work.

Mr. ZIMMERMAN. Yes, I think there is excess capacity in the system now, certainly in the many operations out there. It is certainly

true in H&R Block offices. We’ve got excess capacity from the middle of February clear to the 1st of April to file more returns electronically, prepare more returns electronically. So I do not believe

moving the deadline is going to be that large of an incentive or that

it is really going to dramatically increase the number of returns.

The fee issue is something that I think is important, and the first

step that we need to do, before any incentives are discussed, is to

figure out exactly what we are dealing with. How much does it actually cost us to process a return at the IRS? Before we can start

divvying up the money and the savings, it would really be nice to

know exactly how many dollars that is. And then, if there are sufficient dollars, and it makes good business sense to do that, incentives might be the way to go. But certainly, just throwing this out

on the table, and not knowing where to start does not seem to be

too prudent to me.

Chairman JOHNSON. Ms. Thurman.
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Ms. THURMAN. You have not really had much input into this, and

you actually are one of those that proposed the $3 or whatever fee.

Maybe you would like to explain to us, and I realize your position

is a little different because you are a transmitter, and not necessarily one who puts everything together. You just kind of bundle

it and send it to us. So maybe you would like to give us some explanation on your reason.

Mr. WOLFE. This idea is something that the Commission came up

with. We supported the Commission’s position.

We believe that cost is the number one, or most significant reason people do not file electronically. We would like to get that cost

down to zero. One of the ways that we think would be most effective is to pay an incentive. Specifically we believe the incentive

should be paid to the transmitter, because the costs of electronic

filing—not what taxpayers pay, but the real costs of doing it—are

primarily incurred by the transmitters. Transmitters have the computer systems, the programmers, the customer service staff, the

technical support staff that make this happen. We believe over

time volume will increase so that we can get the actual cost of

transmitting the returns down to just several dollars. Our belief is

that if that can happen, and if an incentive then is paid to cover

those costs, there is no reason that we as a company should not

provide that free to all of our customers, including professional preparers, as well as in consumers. If electronic filing is provided for

free, then hopefully that will extend all the way out to the individual taxpayers.

Ms. THURMAN. I am not sure that I understand all of this. If my

accountant decides to send my tax return by electronic transfer, he

cannot just do that? Do I have to go through somebody? Is that by

law?

Mr. HARRIS. Some can. Some have made the decision to have the

ability to do it themselves.

Ms. THURMAN. What is the cost to them to do that if they decide

to do it in-house, without anybody else in the middle?

Mr. LANE. It depends on the software product they have.

Ms. THURMAN. I am sorry?

Mr. HARRIS. It can vary from software product to software product.

Mr. LANE. It depends on the software product. It can be 20 cents,

it can be $20, depending on the package that you purchase. Some

of the software vendors have an additional charge for each tax return that is submitted electronically. And it also depends on whether or not there are any financial products in connection with it. For

example, if there is a refund anticipation loan that is connected

with it, there are additional fees on top of that. And then that has

to go through a transmitter because there is not a direct transmission from the practitioner’s office to the Service, because there

is a bank involved, and then there is a financial product involved.

So it has to go through a transmission source, and then the bank.

So there is a controlling element that is outside the practitioner’s

office when that refund comes back through.

I confused you more.

Ms. THURMAN. I do not know that I am confused necessarily, as

much as that I think there is a lot more to this whole idea of trans-
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mitting electronically that is outside of the realm of IRS, as much

as it is within the business world in itself.

Mr. LANE. That is right.

Mr. HARRIS. It is more than just pushing a button. I think the

perception is the software that we use to prepare manual returns

or paper returns, all you would have to do is push a button and

it would go electronically, and it is not that simple. There is more

work involved. There is more cost involved that the practitioners

now have to charge for to make money, or they have to have the

increase in business, which right now the refund marketplace provides.

Ms. THURMAN. So who then controls all of this? I think what I

am trying to get to is that it seems that it is easy for us to talk

about IRS on this end as far as the electronic filing, but what I am

hearing you say is there are a lot of other steps that are incurred

that really have nothing to do with IRS at all, and so then, if that

is controlled, who controls that, and who stops those barriers from

happening, and how do I get to that point that I can push that button and send my filing?

Mr. HARRIS. I think that the ECAG that this bill is putting in

place is extremely important. It has to bring all parties together to

develop a program that is beneficial to everyone, including the taxpayer, the practitioner, and the IRS. And I just do not think that

program exists today.

Ms. THURMAN. So where is Bill Gates when we need him?

Mr. LANGER. That program really does exist today with many of

the software packages. There is a lot of integration done with tax

packages and transmitters and all electronic filers, trying to make

that as easy as possible. There is a cost to develop the software;

there is a cost for support, which is mentioned here. And the cost

for the telephone communication is actually probably the smallest

cost of that whole process. And so that can happen today. Companies like Intuit, other tax preparation companies, actually do have

it, where you can basically press a button; the file is created. It

goes through validation. It is transmitted either directly to the IRS

or to the transmitter, and then goes on from there. So that really

does happen today.

Mr. WOLFE. To give you a quick example, with TurboTax and

people who file from home, our costs last year to actually process

a complete electronically filed return were $10. We believe that we

can drive those costs down dramatically. But those costs included

computer costs, costs that we paid to outside companies, such as

Nelco and NUTS, as well as the significant costs of Intuit personnel in call centers that take calls, and are answering questions

from individual taxpayers about how electronic filing works.

Ms. KELLEY. And if I can make the comment, that is true in businesses as well, business taxpayers. They cannot just flip a switch,

and there is a significant amount of internal preparation that goes

into that as we saw with the EFTPS.

Mr. LANE. Let me give you an example, just of some of the additional strokes you have to do. When you file a paper return most

practitioners do not key in all of the W–2 data; they only key in

the wage data on there, because for calculation purposes that is all

you need. But if you file an electronic return you have to rekey ev-
130

erything that is on the W–2 because that has to get transmitted

electronically. So there are additional keystrokes in the practitioner’s office.

This is what I was talking about before, where when you start

to do parallel systems in an office you have a tremendous potential

to mess up and have it come back, if the part-time person you have

working for you does not understand the difference between an

electronically filed return, what path that follows once it leaves the

preparer’s office as opposed to a paper return. So there are additional steps that complicate it.

Mr. ZIMMERMAN. Let me run down just a couple of things here.

These are some of the steps in the electronic filing process. We

have our preparers, 85,000 of them, that we have to train and educate on how to electronically file returns. We have our software development group that develops our electronic filing package. We

have our support group which supports that electronic filing package because the returns that we send to the IRS are bounced back

because of errors, and we have to correct those.

We have all of our phone lines in our 8,500 offices, several thousand of them out there that we use to file directly from our offices

to our third-party transmitter. We have all of our advertising that

I mentioned, that we spend up front to get people interested in

coming in to electronically file their return. We have our transmitter cost that we pay to a third party. We’ve got all of our back office costs of bundling up all the 8453s, attaching the W–2s, and

mailing all that information to the IRS; getting letters back from

them saying that we are missing 8453s and W–2s; going back out

to the client, getting that information; remailing that information

back in to IRS so they can do their verification. And the paperwork

nightmare of the 8633s. Every time we move a district manager

around I have to sign off on all of these forms so that we can electronically file returns.

So, if you start putting all those costs together, and if you have

a good high quality electronic filing product, it is not inexpensive.

Mr. CARVER. I just need to add one thing. This is a transition

cost. As the IRS is going to have downsize as electronic goes up,

and change the way they do it, the industry on the outside is going

to do it. I think Joe’s case is very clear about two filing lines. When

it gets to be one all the software people in the country will have

to provide that, and so it will be seamless at that point. But in the

meantime there is some transition costs. So I think if you make it

10 years, these costs will hang around a long time. If it is a shorter

period of time than that it is amazing how fast the software and

the rest of the industry can adapt to what their customers want.

It is incredibly fast.

Ms. KELLEY. And the same thing is true with businesses, and I

say with complete confidence, that to the extent that business can

work with government on these electronic programs, their costs

will go down.

Chairman JOHNSON. Will the gentlelady yield.

Ms. KELLEY. All right.

Chairman JOHNSON. I understand the point about two systems

and the problems that that creates, and the inevitability of the two

systems situation during the transition. But I do not quite under-
131

stand Mr. Zimmerman’s comments in the light of Mr. Wolfe’s comments.

Many of the costs that you point to, Mr. Zimmerman, you also

have with paper filings. And what are the unique costs, over and

above, for an electronically filed return, and are there any offsetting savings?

And Mr. Wolfe, when you say $10, are you saying that it cost you

$10 over and above what it would cost you to file that same return

manually, through paper?

Mr. ZIMMERMAN. It is very hard right now for us to break out

these costs between our electronically filed returns and our paper

returns, just because they are dual systems, and most of it is all

blended together. So I cannot give you an exact cost of what it cost

to file a return electronically versus on paper.

Hopefully, once we get systems that are integrated, it will be less

expensive, we can charge less, and certainly we are going to lower

our fees this year and we are going to see if that helps drive more

business in, and helps us increase the number of electronically filed

returns.

Chairman JOHNSON. But for instance in advertising, you are

going to advertise anyway. It is a question of what you say in the

advertisement, and you are going to advertise in a way that you

think will maximize your position in the market. And if you are advertising electronic filing in your advertising, it is because you

think it is going to expand your customer base.

So I do not know that we can attribute your advertising costs to

the cost of electronic filing.

Mr. LANE. Could I add something? He does have a cost. The way

the current system is set up, if he does a 1040–EZ for somebody,

and files it, that is a 1-page form. If he files it electronically, he

still has to send IRS the 8463—I mean the thing with the signature, and the W–2s, so he has in effect doubled his costs by sending

that to you electronically, because he still has to send in a piece

of paper and a W–2 attached to it, which he might as well just

have done with the 1040–EZ. So he has incurred twice the costs

to file that return electronically than it would have been to just

sent it to you on paper.

Mr. ZIMMERMAN. There are incremental costs to doing this, and

again, I think as we work together we can drive those costs down,

so it becomes cost effective for both the IRS and for taxpayers to

transmit their returns electronically.

Mr. LUTES. Our company only does electronic filing, and we create software only to electronic file. And we have a development

center of about 25 programmers that do Federal and State electronic filing software, and that is all we do. And we also have support staff to have customers call in about only electronic filing

issues. We work with companies like Intuit. They handle all of the

tax preparation calls; we handle the electronic filing costs. And so

the costs of what we have done really is the electronic filing cost

alone. So we can identify that cost very easily.

Chairman JOHNSON. And what is your cost per return?

Mr. LUTES. It kind of varies, based on the company a little bit,

but it can range from anywhere from $4 to $7.

Chairman JOHNSON. Mr. Wolfe.
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Mr. WOLFE. The $10 number that we quoted is for people using

our product at home. We find that people that use it the first time

generally have more questions, and it costs money to answer their

questions. When electronic filing is being done through a professional preparer, they get very good at it, and so there are fewer

questions that are asked of us.

Our software is perfectly capable out of the box of printing a

paper return, so the costs that we incur, the $10 that we incur for

electronic filing, are all incremental costs. We believe, as several

others have testified, that we can drive those costs down dramatically. We are implementing new systems that will be fully functional this year, and even more functional next year, if that is possible. And we think that those costs are going to come down to the

$3 range very very quickly as volume increases.

Chairman JOHNSON. Thank you.

Ms. THURMAN. I think you made a very good point about this

issue, that the longer we linger, the longer it is going to take people to really get into this. And so, with the Commission—and there

have been these recommendations for IRS and what they should be

doing—if you were given the opportunity to tell those people out

there in the world that were trying to get this done electronically,

what would you tell them that they needed to do quickly? What

kind of recommendations would you be giving them?

Mr. CARVER. Of the 70 percent that are already in electronic format today—and we are talking about practitioners, we are talking

about the business returns and so forth. And I would start this

meeting process, this committee process, to meet with those people

to find out what it would take them—how quickly they could do it.

Ms. THURMAN. And they have not done that to this point.

Mr. CARVER. They have not done that, and they need to hear

from those people, what it would take to get there in 2 years, or

3 years, or 5 years. And if you want to pay what it takes for 2

years, then you could do that. If you think the 5 year or the 3 year

is a better one, then that is the way you go.

Then the next step would have to be for those people who are not

presently filing electronically, or do not have a computer, and then

you need a separate kind of scale for them. But to say 10 years for

everybody misses this opportunity of 70 or 80 percent of the volume

that is there, ready for some significant work; some hard work, but

some quick work.

Ms. THURMAN. I want to ask Mr. Lane one other question because you emphasize this point in your testimony about the issue

of the window period of time, from the 24 to 36 months.

Quite frankly, what I do not know is what the answer from IRS

would be. Maybe you can help me with this, since they are not

here. But if we were to say that that was the incentive instead of

money incentives or other, which is a lot easier probably to carry

out, why would they tell you that that is—or they may not tell you

that that is not something that could happen.

Mr. LANE. Well, putting myself, in the guise of speaking for the

IRS—I did that at one point; I do not do it anymore.

Ms. THURMAN. Oh, but give it a shot.

Mr. LANE. I would suggest that their initial reaction from a cop

perspective would be to resist it. The reality is, they are giving
133

away nothing if they analyze it with a cold eye, and look at it

unemotionally.

Very few tax audits are started in the third year of the statute,

most of them are started in the year after filing or the second year

after filing. Very few are open in the third year after filing. Very

few electronically filed returns are audited to begin with, and they

have an overall audit rate at 1 percent. So you are not looking at

a significant giveaway. I think they would resist it, but if they were

forced to look at it and really consider it, they might go along with

it.

Mr. CARVER. If I may just add a quick comment. I think they

would be very supportive of it. They cannot do their audit until

they get the data through, and that data takes 18 months today.

When you guarantee them the data is there in 6 months they will

be ready and willing to change it, but not until.

Ms. THURMAN. Mr. Carver, I agree, and in fact that has been a

contention that I have talked with some other folks about, because

there has been some legislation that has been introduced. But some

are saying, well, if we do not get the information how can you do

this, and why would you limit us. So there is a lot of controversy

over that.

Madam Chairperson, I appreciate you giving me this opportunity

to do extended questions, and thank the panel.

Chairman JOHNSON. Thank you, Ms. Thurman. I do want to just

ask you one other question. Repeatedly the issue of the forms that

cannot be received electronically have come up, and Mr. Lane, you

particularly have mentioned over and over again that we need to

be able to get all the forms on. And clearly the whole 1040 community is the biggest community, and their forms are not acceptable

yet.

I do not see that we can reach the 80 percent unless we can get

more forms on, because 80 percent of the taxpayers are not going

to be eligible. So at what pace do you think the forms could be accepted by the IRS. What timeframe would we be looking at? Because clearly 100 percent of form acceptance is going to be really

important to getting this system moving, and all the taxpayers involved.

Mr. Carver, do you have any thoughts of that, and then I will

open it to all of you.

Mr. CARVER. Yes, I do. The reason that there are so many forms

and schedules now that are not on there, is because of the state

of the equipment they have inside the service centers. It is old computer equipment that cannot handle any more complexity——

Chairman JOHNSON. But just to stop right there 1 minute. That

is going to take us quite a few years to fix, is it not?

Mr. CARVER. No, ma’am. I think that the equipment they need

to replace it with is off-the-shelf kind of equipment that exists

today. It is a matter of putting enough programmers on it to include that into the program. If you wanted to farm it out to the

private community, they could probably do it a lot quicker. I mean,

I just think it is a matter of how many resources you can get——

Chairman JOHNSON. Do you think this is a couple of years

project to get all the forms on?

Mr. CARVER. Absolutely. At the outside?
134

Chairman JOHNSON. At the outside. The rest of you.

Mr. LANGER. I made a recommendation to the Service this

spring, on how they could accept all forms electronically this year.

They have the ability to accept what they call unformatted statement. And with any software company they have the ability to

print the return, and print it basically in an unformatted way,

much like the form would appear, but only in a text format. And

that would allow any form to be filed electronically, and really not

change the process that they already have; just allow more statements to be attached to the form electronically. They like the idea; they have not acted on it at this point.

Ms. KELLEY. Ms. Johnson, if I may. I think as well the expansion of electronic filing into business returns and business information

documents, can really spike up what IRS is receiving, because as

I stated before, some of those returns do not have the kind of complex schedules that some of these individual tax returns have.

Also, if you take a look at market segmenting, when I was on IRPAC, the IRS Information Reporting Program Advisory Committee, there was a gentleman from a major financial institution that

raised his hand and said they could give IRS 50 million returns tomorrow, if they had the equipment to accept it. So, I think if the

IRS looked at, instead of mandating everyone, look at the kind of

companies that are willing to give them large volumes, and go after

things in an incremental fashion, which seems to go against their

implementation philosophies to date, that you might see a very

large return in a shorter amount of time, than trying to figure out

the entire universe. And again, working with the gentlemen here

and other kinds of companies that can provide you with that large

return on a smaller investment, I think I would be beneficial to upping your volume. Chairman JOHNSON. I appreciate your patience in this rather long hearing, but we do very much appreciate your input. Thank

you. The hearing is adjourned.

[Whereupon, at 2:28 p.m., the hearing was adjourned.]

[Submissions for the record follow:]

Statement of American Bankers Association

The American Bankers Association (ABA) is pleased to submit this statement for

the record in connection with the September 9, 1997 hearing before the Subcommittee on Oversight of the Committee on Ways and Means of the United States House

of Representatives on the recommendations of the National Commission on Restructuring the Internal Revenue Service (Commission) to expand electronic filing of tax

returns.

The ABA brings together all elements of the banking community to best represent

the interests of this rapidly changing industry. Its membership—which includes

community, regional, and money center banks and holding companies, as well as

savings associations, trust companies, savings banks and thrifts—makes ABA the

largest banking trade association in the country.

At the outset, we would like to commend Chairman Nancy Johnson (R–CT) for

holding this hearing to further examine the June 25, 1997 report of the Commission.

We would also like to commend Representative Rob Portman (R–OH) for his work

as co-chairman of the Commission and for the introduction, along with Ben Cardin

(D–MD), of the ‘‘Internal Revenue Service Restructuring and Reform Act of 1997’’

(H.R. 2292). This important legislation would provide a number of incentives to encourage the electronic filing of tax and information returns. It would also authorize

appropriate amendments to the Internal Revenue Code to ‘‘facilitate paperless electronic filing.’’

The ABA has worked closely with the Commission to develop proposals to improve

compliance through the effective use of advanced technology. The ABA particularly
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1 By way of background, there are generally two parts to a bank credit card transaction. The

credit card ‘‘issuing bank’’ handles card issuance and the cardholder relationship. It receives income from consumers to cover its operational and processing expenses. The ‘‘acquiring bank’’

handles processing for the merchant (in the instant case, the IRS) and receives income primarily

from a ‘‘merchant discount fee’’ to cover operational and processing expenses, credit risk, and

expenses to support the merchant (including authorization, merchant accounting, customer service and supplies).

supports the Commission’s recommendations to expand electronic filing of tax and

information returns. Electronic filing would significantly improve efficiencies and

promote the goals of the financial services industry to expand new products and

services while also promoting Internal Revenue Service (IRS) efficiency and other

objectives.

The Taxpayer Relief Act of 1997 (P.L. 105–34) [hereinafter TRA] contains a provision, which if left uncorrected, will impede rather than encourage electronic filing.

A critical component of the streamlining of the electronic filing process is reducing

the number of paper checks written by taxpayers to the IRS. The payment of taxes

by credit card is an important subcomponent of reaching that goal. Permitting taxpayers to make tax payments by credit card is also expected to improve taxpayer

convenience and satisfaction. The TRA permits the payment of taxes by credit card

but prohibits the payment of any fees by the IRS for use of a credit card tax payment service. By contrast, the instant legislation, H.R. 2292, introduced prior to passage of the TRA, contains a comparable provision that would also provide for a separate budget appropriation for payment of credit card fees. ABA urges you to correct

the current law and pass legislation that would allow the IRS to pay appropriate

merchant fees in connection with credit card payment of taxes.

We believe that most taxpayers will not be able to use their credit cards to pay

taxes under the TRA provisions. Typically, one bank is responsible for processing

a merchant’s charges and for servicing the merchant’s account. Credit card companies incur costs and receive payments from merchants for those services, and we

believe the IRS will not be able to receive those services free of charge.1

It is axiomatic that anyone buying a service should pay a fair value for said service. There should be no special legislative exception made for the IRS. We believe

that the implication that corporate taxpayers should provide financial services to

the IRS, at no cost to the IRS, establishes a dangerous precedent with respect to

the financial services industry and others. It has been suggested that the costs of

providing credit card services be passed on to the taxpayer/customer. We do not believe that is the proper solution. The IRS will likely receive a negative reaction from

taxpayers that will only serve to increase taxpayer dissatisfaction with the IRS and

the entire income tax process. Our proposal to permit IRS payment of credit card

merchant fees would not provide any special treatment for banks. Indeed, it would

simply restore the level business playing field that the TRA inadvertently upset.

Currently, governmental entities at all levels, state and local as well as federal,

are allowing taxpayers to make payment by credit card. The TRA provision prohibiting the IRS from paying ordinary merchant fees departs from current practice and

prevents credit card banks from being able to offer card services to the IRS and,

ultimately, to consumers who wish to expedite the filing and payment of federal

taxes through the use of credit cards.

CONCLUSION

The ABA urges you to pass legislation that will allow the IRS to pay the appropriate merchant fees in connection with tax payments made by credit card. Without

modification, the current law will continue to impede and discourage the full implementation of electronic filing of tax and information returns.

We appreciate having this opportunity to present our views.
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AMERICAN SOCIETY FOR PAYROLL MANAGEMENT

NEW YORK, NY 10025

September 18, 1997

A. L. Singleton

Chief of Staff

Committee on Ways and Means

U.S. House of Representatives

1102 Longworth House Office Building

Washington, DC 20515

Honorable Ways and Means Committee Members:

ASPM is a professional association of the senior managers who control the prepa- ration of payroll and employment taxes for large employers in the United States.

We represent large employers, systems vendors and tax service providers. As a

group, we collect and account for a major proportion of the income and employment

taxes the Internal Revenue Service receives.

We take great pride in collecting and paying the taxes exactly as required by law in a cost-efficient and timely manner. However, Congress and the IRS could make

our tasks easier by changing many of the ways they do business. Although there are many areas in which IRS restructuring may be appropriate, ASPM would like to see them attack Simplification and Reduction of Reporting Burden first. There are several initiatives which could significantly reduce employer

burden as well as streamline IRS into a more effective operation. Some of the best

initiatives, such as the Simplified Tax and Wage Reporting System (STAWRS) have

stalled before the complexity of reforming the existing system and because of the

inability of federal and state agencies to agree to standardized approaches. We believe that Congress must keep initiatives to simplify and standardize reporting systems alive, if the cost of tax collection is to be reduced. It is not desirable for Congress to issue mandates for new reporting programs to the states and employers.

However, it is very important that Congress empower the IRS and SSA with the

ability to set standard formats and definitions for all employers and federal and

state agencies to use. State and federal agencies should be encouraged to exchange

data in these standard formats, where appropriate, rather than require employers

to report the same information repeatedly to different agencies in slightly different

formats. Tax simplification will be difficult, if not impossible to achieve without

standardization of formats or input requirements. SSA and IRS have a partnership

in the collection of wage and tax information that needs to be streamlined and

strengthened. We believe that state and federal agencies, such as INS, should leverage their efforts from these existing systems and not require additional, duplicate

layers of reporting. Congress, not IRS, is responsible for ensuring duplication does

not happen. No real progress will be made on tax simplification and reduction of

employer reporting burden until Congress mandates a national harmonized wage

code.

ASPM believes a steady program of systems modernization must be pursued at

IRS. Employers are rapidly changing and developing new technologies for exchanging data, imaging and networking. We have readily partnered with IRS and SSA

in moving to new technologies, but IRS must pursue its upgrades in a deliberate

fashion. We can support a limited number of enhancements each year, so it is incumbent upon IRS to move ahead steadily and avoid falling behind the current technologies and then trying to suddenly leap ahead. It is the crash modernization program that leads to millions of dollars of wasted modernization efforts. We strongly

urge Congressional, OMB and IRS budget makers to keep IRS systems modernization efforts funded at consistent and proper levels, while requiring IRS to rationalize

and automate these systems. This modernization effort is a partnership between

employers and the government agencies, because it reduces the administrative cost

and it lessens the burden of tax collection. Goals for electronic filing will not be met

if IRS does not pursue a measured and planned systems modernization effort.

ASPM believes IRS should strengthen its out-reach programs aimed at employers.

Since employers collect the vast majority of the tax, it is clear employers must have

timely, accurate and understandable regulations, guidance and publications, if we

are to fully comply with the law. Without its partnership with the employer community, the IRS could not function. Yet, much of IRS regulation is aimed at levying

egregious penalties for minor compliance failures, such as the late or insufficient deposit penalties. Severe penalties should be limited to chronically non-compliance em-
137

ployers, the fraudulent taxpayer, or grossly negligent taxpayer. The consistently

compliant employer should not be subject to egregious penalties for minor or rare

human errors. The complexity of the laws that employers are expected to administer

is mind-boggling to anyone who is not regularly involved. It requires a great deal

of effort to know all of the restrictions, reporting and deposit requirements. Compliance and collections can be helped only by the IRS taking a proactive and positive

role in educating employers about current requirements and involving employers in

pending changes. Improvement in the numbers of employers using electronic filing

options can increase only if outreach programs educate them about the advantages

and technical requirements of electronic filing. It is very interesting that IRS is proposing closing its Martinsburg Computing Center telephone support center at the

same time it is starting initiatives aimed at improving customer service. The Martinsburg phone support center has traditionally been very responsive and has delivered high quality customer service to employers and other electronic filers. Martinsburg is widely considered to be one of IRS’s most successful call sites. With OMB and Congress constantly searching for new revenue sources, such as non-cash employee benefits and ever faster deposit deadlines, the complexity and

difficulty of the payroll and employment tax job is increasing all the time. It is extremely difficult to withhold more than an employee was paid to cover a non-cash

employee benefit and to make that deposit on time. Congress and IRS in writing

the legislation and regulations need to keep in mind the business systems that underlie these processes. It is very difficult for a payroll system to process payments

made from the Accounts Payable department, which may be in another office or

even in another city. While payroll withholding is an extremely effective tax collection tool, it cannot be used in such a way that it requires the employer to take on

the employee’s role in proper withholding election, nor can it require the employer

to use information that it does not have. Out-reach programs, such as employer conferences, improved publications, improved communications and high quality telephone support more than pay for themselves in improved compliance and reduced

efforts spent on error correction and prompt tax collection. ASPM believes that Congress should either encourage or require the IRS to work with industry representatives, such as ASPM, in designing processes, developing procedures, and implementing legislation that affects a specific industry or segment of industries. Too often,

IRS develops a process or writes a regulation and then asks for public reaction after

the fact. It would be far more efficient for the IRS to have those affected working

with the IRS. This would reduce the likelihood of major flaws, the need to rewrite

or redesign and would increase industry buy-in. The Internal Revenue Service frequently takes the blame for things that Congress does. It is very tempting for Congress to use tax penalties or loss of tax exemption

for benefits in order to enforce social causes. This places IRS in the position of enforcing provisions, such as discrimination testing of benefits plans. ASPM urges you

to place enforcement of social goals with the enforcement organization in the department or agency responsible for that function, such as DOL or INS. It is important

for the cost-effectiveness and efficiency of the IRS that it stay focused on its core

mission; revenue collection. Such unrelated regulatory requirements make electronic

filing of information and tax returns from employers much more difficult and error

prone.

It is important that Congress pass legislation that is clear and enforceable. It is

just as important that IRS write timely regulations that allow employer compliance

to be effectively and efficiently implemented. It is important that Congress empower

IRS to reward compliance and punish noncompliance. The worst thing Congress can

do from a compliance perspective is to pass retroactive changes to the tax law. This

almost always rewards the non-compliance employer and punishes the compliant

employer. The repeated lapsing of the tax exemption for educational assistance and

its retroactive extension has encouraged employers to take a wait and see approach

toward compliance. It has also greatly complicated the job of developing automated

systems to perform electronic filing.

We would like to recognize the progress SSA and IRS have made in electronic reporting of W2 information, especially the download of state information from SSA/

IRS files to state revenue offices. Currently, employers are sending W2 information

by magnetic media or paper to the Social Security Administration (SSA). SSA captures federal and state data from the W2s, then passes the data to the IRS. SSA

or IRS could transmit the data directly to the States. Getting the information in

bulk and a standard format would have to be much more efficient and effective for

the states than receiving large numbers of separate transmissions from thousands

of employers. The current process utilizes very old technology requiring the manual

loading of tapes and the processing of batch programs. This causes long delays. IRS

frequently does not get the electronic submission information until six months after
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we submit the information. This time lag needs to be greatly reduced. The transmission from the federal agencies could be made via electronic file transfers and

automated to eliminate a large number of what are now manual tasks. It would also

benefit employers, especially large employers that do business in many states. Currently, employers must create magnetic tapes, cartridges or paper for each state and

file this information separately with a different set of requirements for each state.

This is a very costly year-end mandate for employers and for the states receiving

the information. It would take federal leadership to mandate a standard format, but

would not require significantly more federal or state effort. Electronic submission of W2 information is in pilot and should be put on a fast

track, so it could be made available to all employers. Many employers are rapidly

moving into newer, client-server technologies and the old tape formats are not even

available on their newer equipment. When budget cuts were made last year, the IRS

systems modernization project was heavily reduced. This makes no sense for employers nor for the federal government. Meaningful modernization of these systems

is essential, if IRS is to continue to receive electronic information from employers

without placing an extreme burden on employers to keep and maintain obsolete

equipment solely to report to SSA and IRS. Budget funds should be redirected to

meaningful modernization efforts and not just reduced. For all reporting requirements, the form of the reporting should follow the func- tion being performed. Employers do not mind reporting at the state level, but such

reports should be submitted to the employer’s state who should in turn distribute

the information to the other states. Things like child support should be sent to one

central state agency, not to counties. Each state should distribute to the other states

and to its own counties. If information is required to go to the federal government,

then it should only go to one place in the federal government and then be distributed electronically to the other federal agencies, the states, and their agencies. ASPM would like to see IRS and SSA work more closely together. SSA and IRS also need to work more closely with the states. For example, SSA has asked IRS

to accelerate W2 filings for employers going out of business. Paper forms for 1997

have been issued, but magnetic media formats have not been issued and won’t be

until July or August, 1997. The TY 1996 magnetic media format cannot be used because of 1997 format changes. When an employer with more than 250 employees

goes out of business, they must still file on magnetic media. SSA recommends that

the employer going out of business go back to IRS and apply for an exemption to

allow them to file on paper. This is a lot to expect of an employer going out of business. On the pilot W2 magions for 1998, pilot project employers will be using the mag- netic media specifications. Has SSA coordinated with the states that are still expecting the old federal format? Anyone helping IRS and SSA with a pilot must now consider if they will be incurring an extra expense of filing with both formats. This is

still in the early ‘‘discovery stage’’ as bulk filers contemplate participating in the

pilot TY 1998 SSA program, but these questions should already have been answered.

IRS should continue and emphasize development of a unified reporting standards

specification for federal and state wage forms as they have done in the past with

the TIGERS group within ANSI X12. Currently, federal and state specifications

vary from agency to agency. This causes employers to spend endless hours in maintaining and conforming to the different specifications. The continued development

of Electronic Data Interchange (EDI) is recommended. Also, federal and state ID

numbering is just as varied. It would be more efficient to replace the current federal

and state agency IDs, with a single employer ID.

The Simplified Tax And Wage Reporting System initiative (STAWRS) was making

great progress toward standardization and automation of reporting. There has been

a tendency in the current administration to de-emphasize this effort because of the

changing political climate and resistance from the state government agencies.

ASPM and the members involved with STAWRS strongly support this initiative

and recommend that it not only be continued but re-emphasized. This program has

been supported and funded by both Democratic and Republican administrations and

is essentially a nonpartisan issue. It is a program that would greatly reduce tax and

information reporting burden on large employers and bulk reporters who collect the

great majority of taxes and report the greatest volumes of information to government.

STAWRS really consists of two primary proposals:

1.) Single-point filing and processing of tax related information.

Congress needs to mandate that a single federal agency (like IRS, the most logical

choice), be the sole collection point for all tax related information. If this mandate

is given to IRS, the legislation would have to make it a specific part of the agency’s
139

mission, so any funds at the agency’s disposal could be used to pay for the costs

of collecting and distributing the information. Specific empowerment to distribute

the information for legitimate governmental purposes to other government agencies

with specific safe-guards on the confidentially of the information would need to be

included. All other agencies would need to have a mandate to cooperate with the

effort to build the centralized collection point and would need to be given incentives

for using the centralized collection agency. There are significant disparities between the interests of federal agencies and var- ious state agencies and they will not willingly cooperate unless there is something

in it for them. Low cost or no cost distribution and rapid distribution of revenues

collected through centralized single-point filing would be required to overcome state

objections. If incentives are provided and data dissemination is rapid, then the various states would have substantial reasons for joining voluntarily, especially in

areas that have traditionally resisted single-point filing proposals in the past, such

as state unemployment tax agencies. Any single-point filing project would need to be phased in over a period of years as state agencies choose to join. We would recommend starting with W2 and Unemployment information and operating a pilot for large employers and bulk filers. Then

expand the program to increasingly larger numbers of employers. Such participation

would have to be voluntary, but we think a surprising number of businesses would

participate.

Each state could have one record for each employee in a standardized format that every state would have to accept. The format would include income tax and unemployment data. The content of the data in the fields could be calculated differently

for each state. The record format of the data would be exactly the same. Any state

participating would have to use the standard file format, such as the’S record in the

current W2 filing. In this manner, a 50 state employer would submit 4 files each

year for processing all of the tax related information, instead of the 251 tapes that

presently can be required. Most large employers do not have employees in all 50

states, but even an employer who does business in only 16 states would see a reduction to 4 files from 81 files. The cost savings to business and government would be

very substantial resulting in higher profits, more employment, more productivity,

lower tax rates, and increased tax collections. It will also result in better relationships between employers and the government. More profits and more employment

income results in more federal revenue, while lower government costs should result

in lower tax rates. This results in a big win for state and federal government and

a big win for employers. 2.) Harmonized federal and state wage code.

The main reason that STAWRS has politically stalled out is the lack of a stand- ardized or harmonized national wage code. The federal government and each state

have set their own definition of taxable wages. Each state has also set up its own

definition of wages that are covered for fement taxes. This has resulted in 51 different systems and methods for calculating unemployment wages. Each is reported

quarterly. Many of the states have independently settled on the same calculations

and many states already use the federal definition of taxable income for income tax

purposes. Many states have voluntarily moved toward using federal information in

the ANSI X12 program, because it makes so much sense to do so. Unfortunately,

many other states have not. The Congress has the power to mandate that the states

use a uniform calculation and format for calculating unemployment wages and taxable income wages for income tax purposes. The Congress could also mandate that

the states convene and settle amongst themselves upon a standard format and calculation by a certain date or face the federal government deciding for them. This

would allow businesses to use the same calculations for every state and would greatly reduce the cost and complexity of the computer programs used to produce the information, while greatly reducing errors and noncompliance. Reduced costs and improved collections would have many of the same economic benefits discussed under

single-point filing above.

For state and federal income taxes, the federal taxable income is the obvious

standard that should be used. We believe the Congress should mandate that states

with income taxes must use the federal taxable wage as the starting point for their

own income taxes. They could make whatever adjustments they wanted from that

point, but this should be the only taxable wage that they could demand of employers

and would be required to accept the standard format. Once they are required to use

the standard format and the federal wage, using a single-point filing service is a

smart move.

It is difficult or impossible for any one state or even a group of states to show

the leadership necessary to bring all of the states together, especially when there

are so many diverse interests involved. Therefore, it falls to the Congress to show
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the leadership necessary to remove unnecessary costs and reporting burdens from

business and taxpayers. It is a compelling national interest that our economy and

tax systems operate as efficiently as possible, if we are going to compete effectively

in world markets through the next century.

It is our understanding that Form 941 is in a pilot test for electronic filing. It

should be opened up to all employers. Also, an electronic vehicle should be developed to file 940 and 945. The primary employer concern about 941 filing is how IRS

calculates penalties. IRS applies penalties based upon applying the amount necessary to make up the short payment from a portion of the next payment received.

This has the effect of making each subsequent payment also delinquent. Under the

current method the penalties can be pretty egregious. If a mistake was made early

in a quarter the error (underpayment), if not found, could create enormous penalties. There needs to be some kind of relief on the penalties for late deposit procedures under the IRS regulations. IRS needs a better process for determining if payments are timely. There is potential for re-engineering this process that would be

a win for both the IRS and employers.

The magnetic filing of Form 945 has been dropped by IRS for lack of volume and

cost-efficiency. Thus, EDI filing of 945 is unlikely. IRS asked the bulk return filers

to do a pilot magnetic media filing for Form 940 and bulk filer test partners declined, until IRS has worked out the bugs on the EDI for Form 941 and has it ready

for a wider release. The bulk filers also needed to get beyond the implementation

of EFTPS. The employer/taxpayer community can only support a limited number of

system changes each year, so it is extremely important that IRS maintain a steady

continuing modernization program rather than sudden massive changes.

Respectfully submitted,

CLARK G. CASE

Financial Systems and Employee Accounting Manager, City of Winston-Salem, NC, Vice President of

The American Society For Payroll

Management, Government Relations Committee Chair

cc: Dan Glum, ASPM President

ASPM Board Members

ASPM Government Relations Committee Members

Contact Information:, Clark G. Case, P.O. Box 2511, Winston-Salem, NC 27102,

Phone: 910 727–2660, Fax: 910 727–8299, Internet: clarkc@ci.winston-salem.nc.us

Statement of Harriet Bograd, Attorney, New York, New York

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INTRODUCTION:

I am Harriet Bograd, attorney and consultant to nonprofit organizations. I am the

founder and coordinator of the ‘‘Nonprofit Cyber-Accountability’’ listserv, an e-mail

discussion group on how information technology can help make nonprofit organizations more accountable. In the past two years I collaborated with Peter Swords of

the Nonprofit Coordinating Committee of New York on a research project on ‘‘Accountability in the Nonprofit Sector.’’ I am also a Research Affiliate at Yale University’s Program on Nonprofit Organizations.

The ideas submitted here are my own, but they have been informed by three

years of daily discussions with hundreds of people. The Nonprofit Cyber-Accountability listserv, currently with 280 members, makes it possible for an ever-widening

circle of state and federal officials, nonprofit leaders, scholars, accountants, attorneys, journalists, grantmakers, fundraisers, and ordinary citizens to engage in a

consensus-building dialogue on nonprofit accountability.

This testimony starts by stating my recommendations, discusses why these are

important, answers possible objections to these proposals, and finally lists resources

for learning more about ‘‘nonprofit cyber-accountability.’’

I endorse today’s testimony of the National Council of Nonprofit Associations,

which discusses in greater depth the Form 990 and its uses.
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RECOMMENDATIONS: ELECTRONIC FILING OF FORM 990, PUBLISHING FORM 990 DATA

ON THE WEB, AND A STAGGERED SCHEDULE FOR MANDATORY ELECTRONIC FILING OF

FORM 990.

H.R. 2292 offers a great opportunity for Congress to take steps which would cost little but would make a big difference to the nonprofit sector. I urge you to direct

the IRS to accept electronic filing of Form 990 very soon, to publish all electronically

filed data from Form 990’s on the World Wide Web, and to make electronic filing

mandatory for charitable nonprofits and private foundations, according to a staggered schedule based on gross receipts. Here is a more detailed statement of these recommendations.

Congress should:

1) Direct the IRS to accept electronic filing of Form 990 for 501(c)(3) organizations starting with fiscal years ending on or after 12/31/98; 2) Require the IRS to make all electronically filed data from Form 990’s and Form 990–PF’s available to the public on the Internet, in a searchable database [exception: data about donors need not be disclosed by nonprofits, and should not be published on the Web]; and

3) Require nonprofit organizations to file electronically, according to a timetable staggered by the gross receipts of the organization. Electronic filing of Form 990 and

Form 990–PF (for private foundations) should be mandated at least for those ‘‘charitable’’ nonprofits which are tax exempt under Section 501(c)(3).

The following is a suggested schedule for mandatory electronic filing of Form 990:

IRS should accept electronic filing of Form 990 and Form 990–PF for fiscal years ending on or after 12/31/98. For the first year, all electronic filing should be voluntary, as groups get used to the system, and problems are worked out. After this, electronic filing should be mandatory according to the following sched- ule [a similar schedule should be developed for private foundations]:

Nonprofits with annual gross receipts over $10 million should be required to file electronically for fiscal years ending on or after 12/31/99. Nonprofits with gross receipts over $1 million should be required to file electroni- cally for fiscal years ending on or after 12/31/2000. Nonprofits with gross receipts over $500,000 should be required to file electroni- cally for fiscal years ending on or after 12/31/2001. Starting with fiscal year ending on or after 12/31/2002, all groups which are re- quired to file Form 990 or Form 990 EZ should be required to file electronically. The IRS Commissioner should have discretion to delay the effective date of man- datory electronic filing for the last two groups (the groups not over $1 million) if

the Commissioner concludes that such a requirement would impose a hardship on

such groups. In making this decision, the Commissioner should consider the accessibility of computers, necessary software, Internet connections, or other services

which would facilitate electronic filing for such groups. I am suggesting that this schedule of mandatory electronic filing be included in the legislation itself, rather than in regulations. It has been distressing that the

Treasury has not yet been able to issue even draft regulations on disclosure of Form

990, even though more than a year has passed since Congress called for these regulations in the Taxpayer Bill of Rights 2. Because of the risk of similar delays, I suggest that Congress simply set the schedule for mandatory electronic filing in the legislation.

WHY THESE RECOMMENDATIONS ARE IMPORTANT:

As members of Congress consider issues of electronic filing and the IRS, I urge you to pay attentio opportunities related to electronic filing of Form 990. Form 990

is the annual information return which nonprofits must file each year with the Internal Revenue Service, and the information in it is of great importance for nonprofit accountability. In contrast to other tax forms which are confidential, the information on the Form 990 (except for lists of donors) is required to be made available

to the public. Yet it has been notoriously difficult to obtain copies of Form 990 either

from many nonprofits or from the Internal Revenue Service. Furthermore, many

people (such as employees, clients, or board members) who have concerns about nonprofit accountability issues are hesitant to ask for copies of Form 990 from the organization, for fear that they might be risking their jobs or benefits or confronting socially awkward situations.

Information technology offers a powerful and inexpensive solution to this problem.

Form 990’s can be filed electronically, and the information collected can automatically be posted in a searchable database on the World Wide Web. With such a system in place, valuable data about nonprofits would be easily accessible to board

members, employees, journalists, state government officials, and scholars. Easy ac-
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cess to Form 990 data would help people prevent, identify, and correct abuses, make

better decisions, and find out more about the nonprofit sector.

ALLEGED OBSTACLES TO MANDATORY ELECTRONIC FILING OF FORM 990:

What are the obstacles that have made it difficult for the IRS to move forward

with electronic filing of Form 990?

First, as H.R. 2292 recognizes, the Exempt Organization Division has had inadequate resources to do its current job, let alone to work on new initiatives. As of

1996, the Exempt Organizations Division was responsible for supervising 1.2 million

nonprofits with only 400 agents and a budget of $62 million per year. In other

words, the IRS had one agent for every three thousand nonprofits. Since the 1996

data was compiled, IRS staffing has rther staffing cutbacks are planned. The contrast with the Securities and Exchange Commission is daunting; the SEC has a

budget of about $300 million to supervise between 9,000 and 14,000 publicly-traded

corporations.

I strongly support those provisions in H.R. 2292 which would provide the Exempt

Organization Division with more adequate resources. Yet the IRS resources will continue to be much more modest than those of the SEC, for example. Making Form

990 accessible on the Web (with mandatory electronic filing) will allow many citizens to become ‘‘voluntary auditors’’ who assist the IRS and the state regulators in

the oversight of the nonprofit sector.

Second, there has been an erroneous fear that mandating electronic filing would

be politically unpopular—that the nonprofit groups would object to such a requirement. I have discussed this issue with hundreds of people, including people who

work with nonprofits of all sizes, and I expect that there would be surprisingly little

resistance if electronic filing were mandated on a staggered schedule. The vast majority of nonprofit groups are ethical and responsible, and want to support systems

of accountability that will give the public greater confidence in the nonprofit sector.

More and more nonprofits are rapidly gaining access to computers and to modems

or the Internet, either in their own offices or in the offices of their tax preparers.

As people get used to electronic filing of personal and corporate tax returns, electronic filing of Form 990 will become a simple and inexpensive step to take.

Third, when the IRS forms processors set a ‘‘queue’’ for which forms to convert

for electronic filing, they start with the forms that the IRS spends the most time

processing. Since the Exempt Organizations Division has not had the resources to

keypunch the paper forms it receives, Form 990 becomes low on the ‘‘queue. But

this means that the information in Form 990’s has been inaccessible and, in essence,

squandered. The IRS personnel have not even keypunched them, let alone reviewed

them, and the public has had difficulty getting to see them.

Although the volume of Form 990’s processed by the IRS may be lower than the

volume of some other forms, the public nature of these documents, and their importance for the health and integrity of the nonprofit sector must be reckoned in setting

priorities for electronic filing. Although it is true that they are not now keypunching

much of the Form 990’s, IRS and state government agencies which oversee nonprofits could do a much more efficient and effective job if they had all the data from

Form 990’s accessible in a searchable database. An electronic filing/Web posting system would dramatically reduce the costs of making Form 990 data available to government he public. It would ease the burdens for nonprofit filers and eliminate

keypunching errors introduced when government officials process these forms. Form

990’s would be more accurate and complete, because preparation software would

handle calculations and check that essential fields were completed.

Statement of Ann Mitchell Sackey, Executive Director, The National

Council of Nonprofit Associations

f

We offer this testimony to urge Congress to assign the Office of the Assistant

Commissioner of Employee Plans and Exempt Organizations responsibility for the

development of a system through which nonprofit organizations would electronically

file their Form 990 (Return of Organization Exempt From Income Tax), thus creating complete accessibility to all filed Form 990s on the Internet. We believe that the

filing and disclosure requirements for nonprofit organizations should be a high priority for Congress. Our focus is limited to nonprofits which are organized and operated for the public benefit, as described under section 501(c)(3) of the Internal Revenue Code of 1986, as amended.
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We believe that the filing and disclosure requirements of public-benefit nonprofits should receive a high priority in Congress because of their importance to the nation.

In 1992, over one million nonprofits existed and nonprofits generated more than

$500 billion in annual funds. They created 6.5 percent of the national income in

1992. Including full time employees and full time equivalent volunteers, nonprofits

employed nearly 11 percent of the total U.S. employment in 1992. In 1994, nonprofits employed 15.1 million people. (These are the most recent statistics on the

sector as documented by the INDEPENDENT SECTOR, an umbrella group of national nonprofit organizations.) Electronic filing (posting all Form 990s on an IRS Web site) would provide enor- mous benefits for detecting and stopping abuses, for supporting better decision-making about nonprofits, and for conducting research. Electronic access would save

money for the IRS and state charities regulators, who now spend large amounts of

time shuffling and filing papers and keypunching data for analysis. Each year, every nonprofit must file an IRS Form 990, an annual information re- turn. About forty states also require some or all charitable nonprofits to file a copy

of the Form 990 with them. With its attached Schedule A, the form is 10 pages long.

It includes a variety of information about the organization, including: identifying information (e.g., name, address, phone, employer identification number); detailed financial information; program service accomplishments; list of officers; directors;

trustees; and key employees; executive compensation; payments to independent contractors; relationships with other taxable and tax-exempt entities; and more.

The Form 990 is a valuable data collection tool and must be viewed as such. The

U.S. Internal Revenue Service, state charities officials, and representatives of the

nonprofit community have worked together over the years to refine and improve

Form 990. The data in the collected Form 990s provides a uniform baseline of information about individual nonprofits and the nonprofit sector in general. Many efforts

seek to continuously improve the quality of the data and to enable people to more

effectively use the reported information. There are three basic uses of 990 data. First, the information can help identify, prevent, and punish abuses. State charities officials, journalists, concerned board

members, employees, and clients can find valuable information in Form 990 to prevent or uncover abuses such as self-dealing, quasi-looting, excessive compensation

or improper engagement in political activities. These users must be able to review

Form 990s without nonprofits knowing that they are being investigated. Second, stakeholders can use the information to make better informed decisions.

With Form 990 information, potential donors, managers, and board members (as

well as all the other players listed above) can compare present and past financial

performance and benchmark one group’s financial performance with others in its

field.

Third, practitioners, policy-makers, and researchers can apply Form 990 data to

investigations on the composition and history of the nonprofit sector, its sources and

uses of funds, its financial vulnerability and debt management, and its economic

performance.

A public-benefit nonprofit must show its Form 990s, for its most recent three

years, to those who come into its office and ask to see them. Soon, they will have

to be mailed out upon request. These means of accessing the Form 990, however,

take time and have the further disadvantage of revealing to the organization who

is asking to see their Form 990. The system we are urging you to consider answers

both these objections.

To summarize, the Form 990 is the basic nonprofit disclosure form that is used

by both the IRS and state charities offices. It provides the base of nonprofit accountability. We believe that providing all 990s on the Internet will promote nonprofit

accountability and will enable everyone to access an organization’s 990 without notifying the organization. Staff, board members, or other semi-insiders who suspect improper activities will be able to look at the 990 to see whether the activities have

been disclosed or whether the 990 has been filed fraudulently. Would-be malefactors, knowing that their 990 is electronically available to the public, may approach

filing their 990 more seriously. Many refer to such a system as cyber-accountability.

While cyber-accountability might be implemented through a number of means, we

offer a simple, inexpensive explanation. (It enjoys the further virtue of being almost

developed.) Cyber-accountability would be constructed through the following process:

1. The EO Division of the IRS would maintain a 990 Web site, available to anyone

with access to the Internet. By going to the Web site, a user could request a 990

form for completion. It would appear on the user’s screen in a format similar to the

paper-copy Form 990. S/he could then complete the 990 by key-punching in the data

elicited. When the 990 is completed, the user could electronically transmit it to the

IRS.
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2. The 990 Web site would receive and store in a database each 990 filed.

3. By accessing the 990 Web site, any 990s could be viewed by the public immediately after it was filed. This could be done by entering the organization’s name

or Employer Identification Number (E.I.N.)

4. Seconds later, the organization’s 990 would appear on her screen. She would

be able to download it and print it out. At the end of this process, she would have

a hard-copy of the organization’s 990. This could be done for one organization or for

many. For example, all of the day care centers located in three or four contiguous

zip codes could be accessed at once. The user could easily copy the data on the 990

Web site to a file, using a standard database format. The data could then be sent

anywhere. The Exempt Organizations Division of the Office of the Assistant Commissioner of Employee Plans and Exempt Organizations and state charities offices

could easily transfer this data to their system.

As of this writing, the pages of the 990 have been encoded into the language of

the Web, converted to HTML. The next step will involve writing programs to store

and retrieve submitted information. A demonstration project, now underway, will

help to produce the system. If requested, the completed system could be loaded into

a computer and made available to the IRS for less than $25,000, requiring nothing

more than plugging into a power outlet and connecting to the Internet via a phone

line. Several states have expressed an interest in the system; New Hampshire will

most likely install it next spring.

A little over a year ago, the Taxpayers Bill of Rights (H.R. 2337) was signed into

law. Among other things, it requires public-benefit nonprofits to give or mail copies

of their annual Form 990s to anyone who requests them via mail or in person, for

a reasonable cost. A group risks hefty penalties if it does not comply. However, this

disclosure requirement will not go into effect until the Secretary of the Treasury

issues regulations that spell out an exception: if a group makes its Form 990 ‘‘widely

available,’’ then it does not have to give out or mail copies. We believe the system

described above would largely satisfy this ‘‘widely available’’ requirement.

Statement of Robert M. Tobias, National President, National Treasury

f

Employees Union

Madam Chairwoman, Members of the Subcommittee, thank you for this further

opportunity to present the views of the National Treasury Employees Union

(NTEU), the exclusive representative of IRS employees, on the Report of the National Commission on Restructuring the Internal Revenue Service. As NTEU’s National President, I welcome this opportunity to share our thoughts on the electronic

filing of tax returns at the Service.

The IRS processes 205 million tax returns each year; l20 million of these are individual tax returns. In order for the IRS to effectively collect the taxes that run our

government, the taxpaying public must find the IRS to be not only fair, but efficient.

Although it still has a ways to go, the IRS has come a long way in improving its

operations in recent years. The IRS, and the employees who make it run, perform

remarkably well despite its faults.

The guiding principle of the Commission Report was that customer service and

taxpayer satisfaction must become paramount at the Internal Revenue Service

(IRS). NTEU wholeheartedly agrees. Customer service must become the engine

which drives the Service. Expanding, demystifying and removing the barriers to

electronic filing not only carries with it the ability to improve service to IRS customers, but compliance as well.

But, Madam Chairwoman, I must tell you that I remain deeply troubled by reports in the press that indicate this whole exercise may be little more than a political smokescreen and fundraising tool based on ridiculing the Service. Today’s Wall

Street Journal makes clear that IRS bashing is alive and well, quoting the Senate

Majority Leader as stating in a recent radio address, ‘‘The IRS is intrusive, abusive

and out of control.’’ Senator Lott’s comments are by no means the first of this nature, but they ought to be the last. How do we restore the IRS’ credibility with the

public when their elected officials routinely, unfairly and unjustly denigrate the

agency and its mission?

The purpose of today’s hearing is to explore ways to encourage electronic filing.

I do not believe any of us have the power to inspire commitment to electronic filing

and confidence in the IRS while remaining silent when elected officials unfairly

bash the IRS as if it is collectively abusive, inefficient and can only be improved

by being scrapped.
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The Members of Congress who introduced IRS restructuring legislation, based on the Restructuring Commission’s report, recognize that they have a responsibility to

educate their colleagues that disparaging remarks have an effect opposite to that

which their legislation suggests. They know IRS bashing promotes the view that the

government’s tax collection agency is to be ridiculed and that paying one’s federal

taxes need not be taken seriously. Hearing comments such as Senator Lott’s, why then would an individual be com- pelled to even try electronic filing? Why would they believe the IRS can be trusted

to receive and accurately process their return electronically? Why would they believe

the assurances they have been given that electronic filing does not lead to additional

audits? What they hear from their elected representatives is just the opposite—the

IRS cannot be trusted.

As the President of NTEU, I am committed to the path which my colleagues on the Commission and I have embarked on—to make the IRS a world class, respected

organization. It is time for Congress to make a similar commitment and to leave

the rhetoric behind.

There are several specific recommendations contained in the Commission Report

on which I wish to comment relevant to today’s hearing. While the Commission Report suggests that expanding the number of taxpayers who file electronically has the

potential to increase cost savings and compliance, it also points out that it cannot

be accomplished without a comprehensive plan. NTEU believes that it also cannot

be accomplished without the appropriate financial resources. While the Commission

Report states that electronic filing ‘‘holds great potential to increase cost savings

and compliance with only a small investment by the IRS,’’ NTEU believes that to

reach its goal of more universal acceptance of electronic filing, the IRS will require

a sizable investment—both financially and in terms of a comprehensive overhaul of

how the IRS promotes the benefits of electronic filing and how it interacts with its

customers.

The Internal Revenue Service reports that l4 million taxpayers filed their tax re- turns electronically in l997, a l9 percent increase over l996. Moreover, the IRS estimates that l9.2 million Americans will file electronically in l998, almost double the

number who filed electronically in l995. The IRS is clearly moving in the right direction.

The Commission Report rightly suggests that only a comprehensive plan that ap- peals to all segments of the taxpayer and practitioner population will make electronic filing the preferred method of tax return filing. The Commissioners envision

formation of a partnership between the IRS and practitioner community, elimination of the necessity to file a signature form with electronic returns, the establishment of uniform requirements for preparers, and electronic acceptance of all tax

forms as good starting points. The Report also emphasizes the need to establish

paperless payment methods and realigned due dates as inducements to electronic

filing. I note that the IRS has expressed some concern regarding the proposal to extend due dates for electronic filers, adding that this is the one area where there is

presently no confusion—tax returns are due on April l5. I urge the Committee to

review this area carefully.

Those currently taking advantage of electronic filing methods typically are due a

refund and tend to be clustered in the lower income levels. A l99l IRS research

study showed that the ability to receive an earlier refund was the greatest inducement to filing electronically. There is currently little or no incentive for taxpayers

owing taxes to file by this method.

In March of l995, the publication Tax Notes reported that taxpayers filing forms

l040A and l040EZ represented almost 77 percent of electronic returns. These, they

reported, are also the returns with the lowest processing cost savings for the IRS.

The greatest savings potential lies with the Form l040 returns, however, this same

report found that only 2.8 million of the 62.7 million taxpayers in this group chose

to file electronically.

The Commission Report also states that financial incentives may be necessary to

induce a greater number of individuals to file electronically. For many individual

taxpayers, there is little or no incentive to file electronically. Fees for ELF filing are

usually in the neighborhood of $25, yet it only costs .32 cents to mail a paper return.

Clearly, cost is one of the largest disincentives to electronic filing and may be a key

barrier preventing more taxpayers from taking advantage of ELF. A May, l997 national survey of l,035 adults by The Mellman Group found that ‘‘interest in electronic filing increases dramatically when it is positioned as a no cost option to the

taxpayer.’’ Twenty-two percent of their respondents reported that they would be almost certain to file electronically if it were free.

The Commission recommendation that transmitters receive a financial incentive

that is shared with taxpayers is worthy of further consideration. However, there are
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other electronic filing inducements that I believe make even more sense and encourage Congress to consider as well.

To establish electronic filing as the preferred method of tax filing, it must be

made available to a much broader segment of taxpayers. It must be easily understood, simple to accomplish and available at free and convenient locations. For example, terminals with user friendly software could be made available to taxpayers

at local IRS walk-in offices. Customer service personnel staffing these offices could

be available to answer questions and provide guidance. Even libraries, post offices,

and banks could be outfitted with IRS-connected terminals. These venues typically

make IRS forms available now, it only makes sense that as part of a comprehensive

plan to stress both customer service and encourage electronic filing, these same locations should provide electronic filing capability.

Moreover, what could be more customer-service oriented than providing taxpayers

with free and convenient locations to file their taxes electronically? To promote acceptance of electronic filing among a broader group of individual taxpayers, customer service must be part of the equation. For those taxpayers wishing to file electronically from their homes, user-friendly software should also be considered. Just

as tax forms are distributed free of charge, free electronic filing software for use

with home computers should also be considered.

While some seek expansion of electronic filing because of the allure of the possibility of reduced labor and overhead costs, they ignore the main principle underlying

the Restructuring Commission’s Report: Customer Service and Taxpayer Satisfaction must become paramount. Electronic filing holds the potential to improve both,

but only if the savings achieved from its expansion are reinvested in the Service.

To do otherwise ignores the basic principles of the Commission Report.

NTEU supports the expansion of electronic filing. It is the future. We believe

equally as strongly that the efficiency savings that result must be reinvested in compliance and customer service functions at the agency. It is not as though the compliance rate is so high that there is nothing further to accomplish. And, it is not as

though the IRS’ customer service effort is so complete that we can afford to remove

staff resources from the agency. Positions that become excess to the agency’s needs

with advances in electronic filing should be shifted to customer service functions.

That is the answer to improving IRS customer service satisfaction and compliance

levels while simultaneously improving acceptance of electronic filing.

NTEU is committed to making the IRS the world-class, respected organization it

must become. I hope that Congress is equally committed to providing the resources

necessary to make this a reality. Funding shortfalls and the vagaries of the annual

budget process have played havoc with the IRS and its ability to effectively plan

in the past. I look forward to working with this Committee and the others that oversee the IRS to insure that our joint goals become reality.

Thank you.

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