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24–767 2005

2005 TAX RETURN FILING SEASON AND THE IRS 

BUDGET FOR FISCAL YEAR 2006 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

OF THE

COMMITTEE ON WAYS AND MEANS 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED NINTH CONGRESS 

FIRST SESSION 

APRIL 14, 2005 

Serial No. 109–32 

Printed for the use of the Committee on Ways and Means 

( 

ii 

COMMITTEE ON WAYS AND MEANS 

BILL THOMAS, California, Chairman 

E. CLAY SHAW, JR., Florida 

NANCY L. JOHNSON, Connecticut 

WALLY HERGER, California 

JIM MCCRERY, Louisiana 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

JIM NUSSLE, Iowa 

SAM JOHNSON, Texas 

ROB PORTMAN, Ohio 

PHIL ENGLISH, Pennsylvania 

J.D. HAYWORTH, Arizona 

JERRY WELLER, Illinois 

KENNY C. HULSHOF, Missouri 

RON LEWIS, Kentucky 

MARK FOLEY, Florida 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

BOB BEAUPREZ, Colorado 

MELISSA A. HART, Pennsylvania 

CHRIS CHOCOLA, Indiana 

CHARLES B. RANGEL, New York 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

BENJAMIN L. CARDIN, Maryland 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

WILLIAM J. JEFFERSON, Louisiana 

JOHN S. TANNER, Tennessee 

XAVIER BECERRA, California 

LLOYD DOGGETT, Texas 

EARL POMEROY, North Dakota 

STEPHANIE TUBBS JONES, Ohio 

MIKE THOMPSON, California 

JOHN B. LARSON, Connecticut 

RAHM EMANUEL, Illinois 

ALLISON H. GILES, Chief of Staff 

JANICE MAYS, Minority Chief Counsel 

SUBCOMMITTEE ON OVERSIGHT 

JIM RAMSTAD, Minnesota, Chairman 

ERIC CANTOR, Virginia 

BOB BEAUPREZ, Colorado 

THOMAS M. REYNOLDS, New York 

JOHN LINDER, Georgia 

E. CLAY SHAW, JR., Florida 

SAM JOHNSON, Texas 

ROB PORTMAN, Ohio 

JOHN LEWIS, Georgia 

EARL POMEROY, North Dakota 

MICHAEL R. MCNULTY, New York 

JOHN S. TANNER, Tennessee 

CHARLES B. RANGEL, New York 

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 

Advisories announcing the hearing ........................................................................ 2 

WITNESSES 

Internal Revenue Service, Hon. Mark Everson, Commissioner ........................... 6 

Internal Revenue Service Oversight Board, Raymond Wagner, Chair ............... 58 

U.S. Government Accountability Office, James R. White, Director, Tax Issues 30 

American Bar Association, Kenneth Gideon ......................................................... 67 

American Institute of Certified Public Accountants, Thomas J. Purcell, III ...... 71 

National Association of Enrolled Agents, Frank Degan ....................................... 76 

National Council for Taxpayer Advocacy, William Stevenson ............................. 80 

Intuit Corporation, Brad Smith .............................................................................. 84 

SUBMISSIONS FOR THE RECORD 

National Treasury Employees Union, Colleen M. Kelley, statement .................. 101 

Northern Illinois University, Katrina L. Mantzke, and University of Wisconsin-Milwaukee, Christin C. Bauman, joint statement ................................. 103 

Scorse, Gerald E., New York, NY, statement ........................................................ 112 

(1) 

2005 TAX RETURN FILING SEASON AND THE 

IRS BUDGET FOR FISCAL YEAR 2006 

THURSDAY, APRIL 14, 2005 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON OVERSIGHT, 

Washington, DC. 

The Subcommittee met, pursuant to notice, at 3:40 p.m., in room 

B–318, Rayburn House Office Building, Hon. Jim Ramstad (Chairman of the Subcommittee) presiding. 

[The advisory and revised advisory announcing the hearing follow:] 

2 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601 

March 31, 2005 

OV–1 

Ramstad Announces Hearing on 

2005 Tax Return Filing Season and the 

IRS Budget for fiscal Year 2006 

Congressman Jim Ramstad (R–MN), Chairman, Subcommittee on Oversight of 

the Committee on Ways and Means, today announced that the Subcommittee will 

hold a hearing on the 2005 tax return filing season, current issues in tax administration, and the Internal Revenue Service (IRS) budget for fiscal year 2006. The 

hearing will take place on Thursday, April 7, 2005, in the main Committee 

hearing room, 1100 Longworth House Office Building, beginning at 2:00 

p.m. 

In view of the limited time available to hear witnesses, oral testimony at this 

hearing will be from invited witnesses only. Witnesses will include IRS Commissioner Everson and representatives of the U.S. Government Accountability Office 

(GAO), the IRS Oversight Board, the Tax Section of the American Bar Association, 

the American Institute of Certified Public Accountants, National Council for Taxpayer Advocacy, and the National Association of Enrolled Agents. 

BACKGROUND: 

The 2005 tax return filing season refers to the period from January 1st to April 

15th when U.S. taxpayers will file more than 100 million tax returns, including 

more than 50 million e-filed returns. During this period the IRS is expected to issue 

more than 80 million tax refunds, answer more than 20 million telephone calls from 

taxpayers asking for assistance, and its homepage will receive more than 100 million visits. The IRS website is among the busiest in the world during the filing season. 

The Administration’s budget requests $10.68 billion to fund the IRS for fiscal year 

2006, an increase of 4.3 percent over the FY 2005 enacted amount. This level of 

funding will support approximately 97,010 employees who will collect nearly $2 trillion in revenue from all sources and pay over $200 billion in refunds. The fiscal year 

2006 budget request addresses the Administration’s key strategic goals for the IRS. 

In announcing the hearing, Chairman Ramstad stated, ‘‘More than 130 million 

Americans will report their income and file a tax return this year. These taxpayers 

deserve efficiency and fair and courteous treatment from the government they are 

helping to support. 

‘‘I look forward to hearing from IRS Commissioner Mark Everson and a number 

of tax experts about this year’s tax filing season. The Oversight Subcommittee will 

seek to ensure that the IRS is using its resources efficiently, that it is doing everything possible to promote voluntary compliance, and that it is dealing fairly and 

honestly with taxpayers.’’ 

3 

FOCUS OF THE HEARING: 

The hearing will focus on the 2005 tax return filing season, current issues in tax 

administration, and the IRS budget for fiscal year 2006. 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit for the hearing record must follow the appropriate link on the hearing page of the Committee 

website and complete the informational forms. From the Committee homepage, 

http://waysandmeans.house.gov, select ‘‘109th Congress’’ from the menu entitled, 

‘‘Hearing Archives’’ (http://waysandmeans.house.gov/Hearings.asp?congress=17). Select the hearing for which you would like to submit, and click on the link entitled, 

‘‘Click here to provide a submission for the record.’’ Once you have followed the online instructions, completing all informational forms and clicking ‘‘submit’’ on the 

final page, an email will be sent to the address which you supply confirming your 

interest in providing a submission for the record. You MUST REPLY to the email 

and ATTACH your submission as a Word or WordPerfect document, in compliance 

with the formatting requirements listed below, by close of business Thursday, April 

21, 2005. Finally, please note that due to the change in House mail policy, the U.S. 

Capitol Police will refuse sealed-package deliveries to all House Office Buildings. 

For questions, or if you encounter technical problems, please call (202) 225–1721. 

FORMATTING REQUIREMENTS: 

The Committee relies on electronic submissions for printing the official hearing record. As always, submissions will be included in the record according to the discretion of the Committee. 

The Committee will not alter the content of your submission, but we reserve the right to format 

it according to our guidelines. Any submission provided to the Committee by a witness, any supplementary materials submitted for the printed record, and any written comments in response 

to a request for written comments must conform to the guidelines listed below. Any submission 

or supplementary item not 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 submissions and supplementary materials must be provided in Word or WordPerfect 

format and MUST NOT exceed a total of 10 pages, including attachments. Witnesses and submitters are advised that the Committee relies 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. All submissions must include a list of all clients, persons, and/or organizations on whose 

behalf the witness appears. A supplemental sheet must accompany each submission listing the 

name, company, address, telephone and fax numbers of each witness. 

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

Wide Web at http://waysandmeans.house.gov. 

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. 

f 

4 

* * * NOTICE—CHANGE IN DATE AND LOCATION * * * 

ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–7601 

April 14, 2005 

OV–1 Revised 

Change in Date and Location for Hearing on 

2005 Tax Return Filing Season and the 

IRS Budget for fiscal Year 2006 

Congressman Jim Ramstad (R–MN), Chairman, Subcommittee on Oversight of 

the Committee on Ways and Means, today announced that the Subcommittee hearing on the 2005 tax return filing season, current issues in tax administration, and 

the Internal Revenue Service budget for fiscal year 2006, previously scheduled for 

Thursday, April 7, 2005, at 2:00 p.m., in the main Committee hearing room, 1100 

Longworth House Office Building, will now be held on Thursday, April 14, 

2005, in B–318 Rayburn House Office Building, at 2:00 p.m., or at the conclusion of the full Committee hearing. 

The deadline to provide a submission for the record will now be close of 

business, Thursday, April 28, 2005. All other details for the hearing remain the 

same. (See Subcommittee Advisory No. OV–1, dated March 31, 2005). 

f 

Chairman RAMSTAD. The hearing will come to order. Please 

bear with me, because the last time I chaired a hearing or chaired 

anything, was as student council president. 

[Laughter.] 

Chairman RAMSTAD. I want to welcome all of you, on the eve 

of tax day, to this hearing on the 2005 tax return filing season and 

the 2006 Internal Revenue Service (IRS) budget. Now, I am going 

to apologize to all the witnesses and all of you here for the delay. 

House rules are House rules, and as long as the full Committee on 

Ways and Means was meeting, we could not convene this hearing 

for the Subcommittee on Oversight. Nonetheless, I apologize for the 

delay. I also want to say it is a privilege to serve on this Subcommittee with such a distinguished Ranking Member, my friend 

from Georgia, one of the most-respected Members in the entire 

Congress, Mr. Lewis. John, look forward to working with you, just 

as my predecessor, Chairman Amo Houghton, worked so closely 

with Mr. Pomeroy on this Subcommittee. 

A hallmark of our tax system is the honesty of the American taxpayer. A recent study by IRS showed that over 80 percent of all income earned is faithfully reported by individuals and 

businessowners. Taxpayers will pay just over $2 trillion in taxes 

this year. These hard-working taxpayers want and deserve an IRS 

that is responsive to their needs. While there is still work to do, 

the IRS has made great strides in improving taxpayer service since 

5 

1998. One example of many is the IRS website which will receive 

well over 100 million visits during this tax filing season. More than 

4 million taxpayers will file online for free, thanks to an innovative 

partnership with the private sector known as Free File. Retaining 

the goodwill of American taxpayers by providing professional service and detailed guidance on how to comply with the law is critical 

to sustaining voluntary compliance. I look forward to hearing Commissioner Everson’s plans to maintain high levels of service in the 

face of expected budget constraints. Under Commissioner Everson’s 

leadership, the IRS also has made outstanding progress in stemming the tide of corrosive tax shelters and overly aggressive tax 

planning. With President Bush’s support, the Commissioner has increased the number of frontline enforcement personnel and has 

launched a series of enforcement initiatives aimed at stopping illegal tax fraud. Through these efforts, Commissioner Everson has 

helped restore peace of mind to compliant taxpayers who in recent 

years had begun to wonder if they were paying more than their fair 

share. 

We are fortunate to have a number of distinguished witnesses 

before us today. The first panel will consist of IRS Commissioner 

Mark Everson. The second panel will consist of Director James 

White of the U.S. government Accountability Office (GAO) and 

Chairman Ray Wagner of the IRS Oversight Board. The third 

panel will feature testimony from representatives of practitioner 

groups. They will discuss the filing season from the perspective of 

experts who help the average taxpayer interact with the IRS. I am 

now pleased to recognize the distinguished Ranking Member, my 

friend, Mr. Lewis. 

[The opening statement of Chairman Ramstad follows:] 

Opening Statement of The Honorable Jim Ramstad, Chairman, Subcommittee on Oversight, and a Representative in Congress from the State 

of Minnesota 

I want to welcome all of you to this hearing on the 2005 tax return filing season 

and the 2006 Internal Revenue Service (IRS) budget. 

A hallmark of our tax system is the honesty of the American taxpayer. A recent 

study by the IRS showed that over eighty percent of all income earned is faithfully 

reported by individuals and business owners. Taxpayers will pay just over $2 trillion 

in 2005. These taxpayers deserve an Internal Revenue Service that is responsive to 

their needs. 

While there is still work to do, the IRS has made great strides in improving taxpayer service since 1998. One example is the IRS website, which will receive well 

over 100 million visits during the tax filing season. 

More than four million taxpayers will file online for free, thanks to an innovative 

partnership with the private sector, known as Free File. Retaining the good will of 

American taxpayers by providing professional service and detailed guidance on how 

to comply with the law is critical to sustaining voluntary compliance. I look forward 

to hearing Commissioner Everson’s plans to maintain high levels of service in the 

face of expected budget constraints. 

Under Commissioner Everson’s leadership, the IRS also has made outstanding 

progress in stemming the tide of corrosive tax shelters and overly aggressive tax 

planning. With President Bush’s support, the Commissioner has increased the number of frontline enforcement personnel, and has launched a series of enforcement 

initiatives aimed at stopping illegal tax dodges. 

Through these efforts Commissioner Everson has helped to restore peace of mind 

to compliant taxpayers, who in recent years had begun to wonder if they were paying more than their fair share. 

We are fortunate to have a number of distinguished witnesses before us today. 

The first panel will consist of IRS Commissioner Mark Everson. 

6 

On the second panel, we will hear from Director James White of the Government 

Accountability Office and Chairman Ray Wagner of the IRS Oversight Board. These 

witnesses will provide their assessment of the IRS’s recent work, and its budget for 

next year. 

The third panel will feature testimony from representatives of practitioner groups. 

They will discuss the filing season from the perspective of experts who help the average taxpayer interact with the IRS. We value their insights regarding a number 

of the challenges confronting the IRS, including the complexity of the tax code and 

electronic filing. I look forward to all of the witnesses’ testimony. 

f 

Mr. LEWIS. Thank you very much, Mr. Chairman. I am pleased 

to serve as the Ranking Member of the Committee on Ways and 

Means, Subcommittee on Oversight for the 109th Congress. I look 

forward to working closer with you, Mr. Chairman, my friend, my 

colleague, my brother. It is wonderful to be working with you. 

Since serving on the Committee on Ways and Means, since serving 

on the Congress, we have been friends, and on this Committee we 

will continue to be friends. It is my hope and my prayer that we 

will work so close together, people will not know whether I am a 

Democrat or whether you are a Republican. 

[Laughter.] 

Mr. LEWIS. Mr. Chairman, I want to thank you for postponing 

the hearing today, so that I and the Subcommittee Members could 

be here to participate. As in the past, the Subcommittee is holding 

their first hearing of the year to examine how to current tax return 

filing season is progressing, and the adequacy of the Administration proposed budget for the IRS for the next fiscal year. I want 

to thank you, Mr. Chairman, for conducting this annual oversight 

review of the IRS. More than 130 million tax returns will be filed 

during the 2005 tax return filing season which ends tomorrow, 

April 15th. Reports indicate that the tax return filing season is progressing smoothly. IRS employees nationwide should be commended for their diligence and their very hard work. The Administration has proposed, for fiscal year 2006, an IRS budget of $10.68 

billion. I note with great interest that the IRS Oversight Board recommend a 13-percent increase over the amount that Congress provided the IRS last year. I look forward to our discussion of the 

Board’s concern and the testimony of our other distinguished witnesses. It is important that the IRS operate in a fair manner with 

a balanced approach to administer our tax laws. Mr. Chairman, 

again, it is a pleasure, an honor, to serve with you and I especially 

want to recognize and thank the Commissioner for being here, for 

all of his good work. Thank you very much, Mr. Chairman. 

Chairman RAMSTAD. Thank you, Mr. Lewis. 

It is now a pleasure to introduce our first witness, the Commissioner of the IRS, Commissioner Mark Everson. 

STATEMENT OF MARK EVERSON, COMMISSIONER, INTERNAL 

REVENUE SERVICE 

Mr. EVERSON. Thank you, Mr. Chairman and Mr. Lewis. I appreciate the opportunity to be here with you today, and I congratulate you and thank you for your willingness to serve in your positions. We felt a little jilted by Mr. Pomeroy. I guess he decided that 

agriculture was more important to his State than maybe the taxes, 

7 

but we understand, and, Mr. Lewis, we are very pleased that you 

are devoting your energies to this position. 

Mr. LEWIS. You won’t miss him. He will be back. He will be 

right here, to my left. 

Chairman RAMSTAD. Still a Member of the Subcommittee. 

Mr. EVERSON. Very good. As of April 8, 2005 we have received 

more than 88 million total individual returns. Of these, 55.8 million were electronically filed and 32.3 million were paper. Electronic filing continues to grow. Last year individuals filed almost 

62 million electronic returns. This year we expect that over half of 

all individual returns will be e-filed. Paper filers are now in the minority. Electronic filing is fast, convenient and gets you your refund 

back in half the time of a paper return. As of April 2, use of our 

website, which you mentioned, Mr. Chairman, has already exceeded 110 million hits, about double the amount of last year. Taxpayer 

use of our popular ‘‘Where’s my refund’’ feature on the web page 

has risen to 45 percent over last year. Our telephone service, that 

is answering questions from taxpayers, continues to improve. 

Through the end of March our customer accuracy was 91.6 percent, 

up from 89.3 percent, and our tax law accuracy has improved from 

77.7 percent last year to 88 percent in 2005. While we improve 

services, we are boosting enforcement. The President’s 2006 request for the IRS is crafted to continue to do the necessary rebuilding of our enforcement capabilities, and it maintains a stable commitment to our important IT modernization programs. Both enforcement and modernization were categorized earlier this year by 

the GAO as high-risk areas of government-wide importance. 

The 2006 budget request calls for a modest amount of belt tightening in taxpayer services. The percent cut to services is consistent 

with the request for domestic discretionary programs, other than 

those associated with homeland security. In a report issued last 

year—and there is a chart here—the GAO stated: ‘‘Taxpayer services are much improved, raising a question about the appropriate 

balance to strike between investing in further service improvements and enforcement. At the same time the use of IRS’ walk-in 

assistance sites is declining. The improvements in telephone service, increased website use and the availability of volunteer sites 

raise a question about whether IRS should continue to operate as 

many walk-in sites. Reconsidering the level and types of service is 

an option-but not a recommendation-to be considered by IRS management and the Congress.’’ The President’s request for the IRS 

adopts just this approach. I am comfortable with the request and 

support it wholeheartedly. I believe that if enacted at the requested 

level, without constraining language, the IRS will continue to provide good services to taxpayers. The budget will hold Business Systems Modernization (BSM) funding steady at substantially the 

same level as 2005. In terms of modernizing our big computer systems at the IRS after years of cost overruns and missed delivery 

dates, we are finally showing results. In the past 9 months, two important systems have come online. We have a new financial system 

to help better manage the Agency, and more importantly, this filing season we have already processed over a million 1040-EZ returns using the first new processing system in 40 years. 

8 

The 2006 budget continues investment in three critical areas: 

further work on return processing, collections and electronic filing. 

Several weeks ago we announced that the gross tax gap, that is, 

the difference between what taxpayers should pay and what they 

actually pay on a timely basis, exceeds $300 billion per year. Average Americans pay their taxes honestly and accurately, and have 

every right to be confident that when they do so, neighbors and 

competitors are doing the same. We have taken some important 

steps to bolster this confidence. We have ramped up our audits of 

individuals. That is, in that chart over there, 600,000 audits 4 

years ago to over a million audits in fiscal year 2004. Particularly 

for high-income individuals, as you can see, we have basically doubled that number over the same period. Corporations have come up 

as well, and we are focusing more attention on abusive shelters 

and more criminal investigations. We recently announced collections of over $3.2 billion in a settlement initiative for Son of Boss, 

a particularly abusive shelter. The proposed 2006 budget calls for 

a nearly 8-percent increase for enforcement. This will enable us to 

expand our activities across each of our four strategic enforcement 

priorities; first, to discourage and deter noncompliance with emphasis on corrosive activity by corporations, high income individuals, 

and other contributors to the tax cap; second, to ensure that attorneys, accountants and other tax practitioners adhere to professional standards; third, to detect and deter domestic and offshore 

based tax and financial criminal activity; and, finally, to deter 

abuse within tax exempt and governmental entities and misuse of 

such entities by third parties. 

[The exhibits follow:] 


Insert 24767A.001
9 


Insert 24767A.002 Insert 24767A.003
10 

What I am going to do now is just make one final point, since 

I see your red light. I would point out that, in the Senate budget 

resolution there is a protection of this enforcement initiative. That 

is not present on the House side. I urge you to support what is the 

Senate’s position so that we can get that money and continue to rebuild our compliance efforts, the success of which is in the final 

chart I have of the direct enforcement revenues, which have increased from $34 billion in fiscal year 2002 to $41 billion in fiscal 

year 2004. 

[The prepared statement of Mr. Everson follows:] 

Statement of The Honorable Mark Everson Commissioner, Internal 

Revenue Service 

Chairman Ramstad, Ranking Member Lewis, and Members of the Subcommittee, 

thank you for the opportunity testify today on the 2005 tax filing season and our 

FY 2006 budget request. I congratulate you, Mr. Chairman and Ranking Member 

Lewis, for your selections as the leaders on this panel. I look forward to working 

with you as you exercise your oversight responsibilities and we ensure the fair and 

efficient administration of taxes. 

I have been on the job for nearly two years. Last year, I testified about the IRS 

mission of service and enforcement, and about our need to modernize. I spoke about 

how the IRS was doing a good job improving service, had a mixed record on modernization, and had work to do to restore enforcement to proper levels. 

Today, I wish to update the Subcommittee on what we have accomplished over 

the past year, addressing enforcement, the area where our challenges remain the 

greatest. Let me first update the Subcommittee about service. By service, I mean 

helping people understand their tax obligations and making it easier for them to 

participate in the tax system. 

The IRS has greatly improved service to our nation’s taxpayers over the last several years. We are delivering services to taxpayers and we have improved the efficiency and effectiveness for our tax administration system. The deficit in the quality 

of service that the IRS was providing prior to the 1990s is closing. 


Insert 24767A.004
11 

Customer Satisfaction 

The American Customer Satisfaction Index (ACSI), which began in 1994, is a 

measure of customer satisfaction that covers seven economic sectors, 40 industries, 

more than 200 private sector companies, and many governmental agencies. Scores 

are reported on a 0 to 100 scale based on survey data from consumer households 

across the nation. The ACSI is produced by the NationalQualityResearchCenter at 

the University of Michigan Business School, the Claes Fornell International (CFI) 

Group, and the Federal Consulting Group (FCG). Claes Fornell, Chairman of the 

CFI Group, recently praised our progress. He said, 

The Internal Revenue Service (IRS) continues to improve its services. The IRS 

is obviously in a special category when it comes to the satisfaction of the people 

it deals with, and cannot be compared with the private sector or even with most 

public sector services. The collection of taxes is not an activity that taxpayers 

look forward to or expect a great deal of satisfaction from. But even in the face 

of this handicap, the IRS continues to improve on taxpayer satisfaction. Since 

1999, IRS’ overall ACSI score has surged by 26%. While the rate of the improvement has slowed recently, it is clear that a good deal of this increase is attributable to electronic filing. Filers find it convenient, accurate, and refunds are 

delivered quickly. The satisfaction score for electronic filing stands at a remarkable 78, compared with paper filing at 52. The more tax filers the IRS manages 

to move from paper to electronic filing, the more customer satisfaction can be 

expected to increase. 

Return Receipts / Electronic Filing 

Electronic filing continues to grow. Last year, individuals filed over 61 million 

electronic returns. This year, we expect that over half of all individual returns will 

be e-filed. Thus it appears that individuals who file paper tax returns will soon be 

in the minority. We take every opportunity we can to broadcast the benefits of electronic filing, including a reduction in processing errors and cost savings for taxpayers and the IRS. E-filing is fast, convenient, and gets your refund to you in half 

the time of paper returns. 

As of April 8, 2005, we have received more than 88 million total individual returns. 55.8 million returns (63.4 percent) are electronically filed and 32.3 million 

(36.7 percent) are paper. 

• The number of online returns is 13.6 million, a 14.6 percent increase from last 

year. 

• Through March 30, 2005, 3.9 million Free File returns have been accepted, an 

increase of 44 percent from last year. 

• We have issued 72.3 million refunds. Total dollars paid are 3.44 percent higher 

than last year, with an average refund of $2,189 paid. 

IRS.gov 

Use of our website, IRS.gov, has exceeded 105.4 million homepage visits, up 117 

percent from 2004. Not surprisingly, during the filing season, it is one of the busiest 

websites in the world. We average more than one million visits a day. Many of those 

visits are to the ‘‘Free File’’ page, which allows taxpayers visiting the website to 

chose among several free, online filing options. As of April 9, over 16.1 million taxpayers used the ‘‘Where’s my Refund’’ feature on the web page, an increase of 45 

percent from the same time last filing season. These visits decrease the need to visit 

a Taxpayer Assistance Center (TAC), or to call our operators, which allows them to 

focus on more complex calls. During the past year, we have also rolled out important new online services to tax professionals to help them better serve their clients. 

Tax practitioners and other third parties, such as banks and brokerage firms that 

file 1099s, may now access the following functionalities online: electronic account 

resolution, transcript delivery, secure email, disclosure authorization, and bulk Taxpayer Identification Number (TIN) matching. In fact, as of April 12, 2005, tax practitioners submitted 2925 cases for Electronic Account Resolution, 52,824 requests for 

transcripts, 24.3 million Bulk TIN matching requests, and over 13,000 powers of attorney or disclosure authorizations. 

Telephone Service 

Our efforts to improve call routing, as well as staffing and training of phone 

assistors have allowed us to reach world-class service. In filing season 2005, we are 

maintaining the level of service that our customers have come to expect from us. 

As recently as fiscal year 2002, the level of service for those taxpayers who want 

to speak to an assistor was 68 percent. Our improvement efforts raised the level 

to 80 percent in 2003 and to an all-time high of 87 percent in 2004. 

12 

Calls are routed from taxpayers to the proper subject matter expert and the system balances workforce planning against the historic workload patterns to reduce 

waiting time from 263 seconds in fiscal year 2002 to 205 seconds in fiscal year 2005. 

That’s about a minute less time on hold for every call. 

In FY 2004, the number of taxpayers receiving busy signals decreased to 220,000, 

a 66 percent reduction from the previous year. And, that is a reduction of 99.5 percent from the 2.6 million busy signals generated as recently as FY 2002. 

Our telephone service—that is, answering questions from taxpayers—continues to 

improve. We measure telephone quality two ways, 1) customer account accuracy and 

2) tax law accuracy. For the filing season, our customer account accuracy is 91.6 

percent, up from 89.3 percent; our tax law accuracy has improvedfrom 77.7 percent 

in 2004 to 88 percent in 2005. 

Continuing Service and Increasing Enforcement 

We are quite aware of the need to operate efficiently, consolidate operations and 

drive down costs wherever we can. In today’s fiscal environment, we recognize that 

resources are tight. Nevertheless, we are determined to do all we can to improve 

service and modernize the IRS. In the last several years, we have begun to arrest 

the decline in enforcement and stabilize IRS enforcement staffing; now 73 percent 

of taxpayers completely agree that it is every American’s duty to pay their fair share 

of taxes, up from 68 percent in 2003. A 2004 IRS Oversight Board commissioned 

NOP World study revealed 79 percent of taxpayers believe it is very important for 

the IRS to enforce compliance from high-income individuals and 85 percent believe 

it is very important for the IRS to enforce compliance from corporations. But in 

order to continue to reverse the downward trend of compliance, we must continue 

to use our resources wisely. 

We are working aggressively to improve productivity and achieve cost savings, 

which we will apply to other priority areas, such as enforcement. The FY 2006 budget reduction initiatives focus mainly on targeted reductions in assistance, outreach, 

and processing program areas. Reductions will also be achieved through improved 

efficiencies and re-engineering of business processes in key program areas in accounts management, submission processing, media and publications, field assistance, and outreach and education. Approximately 65 percent of these reductions will 

occur in assistance, 20 percent in outreach and 15 percent in processing. We will 

minimize the impact on taxpayers by providing alternative means to obtain service, 

wherever possible. Our budget estimates all these taxpayer service reengineering 

initiatives will yield $134 million in savings we can reinvest in other program areas. 

The reductions represent a balanced approach in program delivery and service to 

taxpayers to enable them to meet their tax obligations. 

We estimate savings of $75 to 95 million from additional efficiencies in our field 

assistance, accounts management and toll-free telephone operations. We will achieve 

these savings, in part, because of our recent consolidation our Customer Accounts 

Service organizations and revamping our business processes. For example, due to 

the steady decline in taxpayers corresponding with us about their accounts, we will 

need fewer resources to manage these accounts. We are also adjusting the hours of 

our toll-free telephone operations from 15 to 12 hours daily, Monday through Friday 

in the local times zones, beginning in 2005. We expect minimal impact to our level 

of service for taxpayers who call us. Another portion of these savings will come from 

reducing the number of walk-in sites. In recent years, the number of taxpayers 

walking into a Taxpayer Assistance Center (TAC) site for assistance has decreased 

from a high of nearly 10 million contacts in FY 2000 to about 7.7 million contacts 

in FY 2004. This trend reflects the increased availability and quality of services that 

do not require travel or waiting in line. Examples include improved access to IRS 

telephone service, the increasing availability of volunteer assistance, and the many 

services now available through IRS.gov, such as ‘‘Free File’’ and ‘‘Where’s My Refund.’’ In addition, the ability to download forms online has also contributed to the 

decline in the number of customers walking into a TAC. We have also continued 

to improve our telephone service for taxpayers who call the IRS with questions. The 

use of other alternatives, such as volunteer return assistance at Volunteer Income 

Tax Assistance (VITA) sites and Tax Counseling for the Elderly (TCE) sites, has 

steadily increased while the number of TAC contacts decreased. In FY 1999, for example, VITA sites filed almost 584,000 returns, and TCE sites filed 446,000 returns. 

In the next five years, the numbers of returns filed through these sites increased 

88 percent, reaching 976,000 VITA returns and 958,000 TCE returns in FY 2004. 

Because of these other options, fewer taxpayers need to travel to an IRS office 

to get the services they need. There are currently about 400 TAC sites across the 

country which are serviced by approximately 2,300 TAC employees. We believe that 

adjusting the TAC sites to more closely align to this decreased walk-in volume will 

13 

yield staffing and building cost savings of $45 to 55 million of the $75 to 95 million 

in savings, and allow us the flexibility to improve efficiencies and concentrate more 

on front-line enforcement. 

We have developed a criteria model that measures the impact on taxpayers across 

the country. The criteria include: location, employee cost, facilities cost, workload, 

and demographic measurements. In anticipation of the closing of approximately 70 

TACs and their employees, we have requested authority to offer early-outs and buyouts to all eligible IRS TAC personnel. We expect to have further announcements 

in the near future. 

In addition to reducing the number of TAC sites, we will save $20 to $31 million 

in outreach programs though reductions in printing and postage and additional efficiencies in our outreach organizations. For example, we will save more money in 

printing and postage as taxpayers shift to e-filing, and as we eliminate redundant 

services and publications. 

We will save another $17 to $23 million by retiring Telefile, implementing program enhancements in the processing of employment tax returns, and re-engineering processes in Submission Processing. We will redirect taxpayers who previously 

used Telefile to e-file alternatives, such as Free File, that are available through 

IRS.gov so we maintain an acceptable level of service. 

Though we are re-engineering how we provide service, we will continually strive 

to improve service to taxpayers. Having stated this, I must address the fundamental 

issue of enforcement. 

While the President’s Budget Request to Congress would increase IRS enforcement activities by 7.8 percent, given the current budgetary constraints, we responsibly proposed to reduce spending in other areas throughout the Service. We are 

confronted with difficult choices. 

Average Americans pay their taxes honestly and accurately, and have every right 

to be confident that when they do so, their neighbors and competitors are doing the 

same. Let me provide an overview of the steps we have taken over the past year 

to bolster this confidence, turning briefly to each of our four service-wide enforcement priorities. 

Our first enforcement priority is to discourage and deter non-compliance, with emphasis on corrosive activity by corporations, high-income individuals, and other contributors to the tax gap. 

• In 2004, audits of high-income taxpayers jumped 40 percent from the year before. We audited almost 200,000 high-income individuals last year—double the 

number from 2000. 

• Overall, audits for individuals exceeded the one million mark last year, up from 

618,000 four years earlier. 

• In 2004, the number of audits of the largest businesses—those with assets of 

$10 million or more—finally increased after years of decline. 

The centerpiece of our enforcement strategy is combating abusive tax shelters, 

both for corporations and high-income individuals. I will touch upon two important 

initiatives of the past twelve months. 

We have continued our program of settlement offers for those who entered into 

abusive transactions in the past but would like to get their problems behind them. 

Last May, we made a settlement offer regarding the Son of Boss tax shelter, a particularly abusive transaction used by wealthy individuals to eliminate taxes on large 

gains, often in the tens of millions of dollars. In this program, for the first time, 

the IRS required a total concession by the taxpayer of artificial losses claimed. I am 

pleased with the response to the offer. So far, $3.2 billion in taxes, interest and penalties have been collected from the 1,165 taxpayers who are participating in the settlement initiative. The typical taxpayer payment was almost $1 million, with 18 taxpayers paying more than $20 million each and one paying over $100 million. Processing of individual settlements continues. 

Based on disclosures we have received from promoter investigations and from investor lists from Justice Department litigation, we have determined that just over 

1,800 people participated in Son of Boss. When the project concludes in the coming 

months, we expect the collected figure should top $3.5 billion. 

In February 2005, we announced a second important settlement initiative—this 

one involving executive stock options. This abusive tax transaction involved the 

transfer of stock options or restricted stock to family-controlled entities. These deals 

were done for the personal benefit of executives, sometimes at the expense of public 

shareholders. This shelter was not just a matter of tax avoidance but, in some instances, raises basic questions about corporate governance. Again, the settlement 

offer is a tough one: full payment of the taxes plus a penalty. 

14 

A noteworthy point about the stock option settlement offer is that our actions in 

this matter were closely coordinated with the Securities and Exchange Commission 

and the Public Company Accounting Oversight Board. 

Our settlement initiatives and increased audits have sent a signal to taxpayers: 

the playing field is no longer as lopsided as it once was. Non-compliant taxpayers 

might have to pay the entire tax, interest, and a stiff penalty. A taxpayer might 

have to wrestle with questions like ‘‘how much am I going to have to pay the lawyers and expert witnesses to litigate this thing?’’ Moreover, going to court is a public 

matter. Damage to one’s reputation is a potential factor. Many wealthy individuals, 

otherwise seen as community leaders, may not want to be identified as paying less 

than their fair share in taxes. 

Another example of cooperation in the battle against abusive shelters is in the 

international arena. A year ago, I announced the formation of what has come to be 

known as the Joint International Tax Shelter Information Centre. Since last Labor 

Day, we have had an operational task force of personnel from Australia, Canada, 

the United Kingdom, and the U.S. working together on-site here in Washington. We 

are exchanging information about specific abusive transactions. Results to date are 

promising. Thus far, we have uncovered a number of transactions which, but for the 

Centre, we would have unraveled only over a number of years, if ever. It makes 

sense that we continue to work with other countries because, in this increasingly 

global world, we are up against what is, in essence, a reinforcing commercial network of largely stateless accounting firms, law firms, investment banks, and brokerage houses. 

The government stepped up its use of civil injunctions in 2001 to prohibit promoters from selling illegal tax schemes on the Internet, at seminars or through 

other means. Currently the courts have issued injunctions against 99 abusive 

scheme promoters—81 permanent injunctions and 18 preliminary injunctions. They 

have issued injunctions against 17 abusive return preparers—all permanent injunctions. And an additional 49 suits have been filed by Justice seeking injunction action—28 against scheme promoters and 21 against return preparers. Injunctions 

issued have involved schemes such as: 

• Using abusive trusts to shift assets out of a taxpayer’s name while retaining 

control • Misusing ‘‘corporation sole’’ laws to establish phony religious organizations • Using frivolous ‘‘Section 861’’ arguments to evade employment taxes • Claiming personal housing and living expenses as business expenses • Filing tax returns reporting ‘‘zero income’’ • Misusing the Disabled Access Credit 

The IRS has another 1,000 investigations ongoing for possible referral to the Department of Justice; and individual examinations are being conducted on thousands 

of scheme participants. Most of the investigations and examinations are being conducted by the IRS Small Business/Self-Employed (SB/SE) Division. 

Our second enforcement priority is to assure that attorneys, accountants, and 

other tax practitioners adhere to professional standards and follow the law. 

Our system of tax administration depends upon the integrity of practitioners. Altogether, there are approximately 1.2 million tax practitioners. The vast majority of 

practitioners are conscientious and honest, but even honest tax professionals suffered from the sad and steep erosion of ethics in recent years by being subjected 

to untoward competitive pressures. The tax shelter industry had a corrupting influence on our legal and accounting professions. 

We have done quite a bit since March 2004 to restore faith in the work of tax 

professionals. We have strengthened regulations governing the standards of tax 

practice to discourage the manufacturing of bogus legal opinions on the validity of 

tax shelters. The IRS standards set forth rules governing what does and does not 

qualify as an independent opinion about a tax shelter. 

Last year, the government won a series of court opinions on privilege. The cases 

established that promoters who develop and market generic tax shelters can no 

longer protect the identity of their clients by hiding behind a false wall of privilege. 

Abusive tax shelters often flourished because penalties were too small. Some blue 

chip tax professionals actually weighed potential fees from promoting shelters, but 

not following the law, against the risk of IRS detection and the size of our penalties. 

Clearly, the penalties were too low. They were no more than a speed bump on a 

single-minded road to professional riches. 

But these speed bumps have become speed traps. Last fall, Congress enacted the 

American Jobs Creation Act. The legislation both created new penalties and increased existing penalties for those who make false statements or fail to properly 

disclose information on tax shelters. Under the new law, the IRS can now impose 

15 

monetary penalties not just on tax professionals who violate standards, but also on 

their employers, firms, or other entities if those parties knew, or should have 

known, of the misconduct. 

Our third enforcement objective is to detect and deter domestic and off-shore 

based criminal tax activity and related financial criminal activity. 

Last year, the IRS referred more than 3,000 cases to the Justice Department for 

possible criminal prosecution, nearly a 20 percent jump over the previous year. We 

continue our active role in the President’s Corporate Fraud Task Force. We are 

going after promoters of tax shelters—both civilly and, where warranted, criminally. 

This tactic is a departure from the past. Previously, during a criminal investigation, 

all civil activity came to a halt. The result was that our business units were reluctant to refer matters for criminal investigation lest they lose their traditional turf. 

But, we are now moving forward on parallel tracks with the Department of Justice. 

We have a number of important criminal investigations underway. The enforcement 

model is changing. 

Our fourth enforcement priority is to discourage and deter noncompliance within 

tax-exempt and government entities, and misuse of such entities by third parties 

for tax avoidance purposes. 

Consider, for example, certain credit counseling agencies. Increasingly, it appears 

that some credit counseling organizations have moved from their original purposes, 

that is, to counsel and educate troubled debtors, to inappropriately enrolling debtors 

in proprietary debt-management plans and credit-repair schemes for a fee. These activities may be disadvantageous to the debtors and are not consistent with the requirements for tax exemption. Further, a number of these organizations appear to 

be rewarding their insiders by negotiating service contracts with for-profit entities 

owned by related parties. Many newer organizations appear to have been created 

as a result of promoter activity. 

Some shelter promoters join with tax-exempt organizations to create abusive shelters. The organization receives a large fee from the taxpayer who is taking advantage of its tax-free status. That is an unintended abuse of the tax exemption that 

our nation bestows upon charities. 

It is heartening to see leading members of the nonprofit community taking steps 

to address abuses. I particularly want to salute the Independent Sector—which recently delivered a constructive report to the Senate Finance Committee. The report 

states that ‘‘government should ensure effective enforcement of the law’’ and calls 

for tougher rules for charities and foundations. The report calls for stronger action 

by the IRS to hold accountable charities that do not supply accurate and timely public information. I encourage the accounting, legal, and business communities to be 

as enthusiastic about confronting abuses and the erosion of professional ethics as 

the nonprofit community. An interesting point to note is that the report supports 

mandatory electronic filing of all tax returns for nonprofits. 

The threat to the integrity of our nation’s charities is real and growing. At the 

IRS, we take it very seriously. We are augmenting our resources in the nonprofit 

area. By the end of September, we will have increased the number of our personnel 

who audit tax-exempt organizations by over 30 percent from two years earlier. If 

we do not act expeditiously, there is a risk that Americans will lose faith in our nation’s charitable organizations. If that happens, Americans will stop giving and 

those in need will suffer. 

As we move forward with these priorities, we will leverage our success to achieve 

greater results within out FY 2006 budget request. 

Budget Restructure 

To facilitate full alignment and integration of the Service’s goals and measures 

with its resources, we are proposing to restructure our budget beginning in FY 2006. 

These changes will facilitate a more accurate assessment of the overall value of IRS 

programs, simplify the full costing of programs, and allow the IRS to demonstrate 

incremental increases in an initiative’s effectiveness based on the level of funding 

received. 

In addition, this new budget structure will enable us to manage activities more 

effectively. The normal processing of tax returns generally proceeds from pre-filing 

activities to filing activities, and finally to compliance activities, should they prove 

necessary. Although these activities are interrelated, we currently distribute their 

resources among three appropriations, with unevenly distributed support costs. This 

system makes it difficult to manage, track, and report the full cost of a given Taxpayer Service or Enforcement program. 

This new budget structure will enable us to prepare a true performance-based 

budget by providing the capability to integrate operational and support costs into 

one appropriation, thereby allowing us to cost budget activities and programs fully 

16 

for the first time. The new structure will also facilitate the full incorporation of performance measures into the budget, as the measures could be tied to funds in one 

appropriation rather than a series of program activities dispersed across multiple 

appropriations. The proposed new budget structure will allow stakeholders to assess 

more accurately the overall value of IRS programs, and make program reviews, such 

as the Office of Management and Budget’s Program Assessment Rating Tool 

(PART), more effective, thus providing greater accountability and results-oriented 

management focus. 

The proposed budget structure combines the three major appropriations accounts—Processing, Assistance and Management (PAM); Tax Law Enforcement 

(TLE); and Information Systems (ISY)—into one appropriation called Tax Administration and Operations (TAO). 

The Taxpayer Service and Enforcement programs of the TAO appropriation are 

divided among eight critical program areas. These budget activities focus on Assistance, Outreach, Processing, Examination, Collection, Investigations, Regulatory 

Compliance, and Research. Full funding for each activity will be reflected in the 

budget, along with key performance measures. As we continue to move toward the 

development and implementation of this new structure, we will refine these program areas and the associated resource distributions to provide more accurate costing. 

Let me now provide more details on the budget request for the IRS. 

President’s FY 2006 Budget Seeks Increase in Enforcement to Address 

Growing Tax Gap 

The President’s fiscal year 2006 budget requests $10.7 billion for the IRS, a 4.3 

percent increase over the fiscal year 2005 enacted level. This request represents a 

1 percent decrease in Taxpayer Service and a 2 percent decrease in Business Systems Modernization (BSM), but an 8 percent increase in enforcement. 

This budget includes $265 million for initiatives aimed at enhancing the enforcement of tax laws. This request is above the increases to fund the pay raise and other 

cost adjustments ($182 million), for a total of $446 million for new enforcement investments and cost increases. It is important the Congress fully fund these cost increases and new enforcement investments. The President’s budget proposal to fund 

them as contingent appropriations reflects the importance of this investment to the 

Administration. 

To ensure full funding of the new enforcement investments, the budget proposes 

to employ a budget enforcement mechanism that allows for an adjustment by the 

Budget Committees to the section 302(a) allocation to the Appropriations Committees found in the concurrent resolution on the budget. In addition, the Administration will also seek to establish statutory spending limits, as defined by section 251 

of the Balanced Budget and Emergency Deficit Control Act of 1985, and to adjust 

them for this purpose. To ensure full funding of the cost increases, either of these 

adjustments would only be permissible if the Congress funds the base level for IRS 

enforcement at $6.4 million and restricts the use of the funds to the specified purpose. The maximum allowable adjustment to the 302(a) allocation and/or the statutory spending limit would be $446 million for 2006, bringing the total enforcement 

level in the IRS to $6.9 million. 

We will use the additional funds for enforcement in several key ways to combat 

the tax gap, the difference between what taxpayers are supposed to pay and what 

they actually do pay, due to non-filing, underreporting, and nonpayment. Combating 

tax non-compliance is a top priority for us. Americans deserve to feel confident that 

when they pay their taxes, their neighbors and competitors are doing the same. 

These investments will yield substantial results. Even though we have increased the 

focus on specific areas of noncompliance, the tax gap increased slightly to between 

$311 billion and $353 billion in tax year 2001. IRS enforcement activities, coupled 

with late payments, recover about $55 billion of the tax gap, leaving a net tax gap 

of between $257 billion and $298 billion. 

Since 2001, the year covered by the National Research Program (NRP) three-year 

study in which we audited 46,000 individual income tax returns, we have taken a 

number of steps to bolster enforcement. We increased our enforcement revenues by 

nearly 28 percent from $33.8 billion in 2001 to $43.1 billion in 2004. Audits of highincome taxpayers—those earning $100,000 or more—topped 195,000 in fiscal year 

2004, which is more than double those conducted in 2001.Total audits of all taxpayers topped 1 million last year—a 37 percent jump from 2001. 

We are ramping up our audits on high-income taxpayers and corporations, focusing more attention on abusive shelters and launching more criminal investigations. 

We recently announced we collected $3.2 billion in the settlement initiative for Son 

of Boss, a particularly abusive tax shelter. 

17 

Our enforcement efforts are designed to increase compliance and reduce the tax 

gap. 

The preliminary results of the NRP determined a range for the tax gap, which 

will be refined into final, more detailed estimates by year-end 2005. It is unlikely 

but possible that the final estimates of the total tax gap will fall outside the established range. We need to continue our efforts in these areas and increase the investment in these areas. 

We need to enforce the law so that when Americans pay their taxes, they are confident that neighbors and business competitors are doing the same. At the same 

time, this research underscores the President’s call for tax reform. Complexity obscures understanding. Complexity in the tax code compromises both the service and 

enforcement missions of the IRS. Those who try to follow the law but cannot understand their tax obligations may make inadvertent errors or ultimately throw up 

their hands and say ‘‘why bother.’’ Meanwhile, individuals who seek to pay less than 

what they owe often hide behind the tax code’s complexity in order to escape detection by the IRS and pay less than their fair share. 

The IRS yields more than four dollars in direct revenue from its enforcement efforts for every dollar invested in its total budget. In FY 2004, we brought in a record 

$43.1 billion in enforcement revenue—an increase of $5.5 billion from the year before, or 15 percent. Beyond the direct revenues generated by increasing audits, collection, and criminal investigations, our enforcement efforts have a deterrent effect 

on those who might be tempted to skirt their tax obligations. 

The nearly 8 percent increase for enforcement activities in the Administration’s 

2006 IRS budget request will increase audits of corporations and high-income individuals as well as expand collection and criminal investigation efforts. 

Detailed Budget Summary 

Our FY 2006 request of $10.7 billion includes a transfer from the Justice Depart- ment of $53.9 million and 329 FTEfor our portion of the Interagency Crime and 

Drug Enforcement (ICDE) appropriation, $277.6 million for a 2.3 percent pay raise 

and non-labor inflationary costs, and $264.6 million for initiatives aimed at enhancing our enforcement efforts. This request also includes a $22 million rent reduction 

to result from consolidation of space, and the $134.1 million reduction to taxpayer 

service activities that we will responsibly leverage through productivity improvements and program reengineering, as previously discussed. We will take a balanced 

approach to these targeted reductions. 

In addition to the taxpayer service reengineering initiatives, we also expect to continue to realize savings, which we reinvest to other key areas, through the following 

other reengineering initiatives: 

• Savings from Increased Individual Master File (IMF) E-Filing (Reduction: 

¥$7,700,000 and ¥190 FTE; Reinvestment: +$7,600,000 and +12 FTE): This 

savings is based on processing efficiencies from the projected decrease in IMF 

paper returns and processing costs for electronically filed IMF returns in Submission Processing Centers. These savings will be reinvested to enable us to 

continue our consolidation of IMF returns processing into fewer Submissions 

Processing sites. • Consolidation of Case Processing Activities to Maximize Resources Devoted to 

Front-Line Operations (Reduction: ¥$66,654,000 and ¥649 FTE; Reinvestment: 

+$66,654,000 and +585 FTE): Staffing for conducting case processing activities 

that support our examination, collection and lien-processing programs will be 

consolidated from nearly 100 sites and centralized among four campuses (Philadelphia, Cincinnati, Ogden and Memphis). • Consolidation of Insolvency Activities to Maximize Resources Devoted to FrontLine Operations (Reduction: ¥$14,928,000 and ¥134 FTE; Reinvestment: 

+$14,928,000 and +156 FTE): Staff conducting insolvency operations to protect 

the government’s interest in bankruptcy proceedings will be consolidated from 

numerous sites and centralized at the Philadelphia campus. • Detection and Deterrence of Corrosive Corporate Non-Compliance (Reduction: 

¥$6,711,000 and ¥52 FTE; Reinvestment: +$6,711,000 and +52 FTE): By using 

improved issue-management and risk-assessment strategies for examining corporations, the IRS expects to realize productivity improvements. These savings 

will be reinvested to fund front-line enforcement activities. 

Finally, the FY 2006 request includes several program increases, totaling $264.6 

million: 

• Attack Corrosive Non-Compliance Activity Driving the Tax Gap (+$149,700,000 

and +920 FTE): This initiative increases coverage of the growing number of 

high-risk compliance problems and addresses the largest portion of the tax 

18 

gap—underreporting of tax. It proposes a funding increase across all major domestic and international compliance programs to leverage new workload-selection systems and case-building approaches from continuing reengineering efforts. • Detect and Deter Corrosive Corporate Non-Compliance (+$51,800,000 and +236 

FTE): This initiative addresses complex, high-risk issues in abusive tax avoidance transactions, promoter activities, corporate fraud, and aggressive domestic 

and off-shore transactions, resulting in increased corporate and high-income return closures and audit coverage. This initiative also includes critical post-filing 

support provided by outside experts to expedite the resolution of issues at the 

field examination level, reducing taxpayer burden, and increasing the credibility 

of the Service’s positions on the most complex and potentially highest compliance impact issues sent to court. • Increase Individual Taxpayer Compliance (+$37,900,000 and +417 FTE): This 

initiative addresses the tax gap through: the identification and implementation 

of actions needed to address non-compliance with filing requirements; increased 

Automated Underreporter resources to address the reporting compliance tax 

gap; increased audit coverage; and expanded collection work in Taxpayer Assistance Centers. • Combat Abusive Transactions by Entities with Special Tax Status (+$14,460,000 

and +77 FTE): This initiative focuses on the most egregious cases of non-compliance and identifies compliance risks sooner, reducing burden on compliant customers and enabling the development of new interventions to curtail the growth 

of abusive transactions. • Curtailing Fraudulent Refund Crimes (+$10,772,000 and +22 FTE): This initiative is aimed at attacking the increased questionable refunds and return preparer fraud identified through expanded operations of the Fraud Detection Centers located on IRS campuses. Fraudulent refund schemes are one of the most 

serious threats to voluntary compliance and an IRS investigative priority. 

The FY 2006 request of $10.7 billion funds the IRS’ three appropriations: Tax Administration and Operations (TAO) for operations, service and enforcement; Business Systems Modernization (BSM) for modernization; and, the Health Insurance 

Tax Credit (HITCA) for administering a refundable tax credit for qualified individuals. I will describe each in turn. 

Tax Administration and Operations (TAO) 

For FY 2006, we request funding of $10,460,051,000, an increase of 4.6 percent over the FY 2005 appropriation of $9,998,164,640 for programs previously funded 

from the PAM, TLE, and ISY appropriations. 

The TAO appropriation provides resources for the IRS’ service and enforcement 

programs. The IRS is responsible for ensuring that each taxpayer receives prompt 

and professional service. To that end, the IRS’ assistance, outreach, and processing 

activities funded in the TAO appropriation are dedicated to providing assistance to 

taxpayers in all forms—electronic interaction, published guidance, paper correspondence, telephone contact, and face-to-face communication—so that taxpayers may fulfill their tax obligations timely and accurately. It also includes the resources the IRS 

requires to handle the processing and disposition of tax returns, refunds, and other 

filing materials. 

We are also responsible for the fair enforcement of the nation’s tax laws. Each 

year, a small percentage of taxpayers file erroneous returns or, for reasons both innocent and less benign, fail to file a return at all. The IRS conducts enforcement 

activities using a variety of methods, including correspondence audits, matching reporting documents (such as Forms W–2) to information on taxpayer returns, in-person audits, criminal investigations of those suspected of violating tax laws, and participation in joint governmental task forces. The IRS’ examination, collection, investigations, regulatory compliance, and research activities funded in the TAO appropriation provide the resources required for equitable enforcement of the tax code 

and the investigation and prosecution of individuals and organizations that circumvent tax laws. 

Business Systems Modernization (BSM) 

The IRS tax administration system, which collects $2 trillion in revenues annually, is critically dependent on a collection of 40-year-old, obsolete computer systems. 

Recognizing the long-term commitment needed to solve the problem of modernizing 

these antiquated systems, Congress and the Administration created a special business systems modernization account. They designed the BSM program to bring the 

IRS’ business systems to a level equivalent with best practices in the private and 

public sectors while managing the risks inherent in a program that is unquestionVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767
19 

ably one of the largest, most visible, and most sensitive modernization programs 

ever undertaken. 

In 2004, the modernization budget was $387 million. Based on the challenges the 

modernization program was facing, we realized the program needed to be smaller 

in 2005 so we requested a lesser budget of $285 million. In the end, Congress appropriated $203 million. One of the ways we are accommodating these changes is by 

substantially lowering the costs of the core infrastructure as well as the architecture, integration, and management parts of the BSM program in 2005. These two 

areas are the programmatic elements of the program, and cost $160 million in FY 

2004. We certainly cannot justify that level of continued investment for a program 

that is roughly $200 million. Therefore, we are dramatically reducing those core 

services to $107 million in FY 2005 and we anticipate making additional reduction 

in FY 2006. For FY 2006, we request funding of $199 million for all BSM activities, 

substantially the same funding as the FY 2005 appropriated level. 

Our most successful year ever for the modernization program was 2004; we measured our success by the number of projects we delivered, the schedule and cost targets we hit, and the substantial improvements we made in program management. 

We delivered the first release of the Customer Account Data Engine (CADE) 

project in July 2004, allowing the IRS to process an initial set of the simplest tax 

returns on a new computer system for the first time in 40 years. We launched IRS’ 

new Integrated Financial System (IFS), and declared it the IRS’ financial accounting 

system of record. IFS will provide the capability for improved timeliness and accuracy of the financial reports and information available to IRS management and key 

stakeholders, facilitating continued clean financial audit opinions of the IRS. We deployed a full suite of e-Services products, providing tax professionals and businesses 

with new Web-based tools that dramatically improve their interface with the IRS. 

Additionally, we released Modernized e-File, whereby corporations and tax-exempt 

organizations can file their annual income tax and information returns electronically. 

We have also made significant improvements in our cost estimating and scheduling. In the Fall and Winter of 2003, we re-baselined the cost estimates and delivery schedules for each of the BSM program projects. Since then, we have shown a 

marked improvement in significantly reducing our variances between cost estimates 

and actual delivery costs from 33 percent in 2002 to 4 percent in 2004. 

In terms of improving program management, we identified four key areas that we 

had to address to enhance the performance of the modernization program: 

• Resizing our modernization efforts to better align with our management and 

skill capacity; 

• Engaging IRS business units to drive the modernization projects with a business focus; 

• Improving contractor performance on cost, schedule, and functionality; and 

• Hiring outside executives to achieve a better balance between large project 

management and tax administration experience. 

We have made significant progress in addressing each of these major challenges. 

First, the IRS will concentrate on a few key projects and will develop a track 

record of improved management and successful delivery of modernization projects. 

Second, the IRS assigned a business unit leader to each project with responsibility 

for leading the related BSM Governance Committee, and sharing accountability for 

delivering the modernization project as stated in their annual performance commitments. 

Third, we are making real progress in improving the accountability of the PRIME 

contractor. I meet monthly with the Chief Operating Officer of the Computer 

Sciences Corporation (CSC) to reinforce the accountability of the contractor to the 

IRS. Additionally, we have made major progress in restructuring BSM project contracts with the PRIME that shift an appropriate amount of financial risk to the contractor and tie costs to performance. These steps have resulted in improved contractor performance, as demonstrated in the deliverables in 2004 and the general 

adherence to costs and schedules. 

Fourth, we have made great progress in hiring experienced executives and seasoned managers from outside the agency who have expertise in running large-scale 

information technology programs and projects. A little over a year ago the mix of 

leadership at the top of the BSM program consisted of one outside expert and six 

internal IRS executives. Today, that mix will soon be five outside experienced outside experts and three internal IRS executives. This mix is a much better balance 

of the project management and technology talent and tax administration experience 

needed to successfully run the BSM program. 

20 

While we were very successful in 2004, we have a lot of work ahead of us. It is 

critical that we continue this level of performance in 2005 and beyond. 

Our focus for FY 2005 is on maintaining substantial modernization work for three 

key tax administration systems that will provide additional benefits to taxpayers 

and IRS employees, specifically: 

• The Customer Account Data Engine (CADE) project; • Modernized e-File; and Filing and • Payment Compliance (F&PC). 

CADE 

CADE replaces the IRS’ antiquated system called the Master File which is the 

Service’s repository of taxpayer information. With CADE being the core fundamental component of the modernized systems, it is the IRS’ highest priority technology project. 

We cannot over-emphasize the importance of CADE. The current Master Files 

have served the IRS for more than 40 years. However, they were developed in a different era and rely on an obsolete programming language and a flat-file system that 

still requires batch updates. These systems are very expensive to maintain; development of new applications costs the IRS two to three times what it would cost if they 

were already retired. Yet the IRS must update the Master Files every year to take 

into account tax law changes. As importantly, the vast majority of the workforce 

who are familiar with these old systems will be retiring over the next few years and 

we cannot hire individuals with these obsolete skills. Until the Master Files are replaced, the IRS can not offer service approaching what a typical financial services 

firm offers today (such as full account views for employees and real-time account 

updates and settlement). 

The returns we are processing in CADE are the most basic of 1040EZ forms and 

have a narrow range of taxpayer information, but it marks the first time since the 

1960s that the IRS has processed individual tax returns in a new way. The success 

of CADE proves that we can deliver technology that will process tax returns on a 

24-hour cycle, breaking the 40-year old standard of processing on a weekly cycle. 

As of April 11, 2005, CADE had processed 1.1 million returns and generated nearly 

$354 million in refunds to taxpayers. This achievement is significant. CADE will 

process over 1.3 million 1040EZ tax returns by the end of the 2005 filing season. 

The CADE system is scheduled to be phased in over several years, processing increasingly more complex tax returns. When fully operational, CADE will be a modern database that will house tax information for more than 200 million individual 

and business tax returns. It will provide a variety of benefits to taxpayers, such as 

faster refunds (by over 50 percent) along with daily postings of transactions and updating accounts, which (with other technology elements) will significantly improve 

customer service and enforcement. With CADE, we will have the flexibility necessary to respond quickly to our complex tax law and tax reform changes. 

One of the most significant changes that we introduced in 2004 was the segmentation of CADE releases into two annual deliveries—one in July and one in January. The July delivery will involve higher risk, more complex functionality, and the 

January delivery will include filing season changes combined with additional 

changes as capacity permits. For the July release, returns will be available from the 

previous six months which will enable us to test the higher risk, complex changes 

with high volumes, and then go live with reduced volumes, which will mitigate the 

operational risks. 

Modernized e-File 

Modernized e-File will provide a single point Federal/State filing option for Forms 

1120, 1120S (corporations) and 990 (tax-exempt organizations) returns in many 

states via a Web Services interface. Our work on Modernized e-File will be comprised of Release 3.1, which includes additional Forms 1120, 7004 (Application for 

Automatic Extension of Time to file Corporation Income Tax Return) and 990, and 

tax law changes for filing season 2004. Release 3.1 deployed initial operating capabilities on schedule on January 10, 2005. Release 3.2 will provide an interface with 

state tax information retrieval systems and a redesign of the signature matching 

process for Form 8453 (U.S. Individual Tax Declaration for Electronic Filing). 

Filing and Payment Compliance/Private Collection Agencies 

In 2004, Congress passed the American Jobs Creation Act, allowing the IRS to 

use Private Collection Agencies (PCAs). The legislation authorized the IRS to augment our collection efforts by allowing us to use PCAs to pursue what has been 

deemed as uncollectible tax liabilities; these agencies will not have enforcement authority and will only contact delinquent taxpayers to arrange voluntary, full-payVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00024 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767
21 

ment installment agreements. We will use the Filing and Payment Compliance 

(F&PC) system to analyze tax collection cases and divide the complex cases requiring direct IRS involvement from the simple ‘‘balance due’’ cases that can be handled 

by PCAs. The use of PCAs is to supplement—not supplant—current IRS personnel. 

Quite frankly, this activity is geared for an inventory that the IRS currently can 

not chase with existing resources. 

PCAs will benefit the IRS in three major ways: 

1. PCAs will help reduce the significant and growing amount of tax liabilities 

deemed uncollectible. 

2. PCAs will help maintain taxpayer confidence in our tax system. 

3. PCAs will allow the IRS to focus on more difficult cases and issues. 

We expect to issue a Request for Procurement (RFP) in the next several weeks. 

We plan to award contract in June 2005, to begin an initial limited release of the 

uncollected tax inventory in January 2006. We provided all interested parties notification via the IRS.gov/Business Opportunity webpage and electronic letters. 

Safeguarding taxpayer rights is paramount. The same IRS standards for customer 

service and protection of taxpayer rights will be strictly enforced. PCAs will be prohibited from threatening or intimidating taxpayers or implying that enforcement action will be taken against them. Specific safeguards to protect the taxpayer include: 

• Fair Debt Collection Practices Act protections; 

• Protections against unauthorized disclosures; 

• Assistance from the National Taxpayer Advocate; and, 

• Protections with respect to third party contacts, installment agreements and 

communications. 

The IRS expects to place cases with PCAs using the following criteria: 

• The taxpayer does not dispute the liability; 

• The liability is reportable on the Form1040 series of returns; 

• The balance due is greater than $100; and, 

• The case does not involve a restriction on collection or otherwise indicate that 

discretion or enforcement action may be required to resolve the liability. 

The delivery of the CADE project was a major milestone, but we still have a long 

way to go and a lot of work ahead of us as we introduce technology changes and 

expand into processing more complex tax returns at greater volumes. To that end, 

we recognize that a project of this complexity must continually look at new technologies that can support the level of development and implementation productivity 

needed for a project of this scale. 

We certainly hope, and expect, that we will build on the successes of 2004, and 

we will continue to mature the modernization program by gaining a solid reputation 

for on-time deliveries with high productivity. 

Health Insurance Tax Credit Administration (HITCA) 

In August 2002, the President signed Public Law 107–210, the Trade Act of 2002, 

which, among other things, provides a refundable tax credit for the cost of health 

insurance for certain individuals who receive a trade readjustment allowance or a 

benefit from the Pension Benefit Guaranty Corporation (PBGC). The Health Insurance Tax Credit Administration (HITCA) Appropriation funds the costs to administer a refundable tax credit for health insurance to qualified individuals. The tax 

credit is equal to 65 percent of the health insurance premium paid by eligible persons for themselves and qualifying family members. For FY 2006 we request funding of $20,210,000, a decrease of 41.5 percent below the FY 2005 appropriation of 

$34,562,272. Costs for the HITCA program have declined since implementation due 

to our active program oversight and management, as well as several cost-cutting initiatives we began to implement in March 2004. We developed a comprehensive action plan outlining cost-reduction initiatives and are following it to achieve these 

significant savings. 

Program Performance 

The IRS expects to achieve the following levels of performance after attaining full 

performance of the requested FY 2006 initiatives: 

• Increase in field examinations for high-income individuals with complex returns; significant increase in collection processed; and closing of over 40 percent 

more delinquent balance-due accounts in FY 2008 than in FY 2004. 

• Nearly double the audit coverage for individuals with income between $250,000 

and $1 million, from 1.5 percent in FY 2004 to 2.8 percent in FY 2008. 

22 

• Auditing 15 percent more individuals earning above $1 million, from 3.4 percent 

projected for FY 2004 to 3.9 percent in FY 2008. • Significantly more collection cases processed, closing 50 percent more delinquent accounts in FY 2008 than FY 2004. • Double the audit coverage for mid-size corporations, from 7.6 percent in FY 

2004 to 16 percent in FY 2008. • Increased efforts to deter abusive tax shelters among corporations. 

Legislative Proposals 

The President’s FY 2006 request includes several proposals that will assist me in 

managing the agency more efficiently and effectively. These proposals, if enacted, 

will allow us to focus more resources on high-income, high-risk areas, automate several routine transactions, use electronic data to reduce costly manual transactions, 

consolidate resources related to judicial and counsel review, and broaden administrative authorities and accesses to support further electronic administration and tax 

reform. We are seeking to: 

• Make Section 1203 of the IRS Restructuring and Reform Act of 1998 more effective and fair; • Curb the use of frivolous submissions and filings made to impede or delay tax 

administration; • Allow for the termination of installment agreements for failure to file returns 

and for failure to make tax deposits; 

• Consolidate judicial review of collection due process cases in the United States 

Tax Court; 

• Eliminate the monetary threshold for counsel review of offers in compromise; 

• Allow the Financial Management Service to retain transaction fees otherwise 

paid from IRS appropriations from levied amounts to recover delinquent taxes; 

• Extend the due date for electronically filed returns to provide additional incentive for taxpayers to e-file and expand the authority to require electronic filing 

by businesses and exempt organizations; and, 

• Allow IRS to access information in the National Directory of New Hires for tax 

administration purposes. 

Conclusion 

The IRS has lagged behind, for reasons that are understandable, in tax enforcement. But that is changing. We will continue to improve service and respect taxpayer rights. But we will also enforce the law. We won’t relax until taxpayers who 

are unwilling to pay their fair share see that that is not a worthwhile course to follow. 

Mr. Chairman, the great majority of Americans honestly and accurately pay their 

taxes. Average Americans deserve to feel confident that, when they pay their taxes, 

their neighbors and competitors are doing the same. 

The President’s budget request will help us enforce the tax law more fairly and 

efficiently. I am most grateful for your support of increased enforcement, and I look 

forward to working with you on this important budget request. 

Thank you very much. I am happy to take your questions. 

f 

Chairman RAMSTAD. Thank you, Commissioner. Like the other 

witnesses, your complete statement will be entered into the record. 

I know you have another commitment at four o’clock, so I am going 

to be very brief, and then yield to my Ranking Member. I understand, given the budget constraints, you are going to be forced to 

close approximately 70 of the 400 Taxpayer Assistance Centers 

(TACs) around the country, including three in my own home State 

of Minnesota. Without these centers taxpayers in certain areas will 

be deprived of face-to-face interaction with the IRS, as you know. 

At the same time the Taxpayer Advocate has raised concern about 

the ability of taxpayers to interact with people in authority at the 

IRS by phone. In your judgment, Commissioner, what impact will 

the closure of these TACs have on taxpayers, and how does the IRS 

plan to improve service in other areas to compensate for the closing 

of the TACs? 

23 

Mr. EVERSON. As I indicated, Mr. Chairman, we have been 

asked to do a little bit of belt tightening in this area. We are working to continue to drive the demand into the phones where you get 

the best answer. If someone has a question on the Tax Code, which 

is so complicated, the best place to get an answer is from the phone 

lines where your question gets routed to someone who understands 

that area of the law very specifically. We are also directing people 

to the website. That change is comparable in many ways to what 

you see happening in other States such as, where I live, Virginia. 

You can’t go to the library any more and get a Virginia tax return 

form. That just isn’t provided any more. It has all migrated to telephones or print on demand off on the web. 

We are trying to be as responsible as we can. Congressman 

Lewis, I have seen your letter. We are going to respond to you very 

quickly. We have gone through a modeling process here, which 

takes into account five different factors. Cost is certainly one of 

them, but so are geography, demographics and workload. The 

whole thing is depicted here. We have come up with two different 

proposals. One would close 67 sites. The other would close 105. The 

difference between the two is really the difference between 

weighting cost and weighting things like workload. If you weight 

workload, you tend to shutter more of the smaller centers out in 

the rural States. We need to work hard to continue to work on the 

phones. We also need to work on the volunteer sites. We have got 

14,000 Volunteer Income Tax Assistance (VITA) sites, volunteer 

sites, around the country, where good community activists get out 

there and help people with their taxes as well. 

[The exhibits follow:] 


Insert 24767A.005
24 

———————————— 

Chairman RAMSTAD. The other question I have, Commissioner, 

I know the IRS has an inventory of roughly $280 billion in unpaid 

tax assessments, not your Agency’s fault, but a large percentage of 

this $280 billion is in a deferred status because I know you lack 

the resources at the IRS to pursue collection. Last year, as you 

know, we enacted legislation to allow you to use Private Collection 

Agencies (PCAs). My question is how soon will the IRS be in a position to get these PCAs, these contractors up and running, or as 

they say, up and collecting? 

Mr. EVERSON. This is a very important question for us. This is 

an important new authority. It is one that is enjoyed by over 40 

States that use PCAs. Of paramount importance to us is that we 

use it responsively, and accordingly, we are proceeding very deliberately. Probably later this year, about June, we will let the initial 

contracts to some of the providers, but we need to do some systems 

work before the collections begin. If a contractor contacts you because you owe us money, but you have already sent us a check in 

the last few days, we want to make sure that is recorded correctly. 

We need to do some systems work to achieve this level of timeliness. So, I would suggest sir, that the collections themselves will 

probably start very early January or so of next year. 

Chairman RAMSTAD. Thank you, Commissioner. The Chair recognizes Mr. Lewis. 

Mr. LEWIS. Thank you very much, Mr. Chairman. Thank you, 

Mr. Commissioner, for being here and for your testimony. I want 

to be very brief also, like the Chairman, and follow up on this 

whole idea of the shut down of some centers. 

Mr. EVERSON. Sure. 

Mr. LEWIS. Will they start very soon? I think I heard maybe as 

early as September. 

Mr. EVERSON. They would start in the fall, sir, in order to realize the savings that we have embedded in the request. That is correct. Closures would start in this coming fall. 


Insert 24767A.006
25 

Mr. LEWIS. Are you planning—maybe this was in my letter—are 

you planning to shut down any operation in my State of Georgia, 

or in the city of Atlanta? Atlanta and the State of Georgia are 

growing so fast; there are a lot of people in Metropolitan Atlanta. 

The population is now moving toward 4 million in the metropolitan 

area. 

Mr. EVERSON. I believe, sir, that Georgia is included on that 

list. I will make a very general comment, that if you look at nearly 

any model for closing these centers—and there are over 400 of 

these centers at present—the models tend to shutter more centers 

on the East Coast and in the Midwest. That is comparable to what 

has changed in the demographics of the country with people moving more toward California or into places like Texas. You do get a 

disproportionate impact on the eastern areas. 

Mr. LEWIS. Is it true that a computer picked the sites to be shut 

down? 

Mr. EVERSON. It is absolutely true. These sites were picked 

based on the model that was developed that had some three dozen 

factors. As I said, we used all those factors because we want to be 

scrupulously fair so that there is not some inference that we don’t 

like you or we want to protect the appropriators which would actually, probably be a sensible thing to do. 

[Laughter.] 

Mr. EVERSON. So, what we have done is use the model and we 

are happy to take you through that model, sir. I will come up and 

do that myself if you wish, to make sure you think it is fair. Let 

me make one additional point on this subject. I talked about constraining language. I want you to know that if there is constraining 

language written in the Appropriations bill that says, ‘‘Don’t shutter these centers,’’ it just gets harder for us. We will have to cut 

back in other areas, which, we think, would be even more damaging. 

Mr. LEWIS. This will be my final question, Mr. Chairman. How 

many times has the IRS revoked the tax exempt status of organizations in the past 10 years, or since you have been the Commissioner? 

Mr. EVERSON. It is my understanding that we have not had a 

lot of revocations. It is a relatively small number, yes, sir. 

Mr. LEWIS. Thank you very much, Mr. Chairman. 

Chairman RAMSTAD. The Chairman recognizes the distinguished gentleman from North Dakota, Mr. Pomeroy. 

Mr. POMEROY. Thank you, Mr. Chairman, Ranking Member. I 

would note for the Subcommittee, this being our initial hearing, in 

particular that each of you have enormous shoes to fill, and of 

course, Amo Houghton we miss as our Chairman; I am told the last 

Ranking Member was something else too. 

[Laughter.] 

Mr. EVERSON. You missed my remarks. I said we feel jilted. 

[Laughter.] 

Mr. POMEROY. I am very pleased to be back on this Subcommittee, and we are very proud of Rob Portman, all of us are, 

that he has been chosen to ascend to the Ambassador rank as U.S. 

Trade Representative, and I would observe for the record that of 

Members of the—the Subcommittee on Oversight is the one that 

26 

really has to pay attention to the nitty-gritty details of revenue collection in this country, and we will work closely with the IRS as 

that moves forward. I don’t think any Member of the Congress has 

been more diligent in this regard than Rob Portman. 

Mr. EVERSON. Yes. 

Mr. POMEROY. As he moves to the executive branch we will 

have to pick up the slack. We are going to miss him. I have like 

five areas of inquiry, all rather quick. First, I was very pleased to 

see that the issue of conservation reserve program income, for retired farmers, as part of a broader issue of the tax treatment of 

this kind of program payment to retired farmers not actively working their land, was part of your priority work list, and I am wondering how that is coming along. 

Mr. EVERSON. It is on that list, the guidance list. As you know, 

there was a collision with the American Jobs Creation Act (P.L. 

108–357) that caused the revision of that list to make sure we get 

out some very pressing guidance. It is still an active part of that 

list and receiving our attention. 

Mr. POMEROY. Good. This will be the second tax year we have 

gone into this circumstance. I know that you are a man of your 

word and I simply hope that that doesn’t in the end—— 

Mr. EVERSON. I will ask how it is going. 

Mr. POMEROY. Thank you. 

Mr. EVERSON. That always helps. 

[Laughter.] 

Mr. POMEROY. That is great. That is why I love being on this 

Subcommittee. An issue that I have been very interested in is the 

Savers Credit which is a savings incentive for modest income 

households, and the tax data from the last couple of years show 

that it has been very effective in ’02 and ’03 in terms of generating 

those applying for this credit. Now in order to qualify they had to 

make a contribution, a qualifying contribution to a savings account, 

and we show over the last couple of years about 5 million a year 

have done that. Now if that truly represents 5 million new retirement savings accounts the first couple years of this program, I 

think we are off to a good start. Unfortunately, it expires and if the 

administration allows it to expire, we will have to wrestle with this 

one in Congress. Do you have any observations in terms of whether 

the Savers Credit is functioning well? 

Mr. EVERSON. Frankly, I have not had any conversations indicating one way or the other, from a tax administration impact, how 

this is functioning. It has not bubbled up as an issue, like the 

earned income tax credit (EITC), which is so controversial. That 

has not been the case, nor like the health coverage tax credit, 

which has had a very slow start, as you know. 

Mr. POMEROY. One of the things that we are intrigued with is 

we couldn’t reauthorize it and improve it by having the refund eligible for direct deposit into the savings account, as opposed to distribute it to the taxpayer. I understand that technically this is now 

possible. Do you have an evaluation? 

Mr. EVERSON. We have looked. There is a comparable issue 

about split refunds that is coming up on the returns. Some of this 

work does take further investment in technology. As you know, despite your active efforts, we haven’t always received as much 

27 

money from the Congress as the Administration has requested. 

This does have an impact, particularly in a systems area, so that 

is a constraint. On this particular matter I would have to check 

and see about it. 

Mr. POMEROY. I would appreciate it if you would check and let 

us know what we need to do to make it work. I think that would 

be important. My final question involves—there was a news report 

that was quite interesting, and it was those using refund loans, 

which is a subprime lending activity that I think is generally scurrilous and overcharged, and varies significantly in different parts 

of the country. I know that in the past we have talked about this 

issue in the context of e-filing partners. The IRS, they would e-file 

without charge, but they would then be a vendor for their services, 

and I felt under that circumstance that the Service has a private 

partner, it ought to do some due diligence in terms of the quality 

of product sold. The fact that we are seeing substantially different 

take-up rates depending on which part of the country you are from 

tells me this is at least as much about marketing and information 

to the taxpayer as it is broad generic need for this kind of service. 

I am wondering if this is something the IRS is concerned about. 

Mr. EVERSON. It could be about marketing. I don’t have a defined position on that, but if you look across the country, e-filing 

varies dramatically by State. You get some States with relatively 

low rates of e-filing. Connecticut is relatively low, Iowa very high. 

So, there are geographic differences across all of these issues, and 

I don’t know if there is a correlation along the lines that you are 

suggesting. We can certainly look at it. The Free File Alliance—I 

think you are hearing from them later—has been tremendously 

successful and is increasing the use of e-file. We are reaching the 

end of the initial period, and we will be reviewing the program 

with the 20-some companies that have worked on it as this filing 

season comes to an end. 

Mr. POMEROY. Do you have a way of capturing, besides from 

the e-file part—I know my time—just a quick follow-up, Mr. Chairman. Thank you for indulgence. Do you have a way of capturing 

the refund loan information beyond your e-file partners? 

Mr. EVERSON. We don’t regulate those loans. That is not the 

job of the IRS. If it is in regulations, it is States or other Federal 

regulations with which I am not familiar. I don’t like them. I am 

not suggesting that Refund Anticipation Loans (RALs) are a good 

thing. Our answer to that is electronic filing, and if somebody electronically files they get their refund back in half the time. It is 

even quicker if they use the direct deposit option, which takes a 

week off of it. So, I don’t want you to misinterpret the fact that I 

am sticking up for refund loans. I am not. I would like to see that 

taken off the table at some point. 

Mr. POMEROY. Would the Service send to the Committee or at 

least to my office the participants in your e-file partnership 

and—— 

Mr. EVERSON. Absolutely—— 

Mr. POMEROY. The services that they are then selling to Members? In addition to that, any inquiry, if any, by the IRS about the 

general suitability of those services, recognizing that some of this 

lending activity is duly regulated in other sectors? 

28 

Mr. EVERSON. Sure. We can certainly do that. 

[The information follows:] 

———————————— 

Mr. POMEROY. Thank you. Thank you, Mr. Chairman. Great to 

work with you again. 

Mr. EVERSON. Nice to see you. I promised a visit to North Dakota, I know, but do I have to go to Georgia first now? I am not 

sure how that works. 

[Laughter.] 

Mr. POMEROY. The Commissioner did agree to come to North 

Dakota, but it was qualified. He said not in the winter. 

Chairman RAMSTAD. We all know he is a very smart man. The 

Chairman now recognizes the distinguished gentleman from New 

York, Mr. Reynolds. 


Insert 24767A.007
29 

Mr. REYNOLDS. Commissioner Everson, thank you for being 

here today, and I look forward to working with you on a variety 

of issues in the 109th Congress. I am particularly interested in 

your testimony regarding the IRS plans to partner with PCAs. As 

you know, many of us in Congress worked hard last year to ensure 

that the Jobs Bill, which President Bush signed into law last October, include a limited and carefully crafted provision authorizing 

PCAs to assist the IRS in collecting delinquent tax debt. Although 

some critics of the partnership argued that taxpayer rights would 

be greatly threatened by permitting PCAs to play limited supplementary role to IRS collection efforts, isn’t it true that the new law 

would include the important safeguards to ensure that taxpayer 

rights are protected, and could you elaborate on some of those key 

safeguards? 

Mr. EVERSON. Yes, sir, you are absolutely right. We started to 

talk about this a moment ago. We are proceeding very deliberately 

on this. We recognize that we will get one shot at this. We can’t 

blow this. We are going to respect taxpayer rights; the same standards of the Fair Debt Collections Act (P.L. 104–208) apply here. 

Also, the same standards that affect our own employees will apply. 

The Treasury Inspector General for Tax Administration (TIGTA) 

which is the independent inspector general, is going to be auditing 

this program as we build it up. I can only assure you that we will 

use this authority responsibly. It really gives us a terribly important benefit though. We are underfunded in this area, and as anybody who gets involved in debt can tell you, the longer you wait, 

the harder it is to get the money. This authority will help us speed 

up the process, and that is a good thing in terms of bringing in the 

revenues we need to bring in. 

Mr. REYNOLDS. Just building further on the PCA issue, your 

testimony notes that the so-called tax gap, the difference between 

what U.S. taxpayers are supposed to pay and what they actually 

pay, grew between $311 billion and $353 billion in 2001, and the 

IRS enforcement efforts that year, coupled with late payments, did 

manage to bring the net tax gap back down to between $257 billion 

and $298 billion. I am sure that you will agree those figures are 

still totally unacceptable for what we are looking at. So, I guess the 

question is, do you believe, as I do, that the PCAs can play that 

useful role in closing the tax gap with the provisions of where we 

are set forth, and now you implementing the procedures that you 

just outlined? 

Mr. EVERSON. Yes, sir. I believe that they will be an important 

component in increasing further the direct enforcement revenues 

that we already are building up through a variety of processes, increased examinations, the audits we are doing, increased collection 

efforts. This just shows you that these are the moneys that we get 

from audits, from collection efforts and from document matching. 

We brought that up from $33.8 billion three years ago to $43.1 billion. The collection agencies will help significantly. 

[The chart follows:] 

30 

Mr. REYNOLDS. I thank the Commissioner. Mr. Chairman, 

thank you. 

Chairman RAMSTAD. Thank you, Commissioner, and again, we 

are sorry for the delay. Thank you for your testimony. 

Mr. EVERSON. For me it is just a question of point and shoot 

this time of the year. They tell me where to go, and, you know. 

[Laughter.] 

Chairman RAMSTAD. I will look forward to seeing you again. 

Mr. LEWIS. Mr. Chairman, just before the Commissioner leaves, 

I would like to ask unanimous consent that additional questions be 

submitted for the hearing record. At this point I would like to submit questions from Representative Neal and Emanuel about the 

IRS plan to close the TACs. 

Chairman RAMSTAD. Without objection, so ordered. 

[The information was not received at the time of printing.] 

Thank you, Commissioner. The second panel consists of IRS 

Oversight Board Chairman Ray Wagner and GAO Director of Tax 

Issues, James White. Gentlemen, welcome, and the same apologies 

are apropos in your cases. Thank you for your patience. Thank you 

for your service. You may proceed, and as I said, your complete 

statements will be entered into the record. 

STATEMENT OF JAMES R. WHITE, DIRECTOR, STRATEGIC 

ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; ACCOMPANIED BY DAVID A. POWNER, DIRECTOR, INFORMATION TECHNOLOGY MANAGEMENT ISSUES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. WHITE. Mr. Chairman and Members of the Subcommittee, 

I am pleased to participate in today’s hearing. Since passage of the 

IRS Restructuring and Reform Act of 1998 (P.L. 105–206), IRS has 


Insert 24767A.008
31 

improved taxpayer service, achieved efficiency gains and implemented some modernized information systems. However, the 

progress has not been uniform. The IRS’ enforcement programs declined after 1998. Despite a recent up-tick in enforcement staffing, 

it is not back to what it was. A number of systems modernization 

projects are over-budget and behind schedule. The IRS is shifting 

its priorities, and tending to better address these problems. First, 

IRS is asking for an 8-percent increase for enforcement for 2006, 

about $500 million. Second, IRS is proposing a 1 percent cut in 

spending on taxpayer service, although when cost increases are 

factored in, the real cut will be larger. To absorb the cut, IRS is 

proposing to reduce its teleph1 hours, has already reduced its telephone accessibility goal, and is proposing to reduce walk-in sites. 

These reductions might have been larger except for noticeable efficiency gains, especially in processing tax returns. Third, IRS is proposing a small cut in its BSM budget, intending to focus on its 

highest priority projects and shifting significant program management responsibilities from contractor staff to IRS staff. Although 

there are sound reasons for the shifts in priorities, they also involve risks. One risk, as IRS shifts its priorities toward enforcement, is that some of the recent gains in taxpayer service could be 

surrendered. Another risk with BSM is more cost overruns, scheduled delays and postponed improvements for taxpayers. Mr. Chairman, if IRS starts surrendering some of its improvements to taxpayers service, we could revert to a swinging pendulum, where enforcement gains are achieved at the expense of taxpayers service 

and vice versa. 

Several steps could help avoid the swinging pendulum. One is to 

agree on long-term goals for IRS. The IRS is developing, but has 

not yet released such goals. Without long-term goals it is difficult 

to assess IRS’ budget request or hold IRS management accountable. Long-term goals would make priorities clearer. For example, 

the budge request proposes some rollback in both telephone and 

walk-in service but does not provide details. What are IRS’ taxpayer service goals? Are telephone and walk-in service equal priorities, or is one more important? Through mid March, IRS answered 

over 23 million telephone calls. About 9 percent as many taxpayers 

walked in. Another step to avoid a swinging pendulum is to review 

the menu of services that IRS provides to see if it is possible to 

maintain overall service to taxpayers, but at lower cost. The IRS 

has added one item to its service menu, Internet service, that now 

is used by tens of millions of taxpayers to get forms and information, access the Free File system, and learn the status of their refunds. Another menu item, telephone service, is noticeably improved. Despite reduced funding, telephone accuracy is improved 

and access is about the same. These new and improved services 

open up the possibility of maintaining overall service to taxpayers 

while cutting some items on the menu. The new or improved services might offset cuts in other areas. Targeting cuts requires criteria. Criteria might include duplication of services, cost per taxpayer served, and whether usage is declining. Options that fit some 

of these criteria include reducing walk-in sites and limiting certain 

types of calls. I call these options because these are not recommendations. There are tradeoffs. 

32 

1Pub. L. No. 105–206 (1998). 

2See for example, GAO–05–67, Tax Administration: IRS Improved Performance in the 2004 

Filing Season, But Better Data on the Quality of Some Services Are Needed (Washington, D.C.: 

Nov. 15, 2004). 3GAO, Internal Revenue Service: Assessment of Fiscal Year 2005 Budget Request and 2004 

Filing Season Performance, GAO–04–560T (Washington, D.C.: Mar. 30, 2004). 

A third step to help avoid a swinging pendulum is to succeed at 

BSM. Business Systems Modernization is critical to good taxpayer 

service and enforcement. It allows, for example, taxpayers to file 

and retrieve information electronically, and provides technology solutions to the backlog of collection cases. For several years we have 

stated concerns about IRS’s schedule and cost estimating, citing 

weaknesses in management controls and capabilities. We have 

made recommendations to improve BSM management and IRS has 

implemented or has begun to implement them. Today, the BSM 

program is undergoing significant changes as it adjusts to budget 

reductions, reductions due to congressional concerns about cost 

overruns and schedule delays, and a desire to have IRS focus on 

its highest priority projects, particularly the Customer Account 

Data Engine (CADE). It is too early to tell what effect the reductions will have on BSM. According to the new associate Chief Financial Officer (CFO) for BSM, IRS is redefining and refocusing 

the BSM program. In summary, IRS will be challenged to maintain 

the quality of service while shifting resources to enforcement. Success will require smart management and success at BSM. Mr. 

Chairman, this concludes my statement. I would be happy to answer questions. 

[The prepared statement of Mr. White follows:] 

Statement of James R. White Director of Tax Issues, U.S. Government 

Accountability Office 

Mr. Chairman and Members of the Subcommittee: 

We are pleased to participate in the Subcommittee’s hearing on the Internal Revenue Service’s (IRS) fiscal year 2006 budget request and performance during the 

2005 tax filing season. 

IRS is in the midst of making significant adjustments to its modernization strategy to better serve taxpayers and ensure their compliance with the nation’s tax 

laws. It is now seven years since the passage of the Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) 1 and IRS is shifting its priorities from 

improving taxpayer service to strengthening tax law enforcement efforts. IRS is also 

adjusting its strategy for managing its Business Systems Modernization (BSM) effort by shifting significant program management responsibilities from contractor to 

IRS staff. Although there are sound reasons for these adjustments, they also involve 

risk. 

We have reported that IRS has made progress improving taxpayer service since 

the passage of RRA 98.2 For example, IRS’s telephone assistance is now more accessible and accurate. Further, IRS is more efficient at processing tax returns, in part, 

because of the growth of electronic filing, and has cut processing staff. IRS has also 

implemented some modernized information systems and increased its capacity to 

manage large systems acquisition and development programs. 

However, progress has not been uniform. We have reported on large and pervasive declines in IRS’s tax law enforcement programs after 1998. We have also reported that a number of systems modernization projects were over budget and behind schedule.3

As noted, IRS is shifting its priorities to better address these problems. The risk, 

as IRS shifts its priorities towards enforcement, is that some of the gains in the 

quality of taxpayer service could be surrendered. There are analogous risks associated with moving more of the management of BSM in-house. 

With these risks in mind, our statement discusses both IRS’s fiscal year 2006 

budget request and 2005 filing season performance to date. To address your request, 

we assessed (1) how IRS proposes to balance its resources between taxpayer service 

33 

4GAO, Tax Administration: IRS Needs to Further Refine Its Tax Filing Season Performance 

Measures, GAO–03–143 (Washington, D.C.: Nov. 22, 2002) and GAO, Financial Audit: IRS’s Fiscal Years 2004 and 2003 Financial Statements, GAO–05–103 (Washington, D.C.: Nov. 10, 2004). 

and enforcement programs and the potential impact on taxpayers, (2) the status of 

IRS’s efforts to develop and implement the BSM program, and (3) the progress IRS 

has made in implementing best practices for developing its information technology 

(IT) operations and maintenance budget. With respect to the interim results of key 

2005 filing season activities, we compared IRS’s performance to past years’ and 

goals it set for this year. 

Our assessment of the budget request and BSM is based on a comparative analysis of IRS’s fiscal year 2002 through 2006 budget requests, funding, expenditures, 

other documentation, and interviews with IRS officials. Our assessment of the interim results of the filing season is based on comparing IRS’s performance this year 

to previous filing seasons, viewing operations at a processing center, call sites, and 

walk-in sites, monitoring various production meetings, interviewing IRS and Treasury Inspector General for Tax Administration (TIGTA) officials and paid tax practitioners and other external stakeholders, reviewing TIGTA and other external reports, and reviewing IRS’s Web site. For both assessments, we used historical budget and performance data from reports and budget requests used by IRS, Department 

of Treasury, and Office of Management and Budget (OMB). In past work, we assessed IRS’s budget and performance data.4 Since the data sources and procedures 

for producing this year’s budget and performance data have not significantly 

changed from prior years, we determined that the budget data and filing season performance data were sufficiently reliable for the purposes of this report. The budget 

and performance data for fiscal years 2005 and 2006 are subject to change. Regarding our analysis of IRS’s BSM program, we primarily used the agency’s BSM expenditure plans to determine the status of the program. To assess the reliability of 

the cost and schedule information contained in these plans, we interviewed applicable IRS officials to gain an understanding of the data and discuss our use of that 

data. In addition, we checked that information in the plans was consistent with information contained in IRS internal briefings. Accordingly, we determined that the 

data in the plans were sufficiently reliable for purposes of this statement. We performed our work in Washington, D.C. and Atlanta, Georgia from December 2004 

through March 2005, in accordance with generally accepted government auditing 

standards. 

In summary, our assessment shows that: 

• IRS’s 2006 fiscal year budget request reflects a continuing shift in priorities 

from improving taxpayer service to strengthening enforcement efforts, but the 

potential impact of these changes on taxpayers in both the short- and long-term 

is unclear. IRS is requesting $10.9 billion, an increase of 3.7 percent over fiscal 

year 2005 enacted levels. This includes an 8 percent increase for enforcement, 

and a 1 percent and 2 percent decrease for taxpayer service and BSM, respectively. IRS has not finalized the details on where reductions in taxpayer service 

would occur. In addition, IRS is developing, but currently lacks, long-term goals 

that can help IRS inform stakeholders, including the Congress, and aid them 

in assessing performance and making budget decisions. In light of the current 

budget environment and IRS’s improvements in taxpayer service over the last 

several years, this is an opportune time to reconsider the menu of services it 

provides. It may be possible to maintain the overall level of assistance to taxpayers by changing the menu of services offered, offsetting reductions in some 

areas with new and improved service in other areas. 

• IRS has taken important steps forward towards implementing the BSM program by delivering the initial phases of several modernized systems in 2004 and 

early 2005. Nevertheless, BSM continues to be high risk because, in part, its 

projects have incurred significant cost increases and schedule delays, and the 

program continues to face major challenges. As a result of funding reductions 

and other factors, IRS has made major adjustments to the BSM program, including reducing the management reserve and changing the mix and roles of 

contractor versus federal staff used to manage the program. It is too early to 

tell what effect these adjustments will ultimately have on the BSM program, 

but they are not without risk, could potentially impact future budget requests, 

and will delay the implementation of certain functionality that was intended to 

provide benefit to IRS operations and taxpayers. Finally, the BSM program is 

based on visions and strategies developed years ago, which, coupled with the 

already significant delays the program has experienced and the changes 

brought on by the budget reductions, indicates that it is time for IRS to revisit 

34 

5 IRS is proposing a new budget structure beginning in fiscal year 2006. The proposal would 

integrate support costs and the IT appropriation into taxpayer assistance and operations appropriation with eight program areas involving both taxpayer service and enforcement. See appendix I for information on the new budget structure. 6The Administration proposes to fully fund enforcement efforts and costs as contingent appropriations. This would be achieved by using one of two budgetary mechanisms that would allow 

for an adjustment to total discretionary spending for fiscal year 2006 of not more than $446 

million for IRS tax enforcement. 

its long-term goals, strategy, and plans for BSM, including an assessment of 

when significant future BSM functionality would be delivered. According to the 

Associate Chief Information Officer (CIO) for BSM, IRS is redefining and refocusing this program. 

• IRS has made progress toward implementing investment management best 

practices that would improve its budget development and support for its IT operations and maintenance funding requests. For example, the recent release of 

a new accounting system included an activity-based cost module, which IRS 

considered to be a necessary action to implement these best practices. However, 

Office of the Chief Financial Officer officials stated that IRS needs 3 years of 

actual costs to have the historical data necessary to provide a basis for future 

budget estimates. Accordingly, they expect that IRS will begin using the activity-based cost module in formulating the fiscal year 2008 budget and will have 

the requisite 3 years of historical data in time to develop the fiscal year 2010 

budget. 

Our assessment of the 2005 filing season to date shows that: 

• IRS has generally maintained or improved its 2005 filing season performance 

compared to last year. Electronic filing continues to increase, allowing IRS to 

continue reducing resources devoted to processing. However, IRS may not meet 

this year’s electronic filing goal and is likely to not to meet its goal of 80 percent 

of all individual tax returns filed electronically by 2007. Access to telephone 

assistors remains relatively comparable to last year, although there are other 

indications of slippage in telephone access such as more abandoned calls and 

longer wait times. The tax law accuracy rate for answers provided via telephone 

or IRS’s Web site has improved. IRS’s performance so far in 2005 is good news, 

considering IRS received $104 million less in fiscal year 2005 than 2004 for taxpayer services. IRS plans to absorb this reduction, in part, by consolidating 

paper—processing operations, shifting resources from service to enforcement, 

and reducing some services—for example, reducing access to telephone 

assistors—in 2005. However, the filing season is not over, and whether or not 

IRS will achieve efficiency increases and the impact on IRS operations and taxpayers is not yet known. 

IRS’s Budget Request Continues to Shift Priority from Taxpayer Service to 

Enforcement, but the Short—and Long-term Impacts on Taxpayers Are 

Unclear 

IRS’s fiscal year 2006 budget request reflects a continuing shift in priorities by 

proposing reductions in taxpayer service and increases in enforcement activities. 

The request does not provide details about how the reductions will impact taxpayers 

in the short-term. Nor does IRS have long-term goals; thus the contribution of the 

fiscal year 2006 budget request to achieving IRS’s mission in the long-term is unclear. Because of budget constraints and the progress IRS has made improving the 

quality of taxpayer services, this is an opportune time to reconsider the menu of 

services IRS offers. 

IRS Is Proposing Reductions in Taxpayer Service and BSM and Increases 

in Enforcement 

IRS is requesting $10.9 billion, which includes just over a 1 percent decrease for 

taxpayer service, a 2 percent decrease for BSM, and nearly an 8 percent increase 

for enforcement, as shown in table 1.5 As table 1 further shows, the changes proposed in the 2006 budget request continue a trend from 2004. In comparison to the 

fiscal year 2004 enacted budget, the 2006 budget request proposes almost 4 percent 

less for service, almost 49 percent less for BSM, and nearly 14 percent more for enforcement.6

35 

7 According to IRS, an FTE is the equivalent of one person working full time for 1 year without overtime. 

Table 1: IRS Budget Summary for Key Activities, Fiscal Years 

2004–2006 (dollars in millions) 

Fiscal year 

2004 

(enacted) 

Fiscal year 

2005 

(enacted) 

Fiscal year 

2006 

(requested) 

Percent 

change 

(2004–2005) 

Percent 

change 

(2005–2006) 

Percent 

change 

(2004–2006) 

Taxpayer Service $3,710 $3,606 $3,567 ¥2.8% ¥1.1% ¥3.8%

Enforcement 6,052 6,392 6,893 5.6 7.8 13.9

BSM 388 203 199 ¥47.6 ¥2.0 ¥48.7

Table 1: 

Source: GAO analysis of IRS data. 

Note: Numbers may not add due to rounding. 

As table 1 also shows, taxpayer service sustained a reduction of $104 million or 

2.8 percent between fiscal years 2004 and 2005. According to IRS officials, the majority of this reduction was the result of consolidating paper-processing operations, 

shifting resources from service to enforcement, and reducing some services. IRS officials said that this reduction is not expected to adversely impact the services they 

provide to taxpayers but added that the agency cannot continue to absorb reductions 

in taxpayer service without beginning to compromise some services. 

For fiscal years 2005 and 2006, table 2 shows some details of changes in both dollars and full-time equivalents (FTE).7 Both are shown because funding changes do 

not translate into proportional changes in FTEs due to cost increases for salaries, 

rent, and other items. For example, the $39 million or 1.1 percent reduction in taxpayer service translates into a reduction of 1,385 FTEs or 3.6 percent. Similarly, the 

over $500 million or 7.8 percent increase in enforcement spending translates into 

an increase of 1,961 FTEs or 3.4 percent. 

Table 2: IRS Requested Changes in Funding for Taxpayer Service 

and Enforcement, Fiscal Years 2005 and 2006 (requested) 

Program activities 

Fiscal year 2005 

(estimated) 

Fiscal year 2006 

(requested) 

Change fiscal year 2005– 

fiscal year 2006 

Dollars 

(in millions) 

Full-time 

equivalents 

Dollars 

(in millions) 

Full-time 

equivalents 

Dollars 

(in millions) 

Full-time 

equivalents 

Assistance $1,829 20,798 $1,806 20,160 ¥ $23 ¥ 638

Outreach 500 2,473 466 1,905 ¥ 34 ¥ 568

Processing 1,276 15,695 1,295 15,516 19 ¥ 179

Taxpayer service 

subtotal 3,606 38,966 3,567 37,581 ¥ 39 ¥ 1,385

Research 154 1,119 158 1,119 4 0

Examination 3,478 31,498 3,712 32,284 234 786

Collection 1,826 18,023 1,991 18,815 165 792

Investigation 682 4,899 767 5,250 85 351

Regulatory 253 1,912 265 1,944 12 32

Enforcement subtotal 6,392 57,451 6,893 59,412 500 1,961

Taxpayer service and 

enforcement total 9,998 96,417 10,460 96,993 462 576

Table 2: 

Source: GAO analysis of IRS data. 

Note: Numbers may not add due to rounding. 

36 

The difference between changes in dollars and FTEs could be even larger because 

of unbudgeted expenses. Unbudgeted expenses have consumed some of IRS’s budget 

increases and internal savings increases over the last few years. Unbudgeted expenses include unfunded portions of annual salary increases, which can be substantial given IRS’s large workforce, and other costs such as higher-than-budgeted rent 

increases. According to IRS officials, these unbudgeted expenses accounted for over 

$150 million in each of the last 4 years. 

An IRS official also told us they anticipate having to cover unbudgeted expenses 

in 2006. As of March 2005, IRS officials were projecting unbudgeted salary increases 

of at least $40 million. This projection could change since potential federal salary 

increases for 2006 have not been determined. 

IRS Is Proposing $39 Million Less for Taxpayer Service, but the Impact on Taxpayers Is Unclear 

The budget request provides some detail on how IRS plans to absorb cost increases in the taxpayer service budget. IRS is proposing a gross reduction of over 

$134 million in taxpayer service from reexamining the budget’s base and plans to 

use more than $95 million of it to cover annual increases such as salaries. This 

leaves a net reduction of nearly $39 million or 1.1 percent in the taxpayer service 

budget. The extent to which IRS is able to achieve the gross reductions will impact 

its ability to use the funds as anticipated. Decisions on how the $134 million gross reduction would be absorbed were not 

finalized prior to releasing the budget. According to IRS officials, some of the reductions would result from efficiency gains such as reducing printing and postage costs; 

however, others would result from reductions in the services provided to taxpayers 

such as shortening the hours of toll-free telephone service operations. The officials 

also said most decisions have now been made about general areas for reduction and 

most changes will not be readily apparent to taxpayers. 

Although IRS has made general decisions about the reductions, many of the details have yet to be determined. Therefore, the extent of the impact on taxpayers 

in the short term is unclear. For example, IRS plans to reduce dependence on field 

assistance, including walk-in sites, but has not reached a final decision on how to 

reduce services. Table 3 provides further detail on how IRS is proposing to reduce 

funding and resources for taxpayer service. 

Table 3: IRS Requested Changes in Funding and Full-time 

Equivalents for Taxpayer Service, Fiscal Years 2005 and 2006 

Program discipline 

Fiscal year 2005 

(actual) 

Fiscal year 2006 

(requested) 

Change fiscal year 

2005–2006 

Dollars (in 

millions) 

Full-time 

equivalents 

Dollars (in 

millions) 

Full-time 

equivalents 

Dollars (in 

millions) 

Full-time 

equivalents 

Assistance 

Electronic $1,536 17,745 $1,557 17,721 $21 ¥24

Field 274 2,796 230 2,181 ¥44 ¥615

EITC assistance 19 258 19 258 <1 0

Assistance total 1,829 20,798 1,806 20,160 ¥23 ¥638

Outreach 

Publication & Media 291 821 276 520 ¥15 ¥301

Taxpayer Education 

& Communication 203 1,592 184 1,326 ¥19 ¥266

EITC Outreach 7 60 7 60 <1 0

Outreach total 500 2,473 466 1,905 ¥34 ¥568

Processing 1,276 15,695 1,295 15,516 19 ¥179

Taxpayer service total 3,606 38,966 3,568 37,581 ¥39 ¥1,385

37 

Table 3: 

Source: GAO analysis of IRS data. 

Note: Numbers may not add due to rounding. 

IRS Continues to Request Significant Increases for Enforcement to Build on Recent Hiring Gains 

IRS Continues to Request Significant Increases for Enforcement to Build on Recent Hiring Gains 

IRS’s fiscal year 2006 budget request is the sixth consecutive year the agency has 

requested additional staffing for enforcement. However, up until last year, IRS was 

unable to increase enforcement staffing; unbudgeted costs and other priorities consumed the budget increase. 

IRS’s proposal for fiscal year 2006, if implemented as planned, would return enforcement staffing in these occupations to their highest levels since 1999. Of the 

more than $500 million increase requested for 2006, about $265 million would fund 

enforcement initiatives, over $182 million would be used in part for salary increases, 

and over $55 million is a proposal to transfer funding authority from the Department of Justice’s Interagency Crime and Drug Enforcement. The $500 million increase would be supplemented by internal enforcement savings of $88 million. As 

is the case with taxpayer service savings, the extent to which IRS achieves enforcement savings will affect its ability to fund the new enforcement initiatives. 

The $265 million for new enforcement initiatives consist of: 

• $149.7 million and 920 FTEs to attack corrosive non-compliance activity driving 

the tax gap such as abusive trusts and shelters, including offshore credit cards 

and organized tax resistance; 

• $51.8 million and 236 FTEs to detect and deter corrosive corporate non-compliance to attack complex abusive tax avoidance transactions on a global basis and 

challenge those who promote their use; 

• $37.9 million and 417 FTEs to increase individual taxpayer compliance by identifying and implementing actions to address non-compliance with filing requirements; increasing Automated Underreporter resources to address the reporting 

compliance tax gap; increasing audit coverage; and expanding collection work 

in walk-in sites; 

• $14.5 million and 77 FTEs to combat abusive transactions by entities with special tax status by initiating examinations more promptly, safeguarding compliant customers from unscrupulous promoters, and increasing vigilance to ensure 

that the assets of tax-exempt organizations are put to their intended tax-preferred purpose and not misdirected to fund terrorism or for private gain; and 

• $10.8 million and 22 FTEs to curtail fraudulent refund crimes. 

The $88 million in internal savings would be reinvested to perform the following 

activities: 

• $66.7 million and 585 FTEs to devote resources to front-line enforcement activities; 

• $14.9 million and 156 FTEs to, in part, address bankruptcy-related taxpayer 

questions; and 

• $6.7 million and 52 FTEs to address complex, high-risk issues such as compliance among tax professionals. 

In the past, IRS has had trouble achieving enforcement staffing increases because 

other priorities, including unbudgeted expenses, have absorbed additional funds. 

IRS achieved some gains in 2004 and expects modest gains in 2005. Figure 1 shows 

that the number of revenue agents (those who audit complex returns), revenue officers (those who do field collection work), and special agents (those who perform 

criminal investigations) decreased over 21 percent between 1998 and 2003, but increased almost 6 percent from 2003 to 2004. 

38 

8GAO, High Risk Series: An Update, GAO–05–207 (Washington, D.C.: January 2005). 

Figure 1: Revenue Agents, Revenue Officers, and Special Agents, Fiscal 

Years 1998–2006 

Source: GAO Analysis of IRS Data 

aFiscal years 2005 and 2006 are IRS projections. 

IRS’s recent gains in enforcement staffing are encouraging, as tax law enforcement continues to remain an area of high risk for the federal government because 

the resources IRS has dedicated to enforcing the tax laws have declined, while IRS’s 

enforcement workload—measured by the number of taxpayer returns filed—has continually increased.8 Figure 2 shows the trend in field, correspondence, and total 

audit rates since 1995. Field audits involve face-to-face audits and correspondence 

audits are typically less complex involving communication through notices. IRS experienced steep declines in audit rates from 1995 to 1999, but the audit rate—the 

proportion of tax returns that IRS audits each year—has slowly increased since 

2000. The figure shows that the increase in total audit rates of individual filers has 

been driven mostly by correspondence audits, while more complex field audits, continue to decline. 


Insert 24767A.009
39 

9 IRS has one long-term goal set by the Congress in RRA 98 for IRS to have 80 percent of 

all individual income tax returns filed electronically. 10Pub. L. No. 103–62 (1993). The Government Performance and Results Act of 1993 seeks to 

improve the management of federal programs, as well as their effectiveness and efficiency, by 

requiring executive agencies to prepare multiyear strategic plans, annual performance plans, 

and annual performance reports. Under the Act, strategic plans are the starting point for setting 

goals and measuring progress towards them. The Act requires executive agencies to develop 

strategic plans that include an agency’s mission statement, long-term general goals, and the 

strategies that the agency will use to achieve these goals. The plans should also explain the 

key external factors that could significantly affect achievement of these goals, and describe how 

long-term goals will be related to annual performance goals. 

Figure 2: Audit Rate of Individual Income Tax Returns, 

Fiscal Years 1995–2004 

Source: GAO Analysis of IRS Data 

The link between the decline in enforcement staff and the decline in enforcement 

actions, such as audits, is complicated, and the real impact on taxpayers’ rate of voluntary compliance is not known. This leaves open the question of whether the declines in IRS’s enforcement programs are eroding taxpayers’ incentives to voluntarily comply. IRS’s National Research Program (NRP) recently completed a study 

on compliance by individual tax filers based on tax data provided on 2001 tax returns. The study estimated that the tax gap—the difference between what taxpayers 

owe and what they pay—is at least $312 billion per year as of 2001 and could be 

as large as $353 billion. This study is important for several reasons beyond measuring compliance. It is intended to help IRS better target its enforcement actions, 

such as audits, on non-compliant taxpayers, and minimize audits of compliant taxpayers. It should also help IRS better understand the impact of taxpayer service on 

compliance. 

IRS Is Developing Long-term Goals That Can Be Used to Assess Performance and Make Budget Decisions 

IRS is developing but currently lacks long-term goals that can be used to assess 

performance and make budget decisions.9 Long-term goals and results measurement 

are a component of the statutory strategic planning and management framework 

that the Congress adopted in the Government Performance and Results Act of 

1993.10 As a part of this comprehensive framework, long-term goals that are linked 


Insert 24767A.010
40 

11The PART was applied during the fiscal year 2004 budget cycle to ‘‘programs’’ selected by 

OMB. The PART includes general questions in each of four broad topics to which all programs 

are subjected: (1) program purpose and design, (2) strategic planning, (3) program management, 

and (4) program results (i.e., whether a program is meeting its long-term and annual goals). 

OMB also makes an overall assessment on program effectiveness. 12GAO, 21st Century Challenges: Reexamining the Base of the Federal Government, GAO– 

05–325SP (Washington, D.C.: February 2005). 13We selected these criteria from a variety of sources based on generally accepted government 

auditing standards. 

to annual performance measures can help guide agencies when considering organizational changes and making resource decisions. 

A recent Program Assessment Rating Tool (PART) review conducted by OMB reported that IRS lacks long-term goals.11 As a result, IRS has been working to identify and establish long-term goals for all aspects of its operations for over a year. 

IRS officials said these goals will be finalized and provided publicly as an update 

to the agency’s strategic plan before May 2005. 

For IRS and its stakeholders, such as the Congress, long-term goals can be used 

to assess performance and progress towards these goals, and determine whether 

budget decisions contribute to achieving those goals. Without long-term goals, the 

Congress and other stakeholders are hampered in evaluating whether IRS is making satisfactory long-term progress. Further, without such goals, the extent to which 

IRS’s 2006 budget request would help IRS achieve its mission over the long-term 

is unclear. 

This Is an Opportune Time to Review IRS’s Menu of Taxpayer Services 

For at least two reasons, this is an opportune time to review the menu of taxpayer 

services that IRS provides. First, IRS’s budget for taxpayer services was reduced in 

2005 and an additional reduction is proposed for 2006. As already discussed, these 

reductions have forced IRS to propose scaling back some services. Second, as we 

have reported, IRS has made significant progress in improving the quality of its taxpayer services. For example, IRS now provides many Internet services that did not 

exist a few years ago and has noticeably improved the quality of telephone services. 

This opens up the possibility of maintaining the overall level of taxpayer service but 

with a different menu of service choices. Cuts in selected services could be offset 

by the new and improved services. 

Generally, as indicated in the budget, the menu of taxpayer services that IRS provides covers assistance, outreach, and processing. Assistance includes answering 

taxpayer questions via telephone, correspondence, and face-to-face at its walk-in 

sites. Outreach includes educational programs and the development of partnerships. 

Processing includes issuing millions of tax refunds. 

When considering program reductions, we support a targeted approach rather 

than across-the-board cuts.12 A targeted approach helps reduce the risk that effective programs are reduced or eliminated while ineffective or lower priority programs 

are maintained. 

With the above reasons in mind for reconsidering IRS’s menu of services, we have 

compiled a list of options for targeted reductions in taxpayer service. The options 

on this list are not recommendations but are intended to contribute to a dialogue 

about the tradeoffs faced when setting IRS’s budget. The options presented meet at 

least one of the following criteria hat we generally use to evaluate programs or 

budget requests.13 These criteria include that the activity 

• duplicates other efforts that may be more effective and/or efficient; 

• historically does not meet performance goals or provide intended results as reported by GAO, TIGTA, IRS, or others; 

• experiences a continued decrease in demand; 

• lacks adequate oversight, implementation and management plans, or structures 

and systems to be implemented effectively; 

• has been the subject of actual or requested funding increases that cannot be 

adequately justified; or 

• has the potential to make an agency more self-sustaining by charging user fees 

for services provided. 

We recognize that the options listed below involve tradeoffs. In each case, some 

taxpayers would lose a service they use. However, the savings could be used to help 

maintain the quality of other services. We also want to give IRS credit for identifying savings, including some on this list. The options include 

• closing walk-in sites. As the filing season section of this testimony discusses, 

taxpayer demand for walk-in services has continued to decrease and staff anVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00044 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767
41 

swer a more limited number of tax law questions in person than staff answer 

via telephone. 

• limiting the type of telephone questions answered by IRS assistors. IRS 

assistors still answer some refund status questions even though IRS provides 

automated answers via telephone and its Web site. 

• mandating electronic filing for some filers such as paid preparers or businesses. 

As noted, efficiency gains from electronic filing have enabled IRS to consolidate 

paper processing operations. 

• charging for services. For example, IRS provides paid preparers with information on federal debts owed by taxpayers seeking refund anticipation loans. 

Progress in BSM Implementation, but the Program Remains High Risk and 

Budget Reductions Have Resulted in Significant Adjustments 

Although IRS has implemented important elements of the BSM program, much 

work remains. In particular, the BSM program remains at high risk and has a long 

history of significant cost overruns and schedule delays. Furthermore, budget reductions have resulted in significant adjustments to the BSM program, although it is 

too early to determine their ultimate effect. 

IRS Has Made Progress in Implementing BSM, but Much Work Remains 

IRS has long relied on obsolete automated systems for key operational and financial management functions, and its attempts to modernize these aging computer 

systems span several decades. IRS’s current modernization program, BSM, is a 

highly complex, multibillion-dollar program that is the agency’s latest attempt to 

modernize its systems. BSM is critical to supporting IRS’s taxpayer service and enforcement goals. For example, BSM includes projects to allow taxpayers to file and 

retrieve information electronically and to provide technology solutions to help reduce 

the backlog of collections cases. BSM is important for another reason. It allows IRS 

to provide the reliable and timely financial management information needed to account for the nation’s largest revenue stream and better enable the agency to justify 

its resource allocation decisions and congressional budgetary requests. 

Since our testimony before this subcommittee on last year’s budget request, IRS 

has deployed initial phases of several modernized systems under its BSM program. 

The following provides examples of the systems and functionality that IRS implemented in 2004 and the beginning of 2005. 

• Modernized e-File (MeF). This project is intended to provide electronic filing for 

large corporations, small businesses, and tax-exempt organizations. The initial 

releases of this project were implemented in June and December 2004, and allowed for the electronic filing of forms and schedules for the form 1120 (corporate tax return) and form 990 (tax-exempt organizations’ tax return). IRS reported that, during the 2004 filing season, it accepted over 53,000 of these 

forms and schedules using MeF. 

• e-Services. This project created a Web portal and provided other electronic services to promote the goal of conducting most IRS transactions with taxpayers 

and tax practitioners electronically. IRS implemented e-Services in May 2004. 

According to IRS, as of late March 2005, over 84,000 users have registered with 

this Web portal. 

• Customer Account Data Engine (CADE). CADE is intended to replace IRS’s antiquated system that contains the agency’s repository of taxpayer information 

and, therefore, is the BSM program’s linchpin and highest priority project. In 

July 2004 and January 2005, IRS implemented the initial releases of CADE, 

which have been used to process filing year 2004 and 2005 1040EZ returns, respectively, for single taxpayers with refund or even-balance returns. According 

to IRS, as of March 16, 2005, CADE had processed over 842,000 tax returns 

so far this filing season. 

• Integrated Financial System (IFS). This system replaces aspects of IRS’s core 

financial systems and is ultimately intended to operate as its new accounting 

system of record. The first release of this system became fully operational in 

January 2005. 

Although IRS is to be applauded for delivering such important functionality, the 

BSM program is far from complete. Future deliveries of additional functionality of 

deployed systems and the implementation of other BSM projects are expected to 

have a significant impact on IRS’s taxpayer services and enforcement capability. For 

example, IRS has projected that CADE will process about 2 million returns in the 

2005 filing season. However, the returns being processed in CADE are the most 

basic and constitute less than 1 percent of the total tax returns expected to be processed during the current filing season. IRS expects the full implementation of CADE 

42 

14For our latest high-risk report, please see GAO, High-Risk Series: An Update, GAO–05–207 

(Washington, D.C., January 2005). 15GAO, Business Systems Modernization: IRS Needs to Better Balance Management Capacity 

with Systems Acquisition Workload, GAO–02–356 (Washington, D.C.: Feb. 28, 2002). 16 BSM funds are unavailable until the IRS submits to congressional appropriations committees for approval a modernization expenditure plan that (1) meets the OMB capital planning 

and investment control review requirements; (2) complies with IRS’s enterprise architecture; (3) 

conforms with IRS’s enterprise life-cycle methodology; (4) is approved by IRS, the Department 

of the Treasury, and OMB; (5) is reviewed by GAO; and (6) complies with acquisition rules, requirements, guidelines, and systems acquisition management practices. 

to take several more years. Another BSM project—the Filing and Payment Compliance (F&PC) project—is expected to increase (1) IRS’s capacity to treat and resolve 

the backlog of delinquent taxpayer cases, (2) the closure of collection cases by 10 

million annually by 2014, and (3) voluntary taxpayer compliance. As part of this 

project, IRS plans to implement an initial limited private debt collection capability 

in January 2006, with full implementation of this aspect of the F&PC project to be 

delivered by January 2008 and additional functionality to follow in later years. 

BSM Program Has History of Cost Increases and Schedule Delays and Is 

High Risk 

The BSM program has a long history of significant cost increases and schedule 

delays, which, in part, has led us to report this program as high—risk since 1995.14

Appendix II provides the history of the BSM life-cycle cost and schedule variances. 

In January 2005 letters to congressional appropriation committees, IRS stated that 

it had showed a marked improvement in significantly reducing its cost variances. 

In particular, IRS claimed that it reduced the variance between estimated and actual costs from 33 percent in fiscal year 2002 to 4 percent in fiscal year 2004. However, we do not agree with the methodology used in the analysis supporting this 

claim. Specifically, (1) the analysis did not reflect actual costs, instead it reflected 

changes in cost estimates (i.e., budget allocations) for various BSM projects; (2) IRS 

aggregated all of the changes in the estimates associated with the major activities 

for some projects, such as CADE, which masked that monies were shifted from future activities to cover increased costs of current activities; and (3) the calculations 

were based on a percentage of specific fiscal year appropriations, which does not reflect that these are multiyear projects. 

In February 2002 we expressed concern over IRS’s cost and schedule estimating 

and made a recommendation for improvement.15 IRS and its prime systems integration support (PRIME) contractor have taken action to improve their estimating practices, such as developing a cost and schedule estimation guidebook and developing 

a risk-adjustment model to include an analysis of uncertainty. These actions may 

ultimately result in more realistic cost and schedule estimates, but our analysis of 

IRS’s expenditure plans 16 over the last few years shows continued increases in estimated project life-cycle costs (see fig. 3). 

43 

17GAO–02–356. 

Figure 3: Life-cycle Cost Estimates for Key BSM Projects 

Source: GAO analysis of IRS data. 

The Associate CIO for BSM stated that he believes that IRS’s cost and schedule 

estimating has improved in the past year. In particular, he pointed out that IRS 

met its cost and schedule goals for the implementation of the latest release of 

CADE, which allowed the agency to use this system to process certain 1040EZ forms 

in the 2005 filing season. It is too early to tell whether this signals a fundamental 

improvement in IRS’s ability to accurately forecast project costs and schedules. 

The reasons for IRS’s cost increases and schedule delays vary. However, we have 

previously reported that they are due, in part, to weaknesses in management controls and capabilities. We have previously made recommendations to improve BSM 

management controls, and IRS has implemented or begun to implement these recommendations. For example, in February 2002, we reported that IRS had not yet 

defined or implemented an IT human capital strategy, and recommended that IRS 

develop plans for 

obtaining, developing, and retaining requisite human capital resources.17 In September 2003, TIGTA reported that IRS had made significant progress in developing 

a human capital strategy but that it needed further development. In August 2004, 

the current Associate CIO for BSM identified the completion of a human capital 

strategy as a high priority. Among the activities that IRS is implementing are 

prioritizing its BSM staffing needs and developing a recruiting plan. IRS has also 

identified, and is addressing, other major management challenges in areas such as 

requirements, contract, and program management. For example, poorly defined requirements have been among the significant weaknesses that have been identified 

as contributing to project cost overruns and schedule delays. As part of addressing 

this problem, in March 2005, the IRS BSM office established a requirements management office, although a leader has not yet been hired. 

IRS Is Adjusting the BSM Program in Response to Budget Reductions 

The BSM program is undergoing significant changes as it adjusts to reductions 

in its budget. Figure 4 illustrates the BSM program’s requested and enacted budgVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767

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18 IRS uses the appropriated funds to cover contractor costs related to the BSM program. IRS 

funds internal costs for managing BSM with another appropriation. These costs are not tracked 

separately for BSM-related activities. 19 U.S. Senate, Senate Report 108–342. 20We did not include in our calculations, reductions to specific project risk adjustment 

amounts that were made for reasons other than the fiscal year 2005 budget reduction. 

ets for fiscal years 2004 through 2006.18 For fiscal year 2005, IRS received about 

29 percent less funding than it requested (from $285 million to $203.4 million). According to the Senate report for the fiscal year 2005 Transportation, Treasury, and 

General Government appropriations bill, in making its recommendation to reduce 

BSM funding, the Senate Appropriations Committee was concerned about the program’s cost overruns and schedule delays. In addition, the committee emphasized 

that in providing fewer funds, it wanted IRS to focus on its highest priority projects, 

particularly CADE.19 In addition, IRS’s fiscal year 2006 budget request reflects an 

additional reduction of about 2 percent, or about $4.4 million, from the fiscal year 

2005 appropriation. 

Figure 4: Changes in the BSM budget (dollars in millions) a

Source: IRS. 

aThe BSM account authorizes funds to be obligated for 3 years. 

It is too early to tell what effect the budget reductions will ultimately have on 

the BSM program. However, the significant adjustments that IRS is making to the 

program to address these reductions are not without risk, could potentially impact 

future budget requests, and will delay the implementation of certain functionality 

that was intended to provide benefit to IRS operations and the taxpayer. For example: 

• Reductions in Management reserve/project risk adjustments. In response to the 

fiscal year 2005 budget reduction, IRS reduced the amount that it had allotted 

to program management reserve and project risk adjustments by about 62 percent (from about $49.1 million to about $18.6 million).20 If BSM projects have 

future cost overruns that cannot be covered by the depleted reserve, this reduction could result in (1) increased budget requests in future years or (2) delays 

in planned future activities (e.g., delays in delivering promised functionality) to 

use those allocated funds to cover the overruns. 


Insert 24767A.012
45 

21GAO, Internal Revenue Service: Improving Adequacy of Information Systems Budget Justification, GAO–02–704 (Washington, D.C., June 28, 2002). 

• Shifts of BSM management responsibility from the PRIME contractor to IRS. 

Due to budget reductions and IRS’s assessment of the PRIME contractor’s performance, IRS decided to shift significant BSM responsibilities for program 

management, systems engineering, and business integration from the PRIME 

contractor to IRS staff. For example, IRS staff are assuming responsibility for 

cost and schedule estimation and measurement, risk management, integration 

test and deployment, and transition management. There are risks associated 

with this decision. To successfully accomplish this transfer, IRS must have the 

management capability to perform this role. Although the BSM program office 

has been attempting to improve this capability through, for example, implementation of a new governance structure and hiring staff with specific technical and 

management expertise, IRS has had significant problems in the past managing 

this and other large development projects, and acknowledges that it has major 

challenges to overcome in this area. 

• Suspension of the Custodial Accounting Project (CAP). Although the initial release of CAP went into production in September 2004, IRS has decided not to 

use this system and to stop work on planned improvements due to budget constraints. According to IRS, it made this decision after it evaluated the business 

benefits and costs to develop and maintain CAP versus the benefits expected 

to be provided by other projects, such as CADE. Among the functionality that 

the initial releases of CAP were expected to provide were (1) critical control and 

reporting capabilities mandated by federal financial management laws; (2) a 

traceable audit trail to support financial reporting; and (3) a subsidiary ledger 

to accurately and promptly identify, classify, track, and report custodial revenue 

transactions and unpaid assessments. With the suspension of CAP, it is now 

unclear how IRS plans to replace the functionality this system was expected to 

provide, which was intended to allow the agency to make meaningful progress 

toward addressing long-standing financial management weaknesses. IRS is currently evaluating alternative approaches to addressing these weaknesses. 

• Reductions in planned functionality. According to IRS, the fiscal year 2006 

funding reduction will result in delays in planned functionality for some of its 

BSM projects. For example, IRS no longer plans to include Form 1041 (the income tax return for estates and trusts) in the fourth release of Modernized eFile, which is expected to be implemented in fiscal year 2007. 

The BSM program is based on visions and strategies developed in 2000 and 2001. 

The age of these plans, in conjunction with the significant delays already experienced by the program and the substantive changes brought on by budget reductions, 

indicate that it is time for IRS to revisit its long-term goals, strategy, and plans for 

BSM. Such an assessment would include an evaluation of when significant future 

BSM functionality would be delivered. IRS’s Associate CIO for BSM has recognized 

that it is time to recast the agency’s BSM strategy because of changes that have 

occurred subsequent to the development of the program’s initial plans. According to 

this official, IRS is redefining and refocusing the BSM program, and he expects this 

effort to be completed by the end of this fiscal year. 

Additional Actions Needed to Improve Budgeting for IT Operations and 

Maintenance 

IRS has requested about $1.62 billion for IT operations and maintenance in fiscal 

year 2006, within its proposed new Tax Administration and Operations account. 

Under the prior years’ budget structure, these funds were included in a separate 

account, for which IRS received an appropriation of about $1.59 billion in fiscal year 

2005. The $1.62 billion requested in fiscal year 2006 is intended to fund the personnel costs for IT staff (including staff supporting the BSM program) and activities 

such as IT security, enterprise networks, and the operations and maintenance costs 

of its current systems. We have previously expressed concern that IRS does not employ best practices in the development of its IT operations and maintenance budget 

request.21 Although IRS has made progress in addressing our concern, more work 

remains. 

The Paperwork Reduction Act (PRA) requires federal agencies to be accountable 

for their IT investments and responsible for maximizing the value and managing 

the risks of their major information systems initiatives. The Clinger-Cohen Act of 

1996 establishes a more definitive framework for implementing the PRA’s requirements for IT investment management. It requires federal agencies to focus more on 

the results they have achieved and introduces more rigor and structure into how 

46 

22GAO–02–704. 

agencies are to select and manage IT projects. In addition, leading private—and 

public-sector organizations have taken a project—or system-centric approach to 

managing not only new investments but also operations and maintenance of existing 

systems. As such, these organizations 

• identify operations and maintenance projects and systems for inclusion in budget requests; 

• assess these projects or systems on the basis of expected costs, benefits, and 

risks to the organization; 

• analyze these projects as a portfolio of competing funding options; and 

• use this information to develop and support budget requests. 

This focus on projects, their outcomes, and risks as the basic elements of analysis 

and decision making is incorporated in the IT investment management approach 

that is recommended by OMB and GAO. By using these proven investment management approaches for budget formulation, agencies have a systematic method, on the 

basis of risk and return on investment, to justify what are typically substantial information systems operations and maintenance budget requests. 

In our assessment of IRS’s fiscal year 2003 budget request, we reported that the 

agency did not develop its information systems operations and maintenance request 

in accordance with the investment management approach used by leading organizations. We recommended that IRS prepare its future budget requests in accordance 

with these best practices.22 To address our recommendation, IRS agreed to take a 

variety of actions, which it has made progress in implementing. For example, IRS 

stated that it planned to develop an activity-based cost model to plan, project, and 

report costs for business tasks/activities funded by the information systems budget. 

The recent release of IFS included an activity-based cost module, but IRS does not 

currently have historical cost data to populate this module. According to officials in 

the Office of the Chief Financial Officer, IRS is in the process of accumulating these 

data. These officials stated that IRS needs 3 years of actual costs to have the historical data that would provide a basis for future budget estimates. Accordingly, these 

officials expected that IRS would begin using the IFS activity-based cost module in 

formulating the fiscal year 2008 budget request and would have the requisite 3 

years’ of historical data in time to develop the fiscal year 2010 budget request. In 

addition, IRS planned to develop a capital planning guide to implement processes 

for capital planning and investment control, budget formulation and execution, business case development, and project prioritization. IRS has developed a draft guide, 

which is currently under review by IRS executives, and IRS expects it to become 

policy on October 1, 2005. Although progress has been made in implementing best 

practices in the development of the IT operations and maintenance budget, until 

these actions are completely implemented IRS will not be able to ensure that its 

request is adequately supported. 

So Far This Filing Season IRS Has Generally Maintained or Improved Performance, Including Telephone Accuracy, with Less Funding 

Results to date show IRS has generally maintained or improved its 2005 filing 

season performance in key areas compared to last year despite a decrease in the 

2005 budget for taxpayer service. These key areas are paper and electronic processing, telephone assistance, IRS’s Web site, and walk-in assistance. Table 4 shows 

performance to date in these four areas. 

Table 4: IRS Performance in the First Weeks of the Filing Season, 

2002–2005 

Volume in thousands 2002 2003 2004 2005 

Actual returns processeda

Paper 24,491 22,117 20,232 17,607 

Electronic 35,067 38,627 42,988 45,848 

Telephone assistance 

Total callsb 34,489 27,905 29,058 23,340 

47 

Table 4: IRS Performance in the First Weeks of the Filing Season, 

2002–2005—Continued 

Volume in thousands 2002 2003 2004 2005 

Answered by assistors 9,208 9,434 10,116 9,421 

Answered by automation 25,281 18,471 18,942 13,919 

Customer service representative 

level of service 62% 82% 84% 83% 

Average speed of answerc 227 seconds 183 seconds 199 seconds 235 seconds 

Accounts accuracy rate estimatesd 88%+/¥1% 88%+/¥1% 89%+/¥1% 92%+/¥1% 

Tax law accuracy rate estimatesd 84%+/¥1% 81%+/¥1% 76%+/¥1% 87%+/¥1% 

Internet assistance 

Forms and publications downloadede N/A N/A N/A 70,321 

Refund status inquiriesf N/A 9,300 14,300 16,400 

Walk-in assistance 

Total walk-in contactsg N/A 2,740 2,433 2,163 

Returns prepared at IRS walk-in 

sitesh 436 291 186 145 

Returns prepared at volunteer sitesi 466 594 741 915 

Source: IRS. 

aFrom January 1 to March 22, 2002; March 21, 2003; March 19, 2004; and March 18, 2005. 

bTotal calls (i.e., calls answered by assistors and automation) and CSR level of service are based on actual 

counts from January 1 to March 16, 2002; March 15, 2003; March 13, 2004; and March 12, 2005. The 2002 totals include increased call demand as a result of the Economic Growth and Tax Relief Reconciliation Act of 

2001 (Pub. L. No. 107–16 (2001). cFrom January 1 to March 16, 2002; March 15, 2003; March 13, 2004; and March 12, 2005. 

d Based on a representative sample estimated at the 90 percent confidence level from January to February 

2002, 2003, 2004, and 2005. e As of February 28, 2005. 

fFrom January 1 to March 20, 2003; 2004; and 2005. 

gFrom January 1 to March 15, 2003; March 13, 2004; and March 12, 2005. 

hFrom January 1 to March 16, 2002; March 15, 2003; March 13, 2004; and March 12, 2005. 

iFrom January 1 to March 9, 2002; March 8, 2003; March 13, 2004; and March 12, 2005. 

Overall IRS’s filing season performance to date is good news because, as table 1 shows (page 6), IRS’s budget for taxpayer service is $104 million less than the year 

before. According to IRS officials, it absorb this reduction by generating additional 

internal savings and program reductions. However, because the filing season is not 

over, the extent to which IRS will achieve efficiency gains and the full impact of 

reductions on taxpayers in this or future filing seasons is not yet known. 

Processing Has Been Smooth, Staff Continues to Decline, and Electronic 

Filing Continues to Grow but not at a Rate to Meet Long-term Goal 

As of March 18, IRS processed about 63 million individual income tax returns and 

57 million refunds. According to IRS data and information from external stakeholders such as paid practitioners, processing has been uneventful and without significant disruptions. IRS officials attribute this year’s smooth processing to adequate 

planning and few tax law changes. This year’s processing activities are important, 

in part, because for the first time during the filing season, IRS is using CADE to 

process the simplest taxpayer accounts (1040EZ without problems or balance due). 

As we note in the BSM section, CADE is the foundation of IRS’s modernization effort and will ultimately replace the Individual Master File that currently houses 

taxpayer data for individual filers. As of March 16, 2005, CADE has processed over 

842,000 tax returns without significant problems. 

Growth in electronic filing (e-filing) helps fund IRS’s modernization. Electronic filing allows IRS to control costs by reducing labor-intensive processing of paper tax 

returns. E-filing also improves taxpayer service by eliminating transcription errors 

associated with processing paper returns. E-filing also has benefits for taxpayers, 

primarily by allowing them to get their refunds in half the time of paper filers. 

48 

As shown in figure 5, the number of e-filed returns has increased since 1999 and 

the number of paper returns has decreased. The figure also shows that these 

changes have allowed IRS to reduce the staff devoted to processing paper returns 

between 1999 and 2004 by just over 1,100 staff years. As the number of e-filed returns has increased, the number of staff years used to process those returns has 

not. The decline in paper processing staff allowed IRS to close its Brookhaven processing center in 2003. In addition, IRS is in the process of closing its paper processing operation in Memphis. 

Figure 5: Number of Individual Returns and IRS Staff Years for 

Individual Paper and Electronic Processing, Fiscal Years 1999–2006 

Source: GAO analysis of IRS data. 

* Fiscal years 2005 and 2006 are IRS projections and, given the current lower e-file growth 

rates, the estimates may be optimistic. 

Note: Staff years and FTEs are units of measurement that are often used interchangeably. According to IRS, an FTE is the equivalent of one person working full 

time for 1 year with no overtime. A staff year includes overtime. Therefore, the cost 

of 1 staff year is equal to the cost of one FTE plus overtime. As noted in the figure, 

staff years for paper filing are for selected major activities only. 

Although the growth in e-filing is about 6.7 percent over the same period last 

year, it is growing at a slower rate than previous years. Based on the current trend 

and the fact that the percentage of returns e-filed traditionally declines as April 15 

approaches, it appears that IRS will not achieve its goal of having 68.2 million individual tax returns e-filed this year (an 11 percent increase over last year). 

Over recent years, IRS has undertaken numerous initiatives to increase e-filing. 

However, neither this year’s current growth rate nor the projected annual growth 

rate will enable IRS to achieve its goal of 80 percent of all individual tax returns 

being e-filed in 2007. This goal has focused attention on increasing e-filing. As we 

reported last year, IRS officials believe that achieving the goal would require additional measures to convert the tens of millions of taxpayers and tax practitioners 

who prepare individual income tax returns on a computer, but filed on paper to efiling. IRS officials also stated that the additional measures might need to include 

legislation that mandates e-filing for certain classes of returns, such as those preVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00052 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767

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23GAO–05–67. 24GAO–04–560T. 

pared by practitioners. Last year we reported five states, including California, that 

mandated the e-filing of state tax returns, also showed increases in the e-filing of 

federal returns.23 This year, three additional states have introduced mandatory efiling of state returns by tax practitioners. 

Telephone Access Has Remained Relatively Stable and Accuracy Has Improved 

Between January 1 and March 12, IRS received approximately 23 million calls. 

As shown in table 4, IRS’s automated service handled nearly 14 million calls and 

customer service representatives (CSRs) handled just over 9 million. The percentage 

of taxpayers who attempted to reach CSRs and actually got through and received 

service—referred to as the CSR level of service—remained relatively stable at 83 

percent compared to 84 percent at the same time last year. 

IRS reduced its 2005 goal for CSR level of service from 85 percent in 2004 to 82 

percent because of the budget reduction for taxpayer service. However, IRS has been 

able to achieve a relatively stable CSR level of service of 83 percent since last year. 

According to IRS officials, this level of performance is due to 

• staff plans being made before the level of service goal was reduced; • the agency receiving fewer calls due to fewer tax law changes than in 2004; • the agency improving methods for handling calls; and • an increased use of IRS’s Web site. 

Although CSR level of service is about the same as last year, down one percentage 

point, there are other indications of slippage in telephone access. Specifically, taxpayers are waiting longer to speak to a CSR. Wait times have increased by about 

35 seconds or 15 percent compared to the same period last year. Additionally, the 

rate at which taxpayers abandon their calls to IRS increased from 10 percent to 11.5 

percent, which translates into about 99,000 calls. The responsible IRS official considers the increase in wait time and increase in abandon rate to be acceptable, in 

part because IRS data are showing that the agency is using 9 percent fewer FTEs 

than last year and answering 195 more calls per FTE. 

IRS officials said they lowered the CSR level of service goal in response to the 

reduction in the taxpayer service budget, and will adjust staffing plans after the filing season to address the taxpayer service budget reduction. IRS officials believe the 

adjustments will likely result in a lower level of service than is currently being 

achieved. 

IRS estimates that the accuracy of CSRs’ answers to taxpayers’ tax law questions 

improved compared to last year. Specifically, tax law accuracy increased to an estimated 87 percent as compared to 76 percent at the same time last year. This represents a significant change from last year, when we drew attention to the declining 

tax law accuracy rate.24 According to IRS officials and staff, the improvement is primarily due to formatting changes made in 2004 to the guide that CSRs use to help 

them answer taxpayers’ tax law questions that have enhanced the usability of the 

guide. IRS officials stated that the revised guide is better and more user-friendly, 

partly because many of the suggested improvements were from CSRs who use the 

guide daily. In addition, IRS officials stated that the improved tax law accuracy rate 

reveals that the previous version of the guide was indeed the reason for last year’s 

decline in tax law accuracy, and attributed fluctuations in the tax law accuracy rate 

to changes in the guide in past years. 

IRS estimates that accounts accuracy (the accuracy of answers to questions from 

taxpayers about the status of their accounts) has improved compared to last year 

and since 2002. Taxpayers who called about their accounts received correct information an estimated 92 percent of the time, which is an improvement compared to last 

year’s 89 percent rate and the 88 percent rate seen in 2002 and 2003. The responsible IRS official told us that accounts accuracy rates have improved because IRS 

has improved its ability to monitor and manage staff, expanded training, and improved its ability to search for account information. 

Web Site Performing Well and Used Extensively 

Various data indicate that IRS’s Web site is performing well. We found it to be 

user-friendly because it was readily accessible and easy to navigate. Problem areas 

that we reported in the past, such as the search function, were much improved this 

filing season, thus eliminating our previous concerns about the search function. Furthermore, an independent weekly study done during the filing season has reported 

that IRS’s Web site has ranked in the top 4 out of 40 government Web sites and 

50 

25These estimates are based on IRS’s random samples of electronic tax law assistance questions submitted via IRS’s Web site. These estimates have a +/¥4.6 percentage points range and 

+/¥2.8 percentage points range in 2004 and 2005 respectively, with a 90 percent confidence 

level. 26Walk-in site employees are trained and authorized to only answer tax law questions on specific tax topics such as those related to income, filing status, exemptions, deductions, and related 

credits. 

that users were able to access the IRS Web site in.65 seconds or less. The same 

independent weekly assessment reported that IRS ranked first or second in response time of downloading data. Finally, the electronic tax law assistance program 

on IRS’s Web site has shown marked improvement this year over last. For example, 

the average response time is down from 3.8 days to 1.6 days and the accuracy rate 

has improved from 56.9 percent to 87.5 percent.25 According to IRS officials, this 

significant improvement is due to a decrease in the number of tax law questions 

being submitted—down from about 56,000 to 8,700 for the same time period. 

IRS’s Web site is experiencing extensive usage this filing season based on the 

number of visits, pages viewed, and forms and publications downloaded. As of February 28, 2005, the Web site was visited about 83 million times by users who viewed 

about 628 million pages. This is the first time that IRS has publicly reported the 

number of visits to and number of pages viewed on its Web site. Further, about 70.3 

million forms and publications had been downloaded this fiscal year through February, with about 45 million of those downloads occurring in January and February. 

IRS’s Web site continues to provide two very important tax service features: (1) 

‘‘Where’s My Refund,’’ which enables taxpayers to check on the status of their refund and (2) Free File, which provides taxpayers the ability to file their tax return 

electronically for free via IRS’s Web site. As of March 20, 2005, about 16 million 

taxpayers accessed the ‘‘Where’s My Refund’’ feature to check the status of their tax 

refund—about a 15 percent increase over the same time period last year. Also, IRS 

provided new functionality for ‘‘Where’s My Refund’’ whereby a taxpayer whose refund could not be delivered by the Postal Service (i.e., returned as undeliverable 

mail), can change their address on the Web site. In addition, as of March 16, 2005, 

3.6 million tax returns had been filed via Free File, which represents a 44 percent 

increase over the same time period last year. In the 2005 filing season, all individual taxpayers are eligible to file free via IRS’s Web site. 

Use of IRS’s Walk-in Assistance Continues to Decline, While Use of Volunteer Assistance Increases 

As of March 12, assistance provided at IRS’s approximately 400 walk-in sites declined by 11 percent compared to the same time last year, with the number receiving tax preparation assistance declining by about 22 percent. Staff at those sites 

provides taxpayers with information about their tax accounts and answer a limited 

scope of tax law questions.26 If staff cannot answer taxpayers’ questions, they are 

required to refer taxpayers to IRS’s telephone operations or have taxpayers correspond via IRS’s Web site. In combination with decreased demand, IRS reduced the 

staff used at walk-in sites for return preparation assistance and continues to encourage taxpayers to use volunteer sites for return preparation. These declines are 

consistent with IRS’s goal to further limit return preparation and tax law assistance 

at walk-in sites by 2007 and with its 2006 budget request. 

51 

27 National Taxpayer Advocate, 2004 Annual Report to Congress (Washington, D.C.: Dec. 31, 

2004). 28GAO, Tax Administration: IRS Improved Performance in the 2004 Filing Season, but Better 

Data on the Quality of Some Services Are Needed, GAO–05–67 (Washington, D.C.: Nov. 4, 

2004). 29Treasury Inspector General for Tax Administration, Improvements Are Needed to Ensure 

Tax Returns Are Correctly Prepared at Taxpayer Assistance Centers, Reference No. 2004–40– 

Continued 

Figure 6: Assistance Provided by IRS Walk-in and Volunteer Sites, 

2001–2006 Filing Seasons (in millions) 

Source: GAO analysis of IRS data. 

aFiscal years 2005 and 2006 are IRS projections. 

Note: ‘‘Other walk-in contacts’’ includes assistance for account notices, tax law inquiries, 

forms, and compliance work, but not return preparation. For the walk-in sites, the time periods 

covered are December 31, 2000, through April 28, 2001; December 30, 2001, through April 27, 

2002; December 29, 2002, through April 26, 2003; and December 28, 2003, through April 24, 

2004. For volunteer sites, the time period covered for 2001 is January 1, 2001, through April 

21, 2001; all other periods are the same as those for IRS walk-in sites. 

As reflected in table 4 and figure 6, in contrast to IRS walk-in sites, the number 

of taxpayers seeking return preparation assistance at volunteer sites has increased 

this year and every year since 2001. These sites, staffed by volunteers certified by 

IRS, do not offer the range of services IRS provides, but instead focus on preparing 

tax returns primarily for low-income and elderly taxpayers and operate chiefly during the filing season. IRS officials estimated that the number of taxpayers receiving 

assistance at approximately 14,000 volunteer sites has increased over 23 percent 

compared to the same time last year. 

The shift of taxpayers from walk-in to volunteer sites is important, because it has 

transferred time-consuming services, particularly return preparation, from IRS to 

volunteer sites and allowed IRS to concentrate on services that only it can provide 

such as account assistance or compliance work. As a result, IRS has devoted fewer 

resources to return preparation. While this shift is important to IRS, others have 

been more cautious. For example, in her January 2005 report,27 the Taxpayer Advocate has expressed concern about the reduction of face-to-face services, such as those 

offered at walk-in sites. She stated that IRS’s plan does not adequately provide for 

the segment of the population that continues to rely on the interaction provided by 

walk-in sites. At the same time, last year, we 28 and TIGTA 29 called attention to 


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52 

025 (Washington, D.C.: 2003) and Treasury Inspector General for Tax Administration, Improvements Are Needed to Ensure Tax Returns Are Prepared Correctly at Internal Revenue Service 

Volunteer Income Tax Assistance Sites, Reference No. 2004–40–154 (Washington, D.C.: 2004). 

issues related to the quality of service at both IRS walk-in and volunteer sites. IRS 

has separate quality initiatives under way at both IRS walk-in sites and volunteer 

sites, although data remain limited and cannot be compared to prior years. 

Conclusions 

As IRS shifts its priorities to enforcement and faces tight budgets for service, the 

agency will be challenged to maintain the gains it has made in taxpayer service. 

In order to avoid a ‘‘swinging pendulum,’’ where enforcement gains are achieved at 

the cost of taxpayer service and vice versa, IRS and the Congress would benefit from 

a set of agreed-upon long-term goals. Long-term goals would provide a framework 

for assessing budgetary tradeoffs between taxpayer service and enforcement and 

whether IRS is making satisfactory progress towards achieving those goals. Similarly, long-term goals could help identify priorities within the taxpayer service and 

enforcement functions. For example, if the budget for taxpayer service were to be 

cut and efficiency gains did not offset the cut, long-term goals could help guide decisions about whether to make service cuts across the board or target selected services. To its credit, IRS has been developing a set of long-term goals, so we are not 

making a recommendation on goals. However, we want to underscore the importance of making the goals public in a timely fashion, as IRS has planned. The Congress would then have an opportunity to review the goals and start using them as 

a tool for holding IRS accountable for performance. 

In addition, the Congress would benefit from more information about the shortterm impacts of the 2006 budget request on taxpayers. The 2006 budget request 

cites a need for reducing the hours of telephone service and scaling back walk-in 

assistance but provides little additional detail. Without more detail about how taxpayers will be affected, it is difficult to assess whether the 2006 proposed budget 

would allow IRS to achieve its stated intent of both maintaining a high level of taxpayer service and increasing enforcement. 

BSM and related initiatives such as electronic filing hold the promise of delivering 

further efficiency gains that could offset the need for larger budget increases to fund 

taxpayer service and enforcement. Today, taxpayers have seen payoffs from BSM; 

however, the program is still high risk and budget reductions have caused substantive program changes. IRS has recognized it is time to revisit its long-term BSM 

strategy and is currently refocusing the program. As we did with long-term goals 

above, we want to underscore the importance of timely completion of the revision 

of the BSM strategy. 

Recommendation 

We recommend that the Commissioner of Internal Revenue supplement the 2006 

budget request with more detailed information on how proposed service reductions 

would impact taxpayers. 

Appendix I 

Description of IRS’s Proposed Budget Structure 

IRS’s proposed new budget structure as depicted in figure 7 combines the three 

major appropriations that the agency has had in the past—Processing, Assistance, 

and Management; Tax Law Enforcement; and Information Systems into one appropriation called Tax Administration and Operations. The Business Systems Modernization and Health Insurance Tax Credit Administration appropriations accounts 

remain unchanged. The Tax Administration and Operations appropriation is divided 

among eight critical program areas. These budget activities focus on Assistance, 

Outreach, Processing, Examination, Collection, Investigations, Regulatory Compliance, and Research. According to IRS, as it continues to move forward with developing and implementing this new structure, these program areas and the associated 

resource distributions will be refined to provide more accurate costing. 

IRS reported that the new budget structure has a more direct relationship to its 

major program areas and strategic plan. We did not evaluate IRS’s proposed budget 

structure as part of this engagement because it was not within the scope of our review. However, we have recently completed a study on the administration’s broader 

budget restructuring effort. In that study we say that, going forward, infusing a performance perspective into budget decisions may only be achieved when the underlying information becomes more credible and used by all major decision makers. 

Thus, the Congress must be considered a partner. In due course, once the goals and 

53 

30For a more detailed discussion, see GAO, Performance Budgeting: Efforts to Restructure 

Budgets to Better Align Resources with Performance,GAO–05–117SP (Washington, D.C.: February 2005). 31 Initial operation refers to the point at which a project is authorized to begin enterprisewide 

deployment. 32Full deployment refers to the point at which enterprisewide deployment has been completed 

and a project is transitioned to operations and support. 

underlying data become more compelling and used by the Congress, budget restructuring may become a better tool to advance budget and performance integration.30

Figure 7: IRS’s Proposed Budget Structure 

Source: GAO representation of IRS information. 

Appendix II 

BSM Project Life Cycle Cost/Schedule Variance and Benefits Summary 

The table below shows the life-cycle variance in cost and schedule estimates for 

completed and ongoing Business Systems Modernization (BSM) projects, based on 

data contained in IRS’s expenditure plans. These variances are based on a comparison of IRS’s initial and revised (as of July 2004) cost and schedule estimates to complete initial operation 31 or full deployment 32 of the projects. 


Insert 24767A.015
54 

Table 5: BSM Project Life Cycle Cost/Schedule Variance and 

Benefits Summary 

Project 

Cost variance (in 

thousands) 

Reported/ 

revised 

estimated 

cost (in 

thousands) 

Schedule 

variance (in 

months) 

Reported/ 

revised estimated completion date 

Reported IRS/ 

taxpayer benefits 

Completed 

projects.

Security 

and 

Technology 

Infrastructure 

Release 

1 

+$8,450 $45,401 +5 1/31/02 (initial operation) a

Provides infrastructure for secure telephony and electronic interaction 

among IRS employees, tax practitioners, and taxpayers 

Customer 

Communications 

2001 

+14,562 60,762 +9 2/26/02 (full deployment) Improves telecommunications infrastructure, including telephone 

call management, 

call routing, and 

customer self-service applications 

Customer 

Relationship 

Management 

Exam 

¥721 9,245 +3 9/30/02 (full deployment) Provides commercial, 

off-the-shelf software to IRS revenue agents to 

allow them to accurately compute 

complex corporate 

transactions 

Human 

Resources 

Connect 

Release 

1 

+200 10,200 0 12/31/02 (initial operation) a

Allows IRS employees 

to access and manage their human 

resources information online 

Internet 

Refund/ 

Fact of 

Filing 

+12,923 26,432 +14 9/26/03 (full deployment) Provides instant refund status information and instructions for resolving 

refund problems to 

taxpayers with 

Internet access 

Modernized eFile 

Release 

1 

+21,057 50,303 +6.5 5/31/04 (initial operation) a

Provides initial electronic filing capability for large corporations, small 

business, and taxexempt organizations 

Ongoing 

projects 

55 

Table 5: BSM Project Life Cycle Cost/Schedule Variance and 

Benefits Summary—Continued 

Project 

Cost variance (in 

thousands) 

Reported/ 

revised 

estimated 

cost (in 

thousands) 

Schedule 

variance (in 

months) 

Reported/ 

revised estimated completion date 

Reported IRS/ 

taxpayer benefits 

Modernized e-File Release 2 

Modernized 

e-File 

Release 

2 

0 16,325 0 9/30/04 (initial operation) Provides additional 

functionality to 

support corporate 

electronic filing and 

other capabilities, 

including required 

public access to 

filed returns for 

tax-exempt organizations 

Modernized eFile 

Release 

3 

+5,300 27,175 0 3/31/05 (initial operation) Provides additional 

functionality to 

support electronic 

filing for tax-exempt organizations 

and other capabilities, including the 

interface with state 

retrieval systems 

e-Services +102,271 148,820 +18 4/30/05 (full deployment) Provides a Web portal and other eServices to promote 

the goal of conducting most IRS 

transactions with 

taxpayers and tax 

practitioners electronically 

Customer 

Account 

Data 

Engine— 

Individual 

Master 

File 

Release 

1 

+118,129 182,774 +30 6/30/05 (full deployment) Provides the modernized database foundation to replace 

the existing individual master file 

processing systems. 

Facilitates faster 

refund processing 

and more timely response to taxpayer 

inquiries for Form 

1040EZ filers 

Integrated Financial 

System 

Release 

1 

+73,710 173,580 +15 6/30/05 (full deployment) Provides a single general ledger for custodial and financial 

data and a platform to integrate 

core financial data 

with budget, performance, and costaccounting data 

56 

Table 5: BSM Project Life Cycle Cost/Schedule Variance and 

Benefits Summary—Continued 

Project 

Cost variance (in 

thousands) 

Reported/ 

revised 

estimated 

cost (in 

thousands) 

Schedule 

variance (in 

months) 

Reported/ 

revised estimated completion date 

Reported IRS/ 

taxpayer benefits 

Custodial 

Accounting 

Project 

Release 

1 

+91,789 138,950 +33 11/01/05 (full deployment) Provides integrated 

tax operations and 

internal management information 

to support evolving 

decision analytics, 

performance measurement, and management information needs 

Source: GAO analysis of IRS data. 

a Information on the costs and schedule for the full-deployment stage of these projects was not available in 

the BSM expenditure plans. 

How IRS Allocated Expenditures and Full-Time Equivalents in Fiscal Year 2004 

Figures 8 and 9 illustrate how the Internal Revenue Service (IRS) allocated expenditures and full-time equivalents (FTE) in fiscal year 2004. Figure 8 shows total 

expenditures. The percentage of expenditures devoted to contracts decreased from 

9 percent in 2002 to 5 percent in 2004, because of fewer private contracts. The percentage of expenditures devoted to other nonlabor costs increased from 8 percent in 

2002 to 12 percent in 2004, due to increases in miscellaneous costs. 

Figure 8: IRS Expenditures in Fiscal Year 2004 

Source: GAO analysis of IRS data. 

Note: Numbers do not add to the total and percentages do not add to 100 percent due to 

rounding. 

Figure 9 shows IRS’s total FTEs. FTEs have decreased slightly from 99,180 in 

2002 to 99,055 in 2004. We previously reported that processing FTEs declined 1 percentage point between 2002 and 2003. Between 2003 and 2004, IRS’s allocation of 


Insert 24767A.016
57 

FTEs remained similar with a 1 percentage point increase in conducting examinations, and in management and other services. 

Figure 9: How IRS Spent 99,055 FTEs in Fiscal Year 2004 

Source: GAO analysis of IRS data. 

f 

Chairman RAMSTAD. Thank you, Mr. White. Mr. Wagner. 


Insert 24767A.017
58 

STATEMENT OF RAYMOND T. WAGNER, JR., CHAIRMAN, 

INTERNAL REVENUE SERVICE OVERSIGHT BOARD 

Mr. WAGNER. Thank you, Mr. Chairman, for this opportunity to 

testify before the Subcommittee and to present the IRS Oversight 

Board’s views on the President’s proposed fiscal year 2006 budget 

for the IRS. Also, I would extend my congratulations to you, sir, 

and to you, Mr. Lewis, on your new positions of leadership on the 

Subcommittee. I believe I also speak for the entire Board when I 

say how much we too will miss Representative Portman and his 

leadership in the area of tax administration. Mr. Chairman, the 

IRS Oversight Board recently released its fiscal year 2006 budget 

report. I would like to ask that the report be entered into the 

record at this time. 

[The information is being retained in the Committee files.] 

The Oversight Board’s report describes improved performance 

which the IRS has achieved in fiscal year 2004 in three important 

areas: customer service, BSM and enforcement. Yet, while progress 

has been made we still face an enormous challenge, the amount of 

known taxes that are not paid. We all heard recently that as of 

2001, the tax gaps stood at between $312 billion and $353 billion. 

To put this into perspective, if all taxpayers paid what they owe 

each year, our government would have enough money to cover 

more than 80 percent of the cost of running all non-Defense and 

non-Homeland Security agencies. With that in mind, I think we 

can all agree that the job is far from done. 

Before describing the Board’s budget recommendations for the 

2006 budget, I want to summarize the factors that influenced the 

Board’s recommendations. First, we recognize the need for all discretionary funding to be thoroughly justified, and we must give priority to the tax administration as a whole. Second, the Board believes that with an effective tax administration system, taxpayers 

would find compliance easy to achieve and difficult to avoid. This 

simple paradigm illustrates the balance between service and enforcement that must be achieved. Third, taxpayers should feel that 

the service they receive is valuable to them in fulfilling their tax 

paying duties. Mr. Chairman, there is much to like in President 

Bush’s 2006 budget request for the IRS. When most budgets are 

being tightened, the President is asking for greater budget increases for the IRS than any other non-Defense or non-Homeland 

Security agency. 

With that in mind, the Board’s recommendation builds upon the President’s budget request. It calls for $11.6 billion in funding for 

fiscal year 2006, a 9-percent increase over the Administration’s recommendation. The Board believes that the IRS must begin to close 

the tax gap through greater enforcement. For that reason we recommend an additional $435 million for IRS enforcement efforts 

that could easily generate more than a billion and a half dollars 

in additional revenues. That is a solid business case we believe. 

The Board also recommends additional funding toward maintaining 

and improving customer service and supporting the BSM program. 

We are concerned and fear that the proposed reductions in customer service and modernization resources in the budget will have 

a negative impact on the IRS’ ability to deliver quality service to 

taxpayers which ultimately will have a negative effect on taxpayer 

59 

compliance. The Board is pleased to see the Administration’s recommendation to adjust the 302(a) allocations to increase enforcement funding for the IRS. To deal with various problems, the 

Board’s budget report recommends a full range of alternatives that 

recognize the value of investing in IRS enforcement. We urge the 

Committee to give our recommendations active consideration, especially the ones falling under this Committee’s jurisdiction. 

The BSM program is critical to the future of the IRS, as you 

have heard. It must be successfully completed to provide a reliable 

and efficient means to serve the American taxpayers. Unfortunately, this program has a checkered history. Poor management by 

the IRS, and lack of delivery by the prime contractor have resulted 

in missed schedules and cost overruns. In response to this performance, the level of activity of the program was appropriately and significantly reduced in the past. Under Commissioner Everson’s efforts, significant improvements have been made. The Board is now 

recommending an increased funding level for fiscal year 2006 for 

BSM. The Board, in short, believes that the BSM program should 

move forward at an accelerated pace. We have heard the Commissioner say many times that service plus enforcement equals compliance. A tax gap of $312 billion annually amounts to an unacceptable $2,000 per taxpayer every year. We must improve compliance, 

which means more enforcement and more service, and improved 

technology if we want to close this unacceptable gap. 

Mr. Chairman, in conclusion, the Board strongly believes that 

our Nation can ill afford to return to the days when the IRS fluctuated between customer service and enforcement, and in an effective tax administration system, the taxpayers would find compliance easy to achieve and difficult to avoid. The IRS is now on the 

right track and is making progress toward this goal, but we must 

give it the resources to do its job. Thank you and I would be happy 

to answer any questions. 

[The prepared statement of Mr. Wagner follows:] 

Statement of Raymond Wagner, Chair, Internal Revenue Service 

Oversight Board 

Thank you, Mr. Chairman for this opportunity to testify before the subcommittee 

and to present the IRS Oversight Board’s views on the President’s proposed FY2006 

budget for the Internal Revenue Service. 

I also want to thank and commend you and the members of the subcommittee for 

your continued oversight of tax administration issues. It is greatly appreciated. And 

I believe that I speak not only for the Board, but the entire tax administration community when I say how much we will miss Representative Portman. He has been 

an outstanding advocate for America’s taxpayers. 

Mr. Chairman, the IRS Oversight Board recently released its FY2006 IRS Budget 

Report. I would like to ask that this report be entered into the record. 

Three Influencing Factors 

Before describing the Board’s budget recommendations for the FY2006 IRS budget, I want to present three factors that influenced the Board’s recommendations 

First, the Oversight Board must weigh competing factors when considering the 

budget it recommends. The Board is cognizant that the world situation and projected deficits for the next several years increase the need to ensure that all federal 

spending be thoroughly justified, deliver value to the taxpayers, and meet priority 

needs. However, in our roles as members of the Oversight Board, we must always 

be mindful of how well the tax administration system is serving taxpayers. 

Second, the Board believes that with an effective tax administration system, taxpayers would find compliance easy to achieve and difficult to avoid. This simple paradigm illustrates the balance between service and enforcement that must be 

60 

achieved. Those who need service to be compliant should receive it; those who flout 

the law should be identified and pursued. 

Third, taxpayers should feel that the service they receive is valuable to them and 

to society. While the tax collector will never win a popularity contest, the Oversight 

Board’s most recent taxpayer attitude survey found wide support for additional 

funding for the IRS—62 percent of respondents favor more funding for enforcement 

and 64 percent favor more taxpayer assistance. The Board believes that this finding 

underscores a fundamental belief that our tax administration should operate in a 

way that is balanced between both service and enforcement. 

In fact, the willingness of a majority of taxpayers to support additional funding 

for the IRS reflects the increasing levels of satisfaction that taxpayers show in the 

IRS. Taxpayer satisfaction surveys such as the American Customer Satisfaction 

Index (ASCI) have shown a steady increase since 1999, as shown in the figure 

below. 

FY2004: Across-the-Board Progress 

The Oversight Board has advocated balance since its inception and it applauds 

the IRS for staying focused and raising both service and enforcement performance 

levels in FY2004 while also seeking greater efficiencies through its modernization 

program. The Board’s recent budget report describes improved performance the IRS 

has achieved in FY2004 in three important areas: (1) customer service, (2) business 

systems modernization and (3) enforcement. 

Telephone service has greatly improved, helping taxpayers navigate an extremely 

complex tax code. In 2005, the IRS estimates that more than half of individual taxpayers will file their returns electronically and millions are using the IRS web site 

to download forms, get information on their tax law questions and track the status 

of their refunds. The IRS’ computer modernization program met its cost and schedule milestones in 2004 and the first taxpayers have been moved off the old tapebased system to a modern reliable database. And although the agency’s enforcement 

effort has been suffering from a declining resource base, in FY2004 the IRS was 

able to increase its enforcement resources and showed an impressive gain in enforcement revenue. 

While progress has been made, we still face an enormous challenge: our nation’s 

tax gap—the amount of known taxes that are not paid. We all heard last week that 

as of 2001, the gap stood at between $312 and $353 billion; a slight increase from 

1988, which was the last time the IRS measured the amount of known unpaid taxes. 


Insert 24767A.018
61 

1 According the Office of Management and Budget, in FY2004, discretionary budget authority 

for non-defense and non-homeland security totaled $386 billion. The mid-point of the tax gap 

range, $333 billion, is 86 percent of this amount. 

To put this into perspective, if all taxpayers paid what they owe each year, our 

government would have enough money to cover more than 85 percent of the cost 

of operating1 all non-defense and non-homeland security agencies. 

With that in mind, I think we can all agree that the job is far from done. A lot 

more hard work is still required if the IRS is to become the tax administration agency envisioned by the authors of the IRS Restructuring and Reform Act of 1998. 

FY2006 Budget Recommendation 

Mr. Chairman, let me now turn to President Bush’s FY2006 budget request for 

the IRS. There is much to like in this request. First, the Oversight Board recognizes 

and appreciates that at a time when most budgets are being tightened, the President is asking for a greater budget increase for the IRS than other non-defense and 

non-homeland security agencies. 

The Board is heartened by the request for additional enforcement funding and is 

pleased that the Administration acknowledges that investments in IRS enforcement 

result in increased tax revenue. 

In addition, the President’s focus on tax reform is most welcome by not only the 

Board, but all honest taxpayers. In the long term, simplification of the code will reduce the burden on America’s taxpayers and in turn, on IRS customer service and 

even enforcement. In the short term, however, changes to the tax code will almost 

certainly increase the demand for IRS customer service. 

With that in mind, the Board’s recommendation builds on the President’s budget 

request. It proposes a budget that it believes will allow the IRS to fully achieve its 

strategic goals and objectives. It calls for $11.6 billion in funding for FY2006, a nine 

percent increase over the Administration’s recommendation. 

Comparison of Administration’s Request, IRS Oversight Board’s 

Recommendation, and Enacted Appropriations 

(in $ millions) 

FY2005 FY2006 

Admin. Oversight Board Enacted Admin. Oversight Board 

10,674 11,206 10,233 10,679 11,629

The Board believes that the IRS must begin to close the tax gap through greater 

enforcement. For that reason, we recommend an additional $435 million for IRS enforcement efforts that could easily generate more than a billion and a half dollars 

in additional tax revenue using the Administrations return on investment of fourto-one. From its private sector perspective, the Board believes it makes perfect sense 

to make the additional investments in enforcement that will pay for themselves 

many times over. 

The Board also recommends additional funding towards maintaining and improving customer service and supporting the BSM program. We are concerned that proposed reductions in customer service and modernization resources in the proposed 

FY2006 budget will have a negative impact on the IRS’ ability to delivery quality 

service to taxpayers, which ultimately will also have a negative effect on taxpayer 

compliance. 

The IRS has already announced that it will end its TeleFile service, used by almost four million taxpayers. Another example of reduction in service is the requirement that tax return and tax account transcripts provided by Taxpayer Assistance 

Centers (TACs) must now be requested by phone or mail, which requires a two-week 

waiting period. These transcripts are often needed urgently by those applying for 

mortgages or other loans. This change in procedure burdens taxpayers and is 

counter to the IRS commitment to provide excellent customer service. 

Other possible customer service cuts may include: 

• Closing some Taxpayer Assistance Centers, which in total serve 7.5 million taxpayers each year, many of them elderly and lower-income taxpayers and those 

with limited or no English proficiency; 

• Reducing hours on the IRS’ toll-free lines; and 

• Providing fewer paper versions of forms and publications, further burdening 

lower-income taxpayers who do not have ready access to the Internet. 

62 

Business systems modernization is also key to improving customer service and enforcement. The program should be accelerated, not only to reduce costs and speed 

up delivery time, but to avoid a catastrophic collapse of the IRS’ archaic legacy computer systems. 

However, for the past few years, the IRS has slowed down modernization even 

though it has demonstrated that past problems can be overcome and tangible benefits can be delivered to taxpayers. 

Mr. Chairman, the IRS needs a realistic budget that recognizes and provides for 

the anticipated expenses it will likely incur, such as congressionally-mandated pay 

raises, inflation and rent increases. By not fully funding these costs—as has been 

the case in the past—the IRS may yet again be forced to make program cuts to pay 

for them. 

Unfortunately, while we may completely agree that the Board’s budget recommendations deliver value to taxpayers, the existing budget evaluation methodology makes it difficult to act on these recommendations because it considers enforcement initiatives simply as an expense, and does not recognize the amount of 

revenue that will be raised. 

Changing the Way Congress Assesses the IRS Budget 

For that reason, the Board is pleased to see the Administration’s recommendation 

to adjust 302(a) allocations to increase enforcement funding for the IRS. 

However, it is unclear how this recommendation could play out should Congress 

accept it. The Board is concerned that there could be unintended consequences. The 

recommendation could result in additional reductions in taxpayer services or modernization should budgets be cut or unanticipated costs arise. 

To deal with these potential problems, the Board recommends that Congress reviews a full range of alternatives that recognize the value of investing in IRS enforcement. These options could include revisiting the Office of Management and 

Budget’s own budget methodology regarding enforcement revenue, authorizing enforcement increases under non-discretionary funding, or allowing the IRS to retain 

a small percentage of enforcement revenue. The Board recognizes that several of 

these options fall under the jurisdiction of this Committee, and the Board urges the 

Committee to give this recommendation active consideration. 

Conclusion 

Mr. Chairman, in conclusion, the Board strongly believes that our nation can ill 

afford to return to the days when the IRS fluctuated between customer service and 

enforcement. We cannot shift resources to pursue those who knowingly avoid taxes 

while neglecting the needs of honest taxpayers attempting to comply with a complex 

tax code. As I mentioned in the beginning of my testimony, in an effective tax administration system taxpayers would find compliance easy to achieve, but difficult 

to avoid. 

The IRS is now solidly on the right track and is making progress toward that goal 

but we must give it the resources to do its job. Thank you and I would be happy 

to answer your questions. 

f 

Chairman RAMSTAD. I want to thank both Members of this 

panel for your excellent testimony and for adhering to the 5-minute 

rule as well. I have two questions. The first is for Chairman Wagner concerning the Free File Alliance and the Free File program. 

I know that when the Free File program was formed, the intent 

was to cover at least 60 percent of individual filers. However, it 

wasn’t agreed that service would be limited to 60 percent, or that 

it would be stuck at 60 percent. This year all individual filers, I 

believe, have access to Free File. There is some dispute about 

whether this program should be made available to all taxpayers or 

restricted to low income taxpayers. What is your opinion? Do you 

think it should be available to as many taxpayers as possible or are 

limits needed? 

Mr. WAGNER. Mr. Chairman, thank you for that question. I 

would say preliminarily that the Board does wholeheartedly support the Free Filing Alliance. We were supportive of the original 

63 

purpose, to provide free filing opportunities for oftentimes low income individuals. It is only in the past year, as I understand it, 

that the program has been expanded to include 100 percent of all 

individual taxpayers. The Board has not taken a position on this 

issue, but we are aware of some of the concerns that surround it. 

We are aware of the concerns between Members of that alliance 

and I believe you will be hearing more about that this afternoon. 

The National Taxpayer Advocate has expressed concerns about the 

ancillary products which are being marketed at the same time. 

That all said, my own personal opinion is that, to the extent that 

we can facilitate for all individual taxpayers, whether they be low, 

middle or high income individuals, the use of electronic systems, 

then I would support as many people as possible being encouraged 

to file electronically and for free. 

Chairman RAMSTAD. Should the priority be to low income individuals? 

Mr. WAGNER. The priority to the low income individuals, yes, 

sir. The second question concerns an issue you both broached in 

your testimony and that is BSM. I know that the IRS is taking on 

more of the management, as you mentioned—I believe Mr. White— 

in your testimony, of the BSM programs. Prior to the start of BSM, 

Congress ended a lengthy effort by the IRS to modernize computers. Both you gentlemen, I am sure, remember that. It came 

with great expense to taxpayers, and I believe the program failed 

because the IRS lacked the capacity to manage the modernization 

of the scale and scope that was proposed. It was a huge undertaking and I just don’t think they had the resources nor the capability. My question to either or both of you, does the IRS have the 

capacity to manage BSM today? Mr. White? 

Mr. WHITE. Mr. Chairman, my statement was jointly authored 

by Dave Powner, who is Director of Information Technology at 

GAO. He is here and he would be an excellent person to answer 

that question. 

Chairman RAMSTAD. Thank you. Welcome to the Subcommittee. 

Mr. POWNER. Thank you, Mr. Chairman. Clearly the IRS is in 

a transition mode as we transition responsibility from the contractor to the IRS. There have been steps in the right direction to 

have the appropriate resources on board, but they acknowledge 

that they still have many challenges in this human capital area to 

fill important positions in order to manage this effectively. In addition to that, managing the contractor will still be a challenge for 

the IRS as they move responsibilities in-house. That is something 

that is acknowledged by the current CIO. Then third, bolstering 

their program management remains a challenge for them. So, I 

think there is movement in the right direction. They acknowledge 

those risks, but clearly there is a lot of work ahead, and this next 

year will be a true test of whether they can successfully pull this 

off. 

Chairman RAMSTAD. So, it is a fair summation that the jury is 

still out? 

Mr. POWNER. Correct. 

64 

Chairman RAMSTAD. I appreciate your responses, from all three 

of you, and your testimony. The Chairman will now yield to the 

distinguished Ranking Member. 

Mr. LEWIS. Thank you very much, Mr. Chairman. Thank you, 

Director White and Chairman Wagner for your testimony. Director 

White, what is the appropriate level of spending for the IRS, the 

level proposed by the President or the higher level proposed by the 

IRS Oversight Board? 

Mr. WHITE. That is an excellent question, and I think the answer depends on IRS’ long-term goals. As I indicated, IRS right 

now does not have long-term goals for either service or enforcement, which makes it very difficult to evaluate the budget proposal 

for 2006. With long-term goals, Congress and others would be 

much better positioned to be able to tell how much the budget proposal—how close the budget proposal would move the IRS to those 

long-term goals; being able to achieve its long-term goals. So, we 

think it is very important that IRS finish developing these goals 

and make them public so that there can be some assessment of the 

goals in terms of whether they are appropriate or not. 

Mr. LEWIS. Thank you. Let me just ask you, what concern does 

GAO have about cuts to IRS taxpayer service as proposed by the 

Administration? Are you concerned about it? 

Mr. WHITE. We are. As I indicated, our major concern is the 

swinging pendulum sort of situation. We don’t want to end up with 

a swinging pendulum where taxpayer service suffers in order to 

shift resources to enforcement, and then in turn enforcement gets 

cut back when the focus returns to providing service. IRS has made 

noticeable improvements to service since 1998. We hope that those 

service gains would not be surrendered. In order to do that, we 

think that one thing that IRS needs to do in thinking about services is to think about what their priorities are right now. They 

have added some new services that didn’t exist 10 years ago such 

as the Internet. Telephone service is greatly improved compared to 

10 years ago. I look back at one of our statements from 10 years 

ago, and 92 percent of phone calls to IRS got busy signals then. 

That situation has been dramatically turned around. So, with the 

new service and the improved service, we think there may be options to change the menu of services that IRS offers; to provide 

good overall service to taxpayers but at lower cost. So, in our statement we laid out some material about areas to cut if cuts are needed without sacrificing the overall level of service. That would be focusing on things like duplication, for example. 

Mr. LEWIS. Thank you very much, Director White. Chairman 

Wagner, do you know which Taxpayer Service sites are on the Administration’s chopping block? Do you have any idea? 

Mr. WAGNER. Mr. Lewis, we have just recently begun to explore 

that. We intend to meet with the Commissioner and learn of the 

60 to 105 sites that he discussed. We are very concerned about the 

issue of closing the sites. We have raised the issue before for the 

same reasons that Mr. White articulated, that these are important 

services. Our surveys have indicated that many taxpayers prefer 

walk-in sites over the Internet, over the telephone. That said, I appreciate what Commissioner Everson said about trying to drive 

taxpayers to perhaps more cost effective vehicles for services, but 

65 

this is something that we at the Board have expressed our concerns 

about, and we have agreed to monitor it. 

Mr. LEWIS. Let me ask you, what could IRS do with an addition of $1 billion for resources? Could they use another $1 billion? 

Would it be helpful for them to get an additional billion dollars? 

Most of the agencies would like to have more moneys to do a lot 

of things. 

Mr. WAGNER. Yes, sir, Mr. Lewis. I believe if you take a look 

at our report, we have outlined and listed a number of initiatives 

that would effectively total up to $1 billion of additional resources. 

We are mindful that a recent study has indicated that for every 

dollar that goes into the IRS, $4 of revenue are produced with that. 

So, there comes a point at which perhaps a billion dollars or some 

amount of money wouldn’t be efficiently absorbed into the organization. With proposed improvements in services, which we have 

outlined, enforcement, pursuing to a greater extent at this time 

BSM, the Board has taken the position that the IRS could use additional resources. 

Mr. LEWIS. Thank you very much, Chairman Wagner. Thank 

you, Mr. Chairman. 

Chairman RAMSTAD. The Chairman recognizes the gentleman 

from North Dakota. 

Mr. POMEROY. Thank you, Mr. Chairman. I want to commend 

you, Mr. Wagner, for the Board’s work, because I think it is extremely helpful to have a highly-qualified group of individuals provide basically a fresh look at whether the country is getting from 

the Service what it needs and whether the Service is getting fair 

treatment by Congress. 

Mr. WAGNER. Thank you, sir. 

Mr. POMEROY. I note with great interest your recommendation 

that additional resources, especially additional resources to the 

Service, means better service to taxpayers, to keep centers open 

that you are otherwise going to have to close, and accelerated collection. Indeed your testimony talks about a 4 to 1 return on additional investment in collection. Could you elaborate on that just 

briefly? 

Mr. WAGNER. Let me make a couple of points with respect to 

that question. Additional resources will buy additional services and 

additional enforcement activities, but I need to be careful to say, 

the IRS can also improve performance out of the current resources. 

I don’t want to suggest that only additional monies are going to 

make the lone difference in improving collections and reducing that 

tax gap. I think the Commissioner’s points are very well taken with 

respect to the improvements within the IRS that they are making 

both with technology, and the Internet, and with the particular initiatives they have under way with respect to enforcement. Again, 

that said, our statutory charge provided to us in the IRS Restructuring and Reform Act 1998, with which you are familiar, is to 

focus on the IRS and to come up with a budget, and to submit a 

budget that would ensure that the IRS obtains its strategic longterm goals, and its annual plans. 

Mr. POMEROY. I am sorry to interrupt. You have been very patient in waiting to testify, but my time is going to run too short, 

sir. 

66 

Mr. WAGNER. Sure. 

Mr. POMEROY. I am just looking at page 3 of your testimony, 

‘‘For that reason we recommend an additional $435 million for IRS 

enforcement efforts that could easily generate more than a billion 

and a half additional tax revenue using the Administration’s return 

on investment, 4 to 1.’’ 

Mr. WAGNER. Yes, sir. 

Mr. POMEROY. You also have a table that shows, although you 

asked for more than the Administration sought, Congress didn’t 

even fund the Administration’s request; is that correct? 

Mr. WAGNER. That is correct, sir, and—— 

Mr. POMEROY. That has resulted in lost revenue to the treasury as a consequence and a deeper deficit to this country; is that 

correct? 

Mr. WAGNER. One could argue that, and I would urge this Congress to fund the President’s budget at a minimum. 

Mr. POMEROY. You would like even more than that? 

Mr. WAGNER. We believe that the IRS could utilize the additional resources above that recommendation. 

Mr. POMEROY. We have an expression at home, ‘‘You don’t eat 

your seed corn,’’ and if you cut revenue to the IRS, and you can’t 

collect the revenue that you are owed, you are essentially eating 

your seed corn. 

Mr. WAGNER. Right. 

Mr. POMEROY. There is another thing that I would like to direct you to, and I would like to direct the GAO to as well. I think 

it is important, and that is this private participation we have with 

Free File. If we are putting the auspices of partnership with the 

IRS before the public, we, I believe, infer approval of the private 

partner, and the private partner’s ongoing relationships with the 

public. So, someone entering, basically a relationship with one of 

our private partners because they are a partner of the IRS, this 

just creates something that we need to be attentive to. Are you 

aware of whether the IRS has been able to collect information on 

what has been sold by these private partners? 

Mr. WAGNER. I am not aware if they have been able to collect 

the information, or if they have that available. I know that it is an 

issue that has been raised. 

Mr. POMEROY. I don’t think they do. I have got my hand on a 

letter that just makes me mad. I don’t know why I didn’t see it before, but I had written and asked for, ‘‘What are you selling?‘‘ I get 

a letter back saying, ‘‘Our Member companies cannot lawfully examine and combine a report of the taxpayer information you are 

seeking without the lawful consent of subject taxpayers.’’ I think 

that is a crock because we are talking about aggregated data of 

sales information. This isn’t individual tax—I am not asking 

whether Harry Hanson bought a certain policy. I am asking, ‘‘What 

did Intel sell as a private partner?’’ Do you think that we ought to 

be able to have this information? 

Mr. WAGNER. I think the information probably could be obtained by simply going to the sites and seeing what products are 

offered with respect to other financial services and other investment opportunities, the RALs and so on. The short answer is, I 

67 

think that information in the aggregate most definitely should be 

available. 

Mr. POMEROY. I think it should be available. I also think it is 

something that the Board might want to exercise some Service 

oversight, because if among vendors we have vastly different takeup rates on, for example, refund lending, it certainly might raise 

an inquiry in terms of, say, what is our private partner doing here 

to generate such a differential return. To the GAO, I would also 

think that this would be a matter of interest. Is it something that 

you think might be an appropriate inquiry of the GAO? 

Mr. WHITE. It very well could be. One general management 

proposition that we support is programs and initiatives ought to 

periodically be reviewed, ought to be assessed, their performance 

ought to be judged based on empirical data. We now have several 

years worth of experience with the Free File program, so this 

might be a good time for such a review. 

Mr. POMEROY. Right. The Free File program; we were interested of course in the numbers that used it, but I always had an 

interest in what are they selling. 

Mr. WHITE. Right. 

Mr. POMEROY. It doesn’t seem to me that that inquiry has even 

begun. I am going to work with you on getting it done, but I hope 

that within the—— 

Mr. WAGNER. Your point is well taken, Congressman, and we 

will communicate with each other and begin to look into that. 

Mr. POMEROY. I appreciate it and look forward to the ongoing 

input the Board will give this Subcommittee on Oversight as we try 

to work these things through. Thank you very much. Thank you. 

I yield back. 

Chairman RAMSTAD. I want to thank the Members of this second panel for your important testimony and your important service. You are now excused. Thank you very much. It is now a pleasure to call the third panel. As I said earlier, this panel will feature 

testimony from representatives of practitioner groups. Mr. Kenneth 

Gideon, Chair of the Tax section of the American Bar Association; 

Mr. Thomas J. Purcell, Chair of the Tax Executive Committee of 

the American Institute of Certified Public Accountants; Mr. Frank 

Degen, President-elect of the National Association of Enrolled 

Agents; Mr. William Stevenson, Enrolled Agent, Spokesperson for 

the National Council of Taxpayer Advocacy; and finally, Mr. Brad 

Smith, Senior Vice President, Consumer Tax Group of Intuit Corporation. Welcome, gentlemen to the Subcommittee and thank you 

for your patience this afternoon. Please deliver your testimony. I 

don’t know if you have any order. 

Mr. GIDEON. I am on the list first and I am happy to begin, Mr. 

Chairman. My name is Kenneth Gideon. 

Chairman RAMSTAD. Let us go right down the list, Mr. Gideon, 

Mr. Purcell, Mr. Degen, Mr. Stevenson, Mr. Smith. Please, Mr. 

Gideon. 

STATEMENT OF KENNETH W. GIDEON, CHAIR, SECTION OF 

TAXATION, AMERICAN BAR ASSOCIATION 

Mr. GIDEON. I am the Chair, as you said, of the ABA Tax Section. The ABA appreciates this opportunity to appear before the 

68 

Subcommittee on Oversight to talk about the critical need for simplification of our Federal tax laws and to support full funding of 

the IRS budget request. Making the tax system fairer, simpler and 

easier to administer has been a legislative priority of the ABA for 

nearly 30 years. We have been on the record urging simplification, 

a broad tax base and lower rates. In recent years we worked with 

our colleagues at the American Institute of Certified Public Accountants and the Tax Executives Institute to identify simplification priorities and realistic simplification initiatives on which Congress can act. It is important that Congress act in every tax bill 

and that it also join in the effort and actually simplify the tax law. 

A substantial effort at identifying complex provisions that can be 

simplified has already been undertaken by the staff of the Joint 

Committee on Taxation (JCT) in their comprehensive 2001 study 

on simplification. The effects of complexity, we believe, contributes 

substantially to taxpayer perceptions that our tax laws are not fair. 

While JCT’s 2001 study provides a substantial number of simplification alternatives, we believe that some like the Alternative 

Minimum Tax (AMT) require urgent attention. The dual system 

created by the AMT is one of the most serious complexity problems 

of the current Code. Each year more and more middle class Americans have to compute their taxes under two systems to determine 

which they must pay. The individual AMT is complex. It leads to 

frequent errors, and whatever policy justification it may have had 

long ago has long since disappeared. We believe that the individual 

and corporate AMT should be repealed. We recognize that replacement sources of revenue will likely have to be identified to accomplish this, but the time has come to eliminate the complexity and 

burden imposed by the AMT. Even if big ticket simplification such 

as AMT repeal cannot be accomplished immediately, there are a 

range of important but smaller simplification proposals, such as 

simplifying phase-out provisions that can be accomplished with appropriate legislative focus. Other useful simplification proposals, 

such as the elimination of provisions that have little current utility 

or current revenue impact, called ‘‘deadwood,’’ should be considered. 

If, in every session, Congress would set itself the task of enacting 

legislation to address some of these problems, Members could create momentum that, over time, could make a real difference in improving the Code, easing taxpayer burdens and making tax laws 

far more administrable. In addition, we have consistently urged 

that the IRS be provided with adequate resources to carry out its 

missions of taxpayer service and fair administration and enforcement of the Federal tax statutes. We continue to believe that adequate funding is vital and, therefore, urge you and your colleagues 

to work with the appropriators to fully fund the President’s budget 

request for the IRS and to consider the further requests made by 

the IRS Oversight Board. 

In closing, we understand that simplification is not easy. It frequently requires that either revenue be foregone or choices be 

made that some taxpayers benefit and some taxpayers suffer as a 

result of enacting simplification proposals, but simplification is 

worth the cost. It pays dividends in terms of easing the burden of 

compliance for all taxpayers, simplifying the task of taxpayer eduVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00072 Fmt 6633 Sfmt 6602 E:\HR\OC\24767.XXX 24767
69 

cation and law enforcement for the IRS, and improving taxpayer 

morale by making it easier to appreciate that the law operates fairly for all taxpayers. The tax section Members stand ready to work 

with you and your staff Members to achieve simplification. We 

commend you for what you have done, and it is vital that you continue and that you succeed. Thank you. 

[The prepared statement of Mr. Gideon follows:] 

Statement of Kenneth Gideon Chair, Tax Section, American Bar 

Association 

Thank you, Mr. Chairman. My name is Kenneth Gideon. I am Chair of the American Bar Association Section of Taxation. This testimony is presented on behalf of 

the American Bar Association. 

The American Bar Association appreciates the opportunity to appear before the 

Subcommittee on Oversight (the ‘‘Subcommittee’’) today to discuss the critical need 

for simplification of the federal tax laws. We know this is an issue the Subcommittee takes seriously, and we appreciate the efforts the Chairman and other 

Members of the Subcommittee have taken over the past few years to focus attention 

on the need for simplification—and to motivate Congress to enact important simplification legislation. 

ABA Section of Taxation 

The ABA is comprised of more than 400,000 members and its Section of Taxation 

has more than 18,000 tax lawyers who work in law firms, corporations and other 

business entities, government, nonprofit organizations, academia, accounting firms 

and other multidisciplinary organizations. 

Our members provide advice on every substantive and procedural area of the tax 

laws, and interact regularly with the Internal Revenue Service (the ‘‘Service’’), the 

Treasury Department, and other government agencies and offices responsible for administering and enforcing the tax laws. Many of our members have served in staff 

and executive-level positions at the Service, the Treasury Department, the Tax Division of the Department of Justice, and Congressional tax-writing committees. 

The Need for Simplification 

Making the tax system fairer, simpler and easier to administer is a legislative priority of the ABA. For nearly thirty years, the ABA and the Section of Taxation have 

been on record urging tax law simplification, a broad tax base and lower tax rates. 

In recent years, the Section of Taxation has worked with our colleagues at the 

AICPA Tax Division and the Tax Executives Institute to identify simplification priorities and realistic simplification initiatives on which Congress can act. The Tax 

Section and our colleagues in our cooperating organizations will continue this important work. But it is important that Congress—in every tax bill—also join in the effort and actually enact viable simplification proposals. In this regard, we want to 

acknowledge that the Congress did just that last year in enacting important simplification in the definition of a ‘‘child’’ in the Internal Revenue Code. This definition 

affects many provisions of the Code. Your efforts last year made life a little easier 

for millions of taxpayers, and we thank you for it. But much more needs to be done. 

We believe that complexity is at the root of many significant obstacles to efficient 

and effective administration of the tax laws. Indeed, the National Taxpayer Advocate and others have repeatedly demonstrated that complex tax law provisions make 

life harder for everyone. They cost taxpayers time in simply trying to understand 

what is required of them, and they make errors by taxpayers and the IRS a virtual 

certainty. Eliminating complexity where we can identify it and fix it must be a continuing priority of the Congress. 

We understand that simplification is not easy. It frequently requires that either 

revenue be foregone or choices made such that some taxpayers benefit and some 

taxpayers suffer as a result of enacting simplification proposals. But simplification 

is worth the cost. It pays dividends in terms of easing the burden of compliance for 

all taxpayers, simplifying the task of taxpayer education and law enforcement for 

the IRS, and improving taxpayer morale by making it easier to appreciate that the 

law operates fairly for all taxpayers. 

A substantial effort at identifying complex provisions that can be simplified has 

already been undertaken by the staff of the Joint Committee on Taxation in their 

comprehensive 2001 study on tax simplification. As the Joint Committee noted, complexity reduces taxpayers’ perceptions of fairness of the federal tax system by creating disparate treatment of similarly situated taxpayers. Although perceptions— 

70 

and their impact—are difficult to measure, the effects of complexity, we believe, contribute substantially to taxpayer perceptions that our tax laws are not fair. 

While the Joint Committee’s 2001 study provides a substantial number of simplification alternatives, we would like to emphasize a few requiring urgent attention. The dual tax system created by the Alternative Minimum Tax is one of the 

most serious complexity problems in the current Code. Each year, more and more 

middle-class Americans have to compute their taxes under two systems to determine 

which they must pay. The individual AMT is complex, leading to frequent errors. 

It results in indefensible policy outcomes such as a taxpayer prevailing in a lawsuit 

only to find that she owes the IRS more than she collected. In short, whatever policy 

justification may have existed for the individual AMT when it was enacted has long 

since disappeared. 

The American Bar Association believes that the individual AMT should be repealed. We recognize that replacement sources of revenue will likely have to be 

identified to accomplish this—but the time has come to eliminate the complexity 

and burden of having a growing number of middle-class Americans each year compute individual taxes under two different systems. 

The Tax Section also notes that the corporate alternative minimum tax creates 

complexity for corporate taxpayers that is in many ways akin to the problem for individuals. The Tax Section has written to Congressional leaders urging that the corporate AMT also be repealed. Again, we recognize that this may well require replacement revenues to be identified and substituted—but, as a matter of tax policy, 

making corporate taxpayers compute their taxes under two different systems creates 

major and wholly unnecessary complexity in our tax system. Our position on the 

corporate AMT represents the views of the Section of Taxation. This position has 

not been approved by the ABA House of Delegates or its Board of Governors and 

should, therefore, not be construed as representing the position of the American Bar 

Association. 

Even if big ticket simplification such as AMT repeal cannot be accomplished immediately, there are a range of important, but smaller scale, simplification proposals 

that can be adopted if appropriate legislative focus is applied. We called your attention last year to the need to address the complexity arising from the numerous provisions such as educational benefits, the earned income tax credit, and retirement 

savings provisions that are phased out as a taxpayer’s income increases. Because 

these provisions have typically not been coordinated, the phase out thresholds and 

ranges in such provisions vary widely—and often overlap. 

The result is not merely mind-numbing complexity but often disappointed taxpayer expectations as the complicated calculations make it difficult for taxpayers to 

plan whether they will be able to utilize tax benefits subject to phase-outs. For example, a teacher contributes to an individual retirement account only to discover 

that she earned $1500 too much last year to claim the deduction. Perhaps even 

more important are the disincentives created by combining phase-outs that occur 

when a taxpayer attempts to avail himself of benefits under several provisions. Such 

combination phase-outs can create marginal tax rates well in excess of what the section 1 tax table says that taxpayer’s marginal rate should be. Again, we applaud 

the Congress for the limited but important action it has taken to address the phaseout problem in the context of personal exemptions and the overall limitation on 

itemized deductions. But much more can and should be done—and the time has 

come to do it. 

Other useful simplification proposals such as elimination of provisions that have 

little current utility or current revenue impact, i.e., ‘‘deadwood,’’ should be considered. There has been progress: corporate taxpayers will be spared having to consider 

what might make a corporation ‘‘collapsible’’ because Congress repealed the provision. Congress could also review whether the accumulated earnings tax provisions 

are needed and whether one set of anti-deferral rules could replace the multiple sets 

of rules we have now. 

We strongly recommend, as we have in the past, that Congress seriously consider 

the many excellent simplification recommendations made by the Joint Committee in 

2001. If, in every session, Congress would set itself the task of enacting legislation 

to address some of these problems, members could create momentum that, over 

time, could make a real difference, by improving the Code, easing taxpayer burdens, 

and making the tax laws far more administrable. We urge you to call on us and 

our colleagues in the AICPA and TEI. There is a consensus for simplification, and 

we are ready to roll up our sleeves and to help you make tax simplification a reality. 

We and others recently testified before the IRS Oversight Board in support of 

Treasury and IRS efforts to achieve simplification through the regulatory process. 

Fundamental to this effort is the publication of prompt and clear administrative 

guidance dealing with new legislation as well as new developments in the way busiVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00074 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767
71 

ness is transacted. The Treasury and IRS deserve commendation for their efforts to 

publish guidance on the 2004 Act that was timely and answered important questions. But the guidance process is continuous, and its work is never done. Timely, 

clear guidance advances the goal of simplification by reducing ambiguity and uncertainty. We believe that a strong published guidance program constitutes one of the 

most important contributions the Treasury and IRS can make to simplification. 

We also want to record our continuing support for IRS efforts to improve the examination process by improving its targeting and currency. Important practical simplification can also be achieved administratively by the creation of clear, accessible 

procedures for the resolution of recurring taxpayer errors. There are several such 

programs now, but more could be implemented. It is worth noting, however, that 

consistently recurring errors over a period of years are probably a strong signal to 

the Congress that the Code provision giving rise to such errors could probably be 

improved. 

As always, Tax Section members stand ready to work with you and your staff 

members to achieve simplification. We commend you for what you have done, but 

it is vital that your efforts continue and that they succeed. 

f 

Chairman RAMSTAD. Thank you, Mr. Gideon. Mr. Purcell, 

please. 

STATEMENT OF THOMAS J. PURCELL, III, CHAIR, TAX EXECUTIVE COMMITTEE, AMERICAN INSTITUTE OF CERTIFIED 

PUBLIC ACCOUNTANTS 

Mr. PURCELL. Mr. Chairman and Members of the Subcommittee, it is my pleasure today to represent the American Institute of Certified Public Accountants before you, and thank you for 

the opportunity to testify. You have my written comments. I have 

four brief points that I want to make in my oral testimony: first, 

I want to address the filing season; second, I want to address the 

budget request; third, the simplification issues; and fourth, tax 

practitioner responsibility. 

With respect to the filing season, it has been our experience so 

far this year not to have any significant issues, and in terms of 

practitioners, we have not heard of issues coming up through the 

ranks to us. So, partly we think that is because of the fact that 

there have not been any significant new changes in the law, and 

so they have had a chance to implement over the past year. We do 

recognize, though, that there have been some isolated events with 

regard to the 1099 dividend form that we noted last year. We are 

still monitoring that, and we will be pleased to provide you with 

information as we get more information. Again, with the filing, we 

think it is very important to continue the effort toward e-filing. We 

support the IRS’ moves in that regard. However, we did express 

some concern. They just recently proposed mandatory e-filing for 

certain corporations and nonprofit organizations to take place for 

next filing season, and we have been on record as asking for a suspension of that for 1 year. It does not appear that they are going 

to offer that suspension, and our concern with that is, not so much 

that taxpayers will have problems being able to implement, although that will be a major imposition on taxpayers, but also that 

the IRS will be able to absorb that number of e-filed returns when 

it comes to the time of the filing crunch that will take place in September, when things get extended to the September filing deadline. 

So, that is a major concern that we have. 

72 

Second, on the budget, we do support the budget appropriation 

for the IRS. We think it is important to give the IRS the money 

it needs to do its job. Currently, for every dollar that you appropriate, they generate revenue of $180. That is a pretty good return 

on the investment. If, at the margin, the 4:1 number that has been 

suggested today is accurate, even that is a very good return on investment. My colleague and friend from Omaha, Warren Buffett, 

would probably jump at the chance to get that kind of return. So, 

I would encourage that if that is, in fact, the rate of return that 

is there. However, we do share the concern about the TACs that 

the IRS proposes to close, because they touch a major segment of 

the population that does not otherwise have a chance to interact 

with the IRS, or provide information that people need to do their 

tax return. Coupled with a decrease and suspension of the TeleFile 

Program, some people do not have Internet access, do not have access to volunteer taxpayer sites, and so they will be left without 

very many resources to provide information they need to do their 

tax return. So, we are concerned with that, as well as the Oversight Board’s concern mentioned earlier today. 

Third, with regard to simplification, it has been our pleasure to 

partner with the ABA and the TEI in the past, and we continue 

to support the sentiments that Mr. Gideon has mentioned today. 

Again, my experience of over 35 years of being involved in tax practice is that there is no quick fix to this. It did not get complex overnight. You are not going to fix the complexity overnight, so I really 

support Mr. Gideon’s proposal that you incrementally fix this. If 

you take it upon yourselves as a regular basis to try and implement simplification in the process and we are there to help you do 

that, to identify areas where we can make it a more simpler Code, 

then this will pay off in the long run in terms of helping taxpayers 

become more compliant. There has been some recent empirical evidence which indicates that once you get an equilibrium point of 

compliance and you start to cut back on the enforcement efforts, 

you stay at an equilibrium level of compliance for a while, but 

when those efforts become lower, the equilibrium shifts downward, 

and to shift it back up takes even more effort and a longer period 

of sustained enforcement activities. So, we would encourage the 

funding for enforcement, that it continue, and the simplification, 

which would help compliance. 

Finally, the last point—and I am almost out of time, but would 

be happy to answer questions in the later period—would be that 

we support taxpayer responsibility. As a profession, we are constantly challenging ourselves to have high ethical standards, and 

we are constantly looking to our Members and requiring that they 

comply with our high ethical standards. So, we support the efforts 

of the IRS in trying to implement that. However, we work in partnership with them rather than in opposition. So, we are trying to 

help make that work for all practitioners. Thank you for your time 

today, and I will answer questions at the end. 

[The prepared statement of Mr. Purcell follows:] 

Statement of Thomas J. Purcell, III, Chair, Tax Executive Committee, 

American Institute of Certified Public Accountants 

Mr. Chairman and members of the House Ways and Means Subcommittee on 

Oversight, the American Institute of Certified Public Accountants thanks you for the 

73 

opportunity to appear before you today. I am Tom Purcell, Chair of the AICPA Tax 

Executive Committee; and Associate Professor of Accounting and Professor of Law 

at Creighton University, Omaha, Nebraska. The AICPA is the national, professional 

organization of certified public accountants comprised of more than 340,000 members. Our members advise clients on federal, state, and international matters, and 

prepare income and other tax returns for millions of Americans. They provide services to individuals, not-for-profit organizations, small and medium-sized businesses, 

as well as America’s largest businesses. It is from this broad base of experience that 

we offer our comments today on the IRS budget and the 2005 tax filing season. 

The AICPA is happy to report that the 2005 filing season is progressing largely 

without any significant problems and American taxpayers and practitioners are generally pleased with the Service’s performance. However, we would like to bring an 

issue to your attention. Last year, brokerage firms and mutual funds had major difficulties determining which dividends constituted ‘‘qualified dividends’’ for purposes 

of the new 15 percent rate, a situation that resulted in large numbers of erroneous 

Forms 1099–DIV being sent to taxpayers. 

While the complaints from practitioners and taxpayers are substantially less than 

what occurred in 2004, we have received a number of reports from CPAs that some 

taxpayers still have not received their Forms 1099–DIV or that they are receiving 

a number of corrected Forms 1099–DIV. We will keep the Subcommittee on Oversight apprised should any significant developments occur with respect to Form 

1099–DIV. 

Our comments focus on a number of programs of critical importance to the Service, specifically: (1) the IRS budget for fiscal year 2006; (2) Business Systems Modernization; (3) achieving e-filing goals; (4) tax practitioners and professional responsibility; and (5) tax simplification. 

1. THE IRS BUDGET 

The AICPA urges Congress to support full funding of the Internal Revenue Service’s fiscal year 2006 budget. The AICPA has long advocated funding levels which 

would allow the IRS to efficiently and effectively administer the tax laws and collect 

taxes. Giving the Service the resources necessary to properly process tax returns 

and enforce the tax laws is vital to maintaining our voluntary compliance tax system. We expect the Service to identify responsible ways to allocate any additional 

resources it receives over prior year funding; and Congress will, through its oversight responsibilities, ensure that those resources are properly utilized. 

The Administration’s 2006 budget requests a $500 million increase in IRS funding, bringing the allocation to $10.7 billion. The AICPA supports the budget proposal’s objectives of principally focusing on increasing staffing and resources in the 

enforcement area. In light of Commissioner Mark Everson’s February 7, 2005 statement that increased enforcement funding would be coupled with ‘‘a modest amount 

of belt tightening in the area of taxpayer services,’’ we encourage Congress and the 

Administration to maintain an appropriate balance between enforcement and taxpayer service. The AICPA stands ready to work with the Service to ensure that the 

needs of American taxpayers are adequately addressed. 

Many AICPA members are tax practitioners. As such, we have seen first-hand the 

problems caused by an IRS that is not responsive to the taxpayers as customers. 

We have also witnessed the improvements initiated by Commissioner Everson, particularly with respect to enforcement. Any lack of attention to the Service’s funding 

needs will likely only serve to undercut the tax administration improvements Congress expects and the nation’s taxpayers deserve. 

2. BUSINESS SYSTEMS MODERNIZATION 

The fiscal year 2006 budget submission generally recommends funding the Service’s Business Systems Modernization (BSM) program at approximately the same 

level Congress approved for 2005. In acknowledging this relatively flat funding level 

in his February 7, 2005 statement, Commissioner Everson highlighted the successes 

that the IRS’s modernization program had over last year, including ‘‘the first update 

to the main IRS database in 40 years, the roll-out of new Internet services for taxpayers and practitioners and improved administration systems.’’ 

Although we appreciate and commend the IRS’s successes, the Service continues 

to experience difficulties with BSM. We strongly encourage Congress to stay the 

course in terms of supporting appropriate funding for the modernization effort. This 

is an issue that must remain a central feature of the Service’s strategic plan. 

The BSM goals are critical to future IRS success. BSM is designed to change the 

entire way the Service conducts business with taxpayers and stakeholders, by (1) 

implementing systems to improve IRS effectiveness in receiving, routing, and responding to millions of taxpayer telephone calls; (2) supplying Revenue Agents with 

74 

software capable of accurately assessing a taxpayer’s liability when faced with a 

complex tax matter or calculation; (3) establishing a modern, reliable data base; and 

(4) implementing a nationwide e-mail and voice-mail messaging system for Service 

employees. 

3. ACHIEVING E-FILING GOALS 

The AICPA supports the IRS’s long-range goals for electronic tax administration 

in general, and electronic filing in particular, and we applaud the success of e-filing 

for the 2004 and 2005 filing seasons. As of March 25, 2005, taxpayers have submitted 49 million e-filed returns, or a 7 percent increase over the same period last 

year. Approximately 60 million Americans utilized e-file options in 2004. 

We concur with Commissioner Everson’sJanuary 11, 2005, comments that ‘‘electronic filing can improve both [the IRS’s] service and enforcement missions.’’ Moreover, we appreciate the administrative benefits e-filing offers, including faster tax 

processing, reduced cycle time, quicker identification of emerging audit trends, and 

the potential for more current resolution of taxpayer uncertainties. 

The IRS has done a commendable job of introducing programs—such as the Free 

File and the Volunteer Income Tax Assistance (VITA) programs—to help low income 

taxpayers who often don’t own computers to file their own income tax returns. We 

are pleased to report that many CPAs routinely volunteer at VITA sites to help 

these taxpayers with their returns. Another critical component of helping low income taxpayers is to consider funding for low-income tax return preparation clinics, 

in a similar fashion to the funding low income (controversy) clinics receive under 

Internal Revenue Code section 7526. We believe this latter recommendation would 

encourage e-filing and improve compliance by low income taxpayers generally. 

The IRS has developed an excellent website for use by taxpayers through IRS.gov. 

We have received a number of suggestions for further improvements for the website, 

including a suggestion for the Service to upgrade the website’s search capacity. We 

have received a few reports that persons searching for a particular tax form have 

found it difficult to find the form because the current search engine at the IRS.gov 

home page searches the full IRS website—unless the person alternatively scrolls 

down and clicks on the Forms and Publications category. The Service should consider having two separate search engines at the agency’s home page—one for the 

website at large and one specifically for forms and publications. 

We support the IRS’s suite of web-based products for tax professionals and taxpayers called ‘‘e-services.’’ Through e-services, practitioners and taxpayers have access to a suite of online products, including the Preparer Tax Identification Number 

(PTIN) Application; the Online e-file Application; Electronic Account Resolution 

(EAR); submission of Form 2848, Power of Attorney and Declaration of Representative; and the Service’s Transcript Delivery System (TDS). 

When the program was launched in 2004, e-services was made available to tax 

professionals who e-filed 100 or more individual returns. The IRS announced last 

month that the e-Services suite will now be available to tax professionals who efile 5 or more individual and business income tax returns. We believe this expansion 

of e-services to more practitioners should have the added benefit of making the 

IRS’s interaction with tax professionals more efficient, thereby generating significant cost savings to the Service as well. 

E-File for Large Corporations and Exempt Organizations 

On January 11, 2005, the IRS issued temporary and proposed regulations (REG– 

130671–04) regarding mandatory requirements for electronically filing (1) income 

tax returns for large corporations; and (2) annual information returns for certain exempt organizations. Based on the Service’s difficult experience several years ago 

with the mandatory large partnership e-file program, the IRS should expect to encounter significant issues when implementing this new mandatory e-filing program 

for large corporations and exempt organizations. 

During the last several years, the IRS has generally done an outstanding job in 

terms of seeking input from key stakeholders on the details and development of tax 

administration programs, prior to formal announcement of the program’s start-up. 

Unfortunately, the IRS did not actively reach out and seek prior input from all key 

stakeholders in advance of the launch of the corporate component of the e-file 

project. When the Service announces a new initiative without vetting the proposed 

program with stakeholders in advance, the new program has often encountered significant problems, forcing the IRS to suspend the program in mid-course. 

Our members have concerns about the steps, if any, the IRS has taken to mitigate 

chances of a significant security breach. Corporate and exempt organization officers 

are likely to be very concerned about the risks associated with the implementation 

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75 

ers attempting to steal sensitive financial data or tax return information. Before engaging in electronic filing, practitioners and taxpayers should be made comfortable 

with the security features of the e-file program. 

We appreciate that the IRS intends to issue guidance as to how a taxpayer may 

request a hardship waiver. Nevertheless, because the corporate and exempt organization e-file program is so new, the IRS should maintain a posture of flexibility on 

the issue of filing waivers and not attempt to establish a stated policy of only granting waivers in exceptional cases. 

The regulations’ preamble states that: ‘‘A return filed electronically is deemed to 

be filed on the date of the electronic postmark.’’ While we strongly support the concept and use of an electronic postmark with the new e-file program, we are concerned that the electronic postmark feature could become unworkable or meaningless should the IRS experience ‘‘capacity’’ problems with the mandatory e-file system 

or should the system ‘‘crash.’’ 

At the IRS’s March 16, 2005 hearing on REG–130671–04, we stressed the need 

for further planning and collaboration between the Service and stakeholders; and 

accordingly, we recommended during the hearing that the IRS delay implementation of the regulations by at least one year to allow these issues to be resolved satisfactorily. During this transition period from a voluntary to mandatory e-file program, we look forward to working with the Service to develop, test, and ultimately 

implement an effective program for taxpayers. 

4. TAX PRACTITIONERS AND PROFESSIONAL RESPONSIBILITY 

Professional Ethics 

The AICPA applauds Commissioner Everson’s commitment to high standards for 

tax professionals, as exemplified by the final regulations revising Circular 230 (as 

released on December 8, 2004), and his efforts to upgrade the Office of Professional 

Responsibility. We view this commitment as one of the best opportunities for the 

Service to take advantage of working with external stakeholders. 

We have a longstanding track record of establishing high professional standards 

for our CPA members, including the AICPA Code of Professional Conduct and enforceable Statements on Standards for Tax Services. These standards provide meaningful guidance to CPA members in performing their professional responsibilities. 

The AICPA is actively communicating with our membership and state CPA societies regarding the new Circular 230 provisions governing ‘‘best practices’’ for tax 

advisors and tax shelter (‘‘covered’’) opinion standards. In this context, we are interested in the IRS providing further guidance to help clarify some of the inevitable 

questions that are arising as a result of these new provisions. We agree with the 

preamble of the final regulations, that: 

Tax advisors play a critical role in the Federal tax system, which is founded on 

the principles of compliance and voluntary self-assessment. The tax system is best 

served when the public has confidence in the honesty and integrity of the professionals providing tax advice. 

The AICPA has a clear position on abusive tax transactions—we unequivocally 

support their eradication. We have consistently supported protecting the public interest by prohibitions against the misuse of our tax system. We continue to be actively engaged in proposing and evaluating various legislative and regulatory measures designed to identify and prevent taxpayers from undertaking, and tax advisers 

from rendering advice on, transactions having no purpose other than the reduction 

of federal income taxes in an abusive manner. 

We also support initiatives focused on ethics training for Service employees. We 

believe that IRS examination and collections employees must be able to ‘‘step into 

the shoes’’ of tax professionals and vice versa. Government workers and professional 

tax practitioners must be able to understand each other in order to ensure greater 

strides in tax compliance. 

Registration of Federal Income Tax Return Preparers and Refund Anticipation Loans 

The AICPA strongly supports the implementation of high professional standards 

for tax practitioners, as discussed above. For this reason, we support the concept of 

the Senate Finance Committee’s proposal requiring the registration of all income 

tax preparers. This measure was included in the Tax Administration and Good Government Act (H.R. 1528); legislation that passed the full Senate in 2004 but which 

was not enacted into law. 

It is apparent that the legislation was introduced as a partial response to (1) the 

high error rate associated with Earned Income Tax Credit (EITC) claims and (2) 

consumer protection concerns with refund anticipation loans. The AICPA believes 

that direct approaches might better resolve these enforcement and consumer protecVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00079 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767
76 

tion issues and result in more tangible increases in compliance levels than a preparer registration process alone might yield. 

We recommend enacting legislation that directly attacks the fraud, negligence, 

and abuses committed by some preparers with respect to EITC claims. We also 

strongly urge Congress to enact legislation that further restricts or outright prohibits the use and availability of refund anticipation loans. 

Tax Return Outsourcing 

On the issue of tax return outsourcing,the AICPA has adopted two new and one 

revised ethics rulings that address a member’s responsibilities when outsourcing 

services to third-party service providers. In general, we define a third-party service 

provider as any entity that an AICPA member individually or collectively with his 

firm, does not control and any individual who is not employed by the CPA member 

or his firm. Accordingly, the new standards would apply to all independent contractors used by the firm. 

The new ethics ruling under Rule 102, Integrity and Objectivity of the AICPA 

Code of Professional Conduct requires that, prior to sharing confidential client information (such as a tax return) with a service provider, the AICPA member must inform the client, preferably in writing, that he or she may be using a third-party 

service provider when providing professional services to the client. The rule also emphasizes that members are not required to inform clients of third-party service providers used only to provide administrative support services such as record storage, 

software application hosting and authorized e-file tax transmittal services. In addition, the new ethics ruling under Rule 201, General Standards and Rule 202, Compliance With Standards, states the AICPA’s longstanding belief that members—who 

use third-party service providers in providing professional services to clients—remain responsible for the work performed by the service provider. 

Finally, Rule 301, Confidential Client Information, of the AICPA Code of Professional Conduct was updated to require an AICPA member to (1) enter into a contractual agreement with the third-party service provider to maintain the confidentiality of the client’s information and (2) be reasonably assured that the third-party 

service provider has appropriate procedures in place to prevent the unauthorized release of such information. 

5. TAX SIMPLIFICATION 

Enacting tax simplification measures is integral to the success of future filing seasons. As Commissioner Everson stated in his March 3, 2005 testimony before the 

Tax Reform Commission: 

Complexity in the tax code compromises both the [IRS’s] service and enforcement 

missions. That is because complexity obscures understanding. Those who seek to 

comply but cannot understand their tax obligations may make inadvertent errors or 

ultimately throw up their hands and say why bother. In the enforcement context, 

complexity in the code facilitates behaviors at variance with those intended by Congress. 

Simplification of the tax laws is a high priority of the AICPA. We have worked 

closely with the American Bar Association and the Tax Executives Institute to jointly identify specific proposals for simplification. Similarly, we have recently released 

a study entitled, ‘‘Understanding Social Security Reform: The Issues and Alternatives,’’ and we anticipate releasing a study on fundamental tax reform in the next 

few months. 

The IRS released a study in the last few weeks stating the tax gap is in excess 

of $312 billion. We believe tax simplification can play a significant role in helping 

to reduce the overall tax gap, as simplification would (1) result in fewer errors on 

tax returns and (2) reduce taxpayer susceptibility to the marketing of abusive tax 

shelters. 

Thank you for the opportunity to share these views with you. 

f 

Chairman RAMSTAD. Thank you, Mr. Purcell. Mr. Degen, 

please. 

STATEMENT OF FRANCIS X. DEGEN, PRESIDENT-ELECT, 

NATIONAL ASSOCIATION OF ENROLLED AGENTS 

Mr. DEGEN. Thank you, Mr. Chairman, Mr. Lewis, Mr. Pomeroy. I will speak today as NAEA, which represents 40,000 enrolled 

77 

agents throughout the United States. We appreciate our time here 

today. Enrolled agents are the only practitioners for whom the IRS 

directly attests competency and ethical behavior. As it has been 

noted, it has been a relatively smooth season, though I would like 

to concentrate my remarks on three areas to ensure equally successful seasons in the future. 

The first area is that Congress must provide adequate budgetary 

resources to the IRS, which includes both enforcement and service 

to the taxpayer, as well as to the practitioner community. Please 

do not let the pendulum swing wildly back and forth between funding customer service on one side and funding compliance programs 

on the other. The truth of the matter is that both of these strategic 

objectives, service and enforcement, must be adequately funded for 

the system to work correctly. The IRS interacts with more citizens 

than any other government agency. The Service’s budget allocation 

should reflect the agency’s essential position within the government. 

The second area, the recent push for tax reform provides a wonderful opportunity to create a simpler system. While the Presidential Commission’s search for the best theoretical tax system is 

interesting, I suggest that efforts to insert plain language into instructions, regulations, and the Code would go a long way toward 

creating a better, more understandable, and simpler system. The 

esteemed jurist, Learned Hand, once wrote, ‘‘The Tax Code is a fantastic labyrinth whose words merely dance before my eyes in a 

meaningless procession: cross-reference to cross-reference, exception upon exception.’’ Gentlemen, the Tax Code is undecipherable 

to the average taxpayer, and I submit if we can send a man to the 

moon, we should be able to write a Tax Code in plain language that 

a high school graduate can read and understand. 

The third area, we urge the Subcommittee to move expeditiously 

to regulate all people doing tax returns in order to ensure the integrity of the tax administration system. If I get my hair cut, I go 

to a licensed barber. If my wife goes to get her nails done, she goes 

to a licensed manicurist. If a taxpayer goes to someone for tax 

preparation, shouldn’t that individual also be licensed? NAEA believes the answer should be yes, and we encourage Congress to 

enact legislation. 

The good news is that there is an existing structure already in 

place. The IRS has established an Office of Professional Responsibility. This office regulates what I will call Circular 230 practitioners: enrolled agents, CPAs, and attorneys. Legislative changes 

should focus on expanding and promoting this current regulatory 

regime rather than creating an overlapping and possibly confusing 

new system. The legislation should direct the U.S. Department of 

Treasury to enroll individuals under a modified Circular 230. 

Additionally, the legislation must ensure adequate funding for 

the Office of Professional Responsibility by dedicating all fees and 

penalties for practitioners for its operations. Simply mandating the 

regulation of potentially hundreds of thousands of new enrollees 

without beefed-up enforcement would merely push the problem preparers underground. The professionalism of the practitioner completing the return is among the most important and the lowest cost 

of the factors in increasing compliance. An ounce of prevention is 

78 

worth a pound of cure. An incorrect return dramatically shifts its 

cost over to the IRS. 

Finally, the IRS needs to be given the resources to promote all 

Circular 230 practitioners with the public in this new system. Most 

taxpayers would be astounded to find out, while their barber or 

their manicurist is licensed, that their tax preparer may not be and 

usually is not. Comparing the downside of a bad haircut to an incorrect tax return, I would hazard to say that the public would support legislation requiring all preparers to demonstrate ethical behavior and basic competency. As Members of Congress, you have 

dedicated your professional lives to public service. We ask you to 

carry this mission out and ensure that the taxpayers of this country are protected. In summary, Mr. Chairman, I thank you once 

again for allowing NAEA to speak today. We ask Congress to provide the correct funding for the IRS, to simplify the tax system and 

starting working on the plain language, and to expand and enhance the current system of regulating preparers. Thank you, sir. 

[The prepared statement of Mr. Degen follows:] 

Statement of Frank Degen President-Elect, National Association of 

Enrolled Agents 

Thank you, Mr. Chairman, Ranking Member Pomeroy, and members of the Oversight Subcommittee for asking the National Association of Enrolled Agents (NAEA) 

to testify before you today. As you know, NAEA is the premier organization representing the interests of the 40,000 enrolled agents (EAs) across the country. EAs 

are the only practitioners for whom the IRS directly attests competency and ethical 

behavior. Over the years, NAEA has worked tirelessly to increase the professionalism of its members and the integrity of the tax administration system as a 

whole. 

The 2005 filing season has progressed relatively smoothly this year. EAs have reported precious few problems. Those reported are fairly insignificant and range from 

the inability to e-file some complex returns (i.e., cases in which more than 50% of 

pension or wages are withheld for taxes) to a printing problem with thousands of 

Forms 1120H (Income Tax Return for Homeowners Associations), which, as printed, 

would have credited tax to another homeowners association. On the flip side, EAs 

are by and large pleased with the quick e-file cycle time and the new Schedules K– 

1 (notwithstanding any difficulties with businesses that prepare them incorrectly). 

Using the success of the 2005 filing season as a springboard, we would like to 

take this opportunity to emphasize three areas for the subcommittee to focus its attention on in the coming months and years to ensure future filing seasons are equally successful. 

First, we urge the subcommittee to dedicate its substantial prestige to advocating 

your fellow Members of Congress for adequate resources at the IRS, which includes 

both enforcement and service—and service includes service to the taxpayer as well 

as to the practitioner community. Second, please continue to act as the conscience 

of the tax-writing committee when it comes to the creation of tax laws that are both 

administrable by the agency and understandable to the public. Finally, we urge the 

subcommittee to move expeditiously to pass legislation to require all people doing 

tax returns to demonstrate competency and ethical standards under the existing 

regulatory framework. 

We cannot urge too strongly that the subcommittee—in its capacity as the overseer of the IRS and its budget—continues to advocate that the IRS budget is adequate for the agency to meet its strategic goals. An adequate budget includes funding to meet reasonable goals for both compliance and service, as well as funding for 

the technology investments the agency needs to support its strategic objectives in 

those two areas. NAEA urges you to act as a bulwark against the tendency of policymakers to pendulum wildly back and forth between funding taxpayer/practitioner 

service on one side and funding compliance programs on the other. As to service, 

we need to stress that IRS is uniquely positioned to provide assistance and education to taxpayers as well as to practitioners. The truth of the matter is that both 

of these strategic objectives—service and enforcement—must be adequately funded 

for the system to work correctly. Particularly in light of IRS’ recent tax gap estimate, which pegs the gap between $312 and $353 billion annually, we hope that 

79 

members of the committee can work with the appropriators to ensure sufficient 

funding. Let’s not forget that the IRS collects nearly all the government’s revenues 

and interacts with more citizens than any other government agency. As a result, 

we believe the Service’s budget allocation should reflect the agency’s essential position within the government. 

At a micro level, Congress should continue to support (and urge the agency to 

support) a number of programs that at first blush appear to be strictly taxpayer 

service oriented, but upon closer inspection have real returns for compliance. The 

public liaison program is one such function. Immediately after the passage of the 

IRS Restructuring and Reform Act, the IRS instituted a significant field-base public 

liaison effort with practitioners around the country. These forums made a real contribution to improving efficiency in helping taxpayers comply with the tax laws. Recently, our members have seen these meetings curtailed drastically or eliminated 

completely. We have every reason to believe this shortsighted movement will serve 

only to increase downstream costs for the agency as it attempts to respond—after 

the fact—to problems that could have been resolved with better communications upfront at a lower cost. 

The e-services program is another example of front-loaded investment that will 

produce untold millions of dollars of return. By allowing practitioners to go online 

to resolve a large number of taxpayer problems, it has freed up thousands of staff 

hours at the agency and saved taxpayers millions of dollars worth of practitioner 

costs. We applaud the recent IRS announcement expanding the program to preparers e-filing five or more returns. At the same time, we sincerely hope Congress 

and the IRS will continue to expand this program with new technology investments 

and by making it accessible to all Circular 230 practitioners, without respect to the 

number of returns e-filed. We note that some Circular 230 practitioners provide representation services exclusively and comprise, in our opinion, one of the populations 

that could benefit most from Electronic Account Resolution. While expanding electronic filing continues to be an important priority, it should not happen in spite of 

good tax administration. Our members have noticed a marked increase in advertising that seems to suggest that being an ERO indicates some level of competency 

in the preparation of returns. This is a serious problem for the system. 

Tying e-services back to the budget, we are seriously concerned to hear that due 

to cuts for business systems modernization, the IRS has cancelled all scheduled improvements and additional rollouts of the e-services program. While we acknowledge 

the current budget constraints, we believe canceling the technology expansions of 

the program is a quintessential example of being penny wise and pound foolish. 

In the area of simplification, the President’s Advisory Panel on Tax Reform, the 

Department of Treasury, IRS, and Congress are well advised to heed Commissioner 

Everson’s trenchant comments when he unveiled the new tax gap estimates. He 

said, ‘‘Complexity obscures understanding.’’ Everson went on to say, ‘‘Those who try 

to follow the law but cannot understand their tax obligations may make inadvertent 

errors or in the end simply throw up their hands. . . .’’ 

The recent push for tax reform provides a wonderful opportunity to create a simpler system. We hope policymakers remember that for low and middle income people—who comprise the vast majority of all taxpayers—the measure of simplification 

is straightforward: How long does it take or how expensive is it to do my return 

every year? We hope that in the search for a new system, practical simplification 

proposals are not lost in the search for more academic or theoretical solutions. Additionally, and I cannot stress this enough, do not add to the IRS’ woes by creating 

a whole new tax system for it to administer without repealing an old tax regime. 

For instance, if policymakers are going to institute a VAT or new consumption tax, 

they need to eliminate one of the existing systems such as the corporate tax or payroll tax. At the risk of sounding like Chicken Little, such a move could be the last 

straw for the tax administrator. 

During the last Congress, key members of the tax-writing committees considered 

whether to regulate all return preparers. NAEA has worked closely with Senators 

Grassley and Baucus as well as Congressman Portman and former Congressman 

Houghton to ensure they do not reinvent the wheel. We believe strongly that if Congress is going to expand oversight of all preparers, its legislative changes should 

focus on expanding and promoting the current regulatory regime rather than creating an overlapping and possibly confusing new system. We feel strongly that to 

avoid confusion and possible opposition from state accountancy boards, the legislation should direct the Department of Treasury to enroll individuals under a modified 

Circular 230. Additionally, the legislation must ensure adequate funding to IRS’ Office of Professional Responsibility by dedicating all fees and penalties for practitioners to its operation. Simply passing the regulation of potentially hundreds of 

80 

thousands of new enrollees without beefed up enforcement will merely push the 

problem preparers underground. 

Additionally, the IRS needs encouragement from policymakers at Treasury and 

Congress to do everything within its means to promote Circular 230 practitioners 

to taxpayers and to support and enhance this credential. The IRS is making a major 

shift toward bolstering compliance. What we can learn from the current system is 

that the professionalism of the practitioner doing the return in the end is one of 

the most important factors in increasing compliance. The old adage, ‘‘An ounce of 

prevention is worth a pound of cure,’’ is certainly apt here. If the information on 

the return is purposely incorrect, then the cost of compliance shifts dramatically 

over to the agency. Let’s face it, the IRS has gone through the time and money to 

create a regime of certifying competency and integrity; it needs strenuously to support those practitioners that equally have gone through the effort and cost to enroll 

and stay current under this program. 

In closing, Mr. Chairman and members of the subcommittee, the National Association of Enrolled Agents and its members stand prepared to work with you and 

the IRS in ensuring a strong tax administration system and improving voluntary 

compliance. It is up to Congress, however, to do its part to provide the agency with 

the proper level of funding; simplify the tax system; and to encourage the use of 

Circular 230 practitioners, expanding and enhancing the current system of regulating practitioners to include all people paid to complete a tax return. 

Thank you and I stand ready to answer any questions you may have. 

The National Association of Enrolled Agents (NAEA) is the professional society representing enrolled agents (EAs), which number some 40,000 nationwide. Its 

11,000 members are licensed by the U.S. Department of the Treasury to represent 

taxpayers before all administrative levels of the IRS, including examination, collection, and appeals functions. 

While the enrolled agent license was created in 1884 and has a long and storied 

past, today’s EAs are the only tax professionals tested by IRS on their knowledge 

of tax law and regulations. EAs provide tax preparation, representation, tax planning, and other financial services to millions of individual and business taxpayers. 

EAs adhere to a code of ethics and professional conduct and are required by IRS 

to take Continuing Professional Education. Like attorneys and certified public accountants, enrolled agents are governed by Treasury Circular 230 in their practice 

before the IRS. 

Since its founding in 1972, NAEA has been the enrolled agents’ primary advocate 

before Congress and the IRS. NAEA has affiliates and chapters in 42 states. For 

additional information about NAEA, please go to our website at www.naea.org. 

f 

Chairman RAMSTAD. Thank you, Mr. Degen. Mr. Stevenson, 

please. 

STATEMENT OF WILLIAM STEVENSON, ENROLLED AGENT, 

AND SPOKESPERSON, NATIONAL COUNCIL FOR TAXPAYER 

ADVOCACY 

Mr. STEVENSON. My name is Bill Stevenson. I, too, am an enrolled agent. An interesting thing about enrolled agents is that we 

are creatures of Congress. We were created by Congress as a group 

authorized to represent taxpayers before the IRS. Today marks my 

10th anniversary of providing testimony for this Committee, and I 

kind of miss Congressman Portman down at the other end, who 

was there at the time. Ten years ago, 2 1/2 years prior to the famous Senate hearings, I pleaded with this organization that I am 

looking at now to provide more oversight to the IRS, and here I am 

10 years later asking the same thing, and this is why. When we 

were working with the Commission to Restructure the IRS, the 

major issue that we faced in the beginning is: What is the mission 

of the IRS? Is it an enforcement mission? We are talking primary 

81 

mission, because an organization can only have one primary mission. Is it enforcement? Is it service? 

The Commissioners and the staff of the restructuring commission 

came to the conclusion that what this Nation needed was an agency with a service mission. That was one of the most important decisions that was made because if you make that decision, then everything that follows, every decision you make after that, you ask your 

question: Is this following our primary mission? If the Commission 

had said we should have an enforcement agency, the restructuring 

would have been entirely different. The most important moment of 

my life, because I am the one who recommended this, is when Congress adopted that mission and made it statutory. I thought my 

work was done in trying to help provide feedback and insight into 

how to improve the IRS, because a primary mission of service layered on top of people of good will would give us what we wanted 

as far as raising the quality of life of Americans everywhere and 

not having an abusive type of agency in our lives. 

Let me give you examples, though, that really trouble me, and 

these examples show that the adoption of the primary mission may 

not be service. An organization that emphasized service would emphasize liaison with the people in the community. Practitioners 

don’t—we don’t just do 1040 tax returns. We are the ones who 

stand in between most of the taxpayers and the IRS. We are on the 

frontlines. The money that comes into the IRS is not collected. It 

is received. It is a process that is in place where, through W-2 

withholding, most of the money goes in automatically. Who prepares these taxes? It is the practitioner community; and when 

there is a problem, who has to resolve these problems? It is the 

Members of the practitioner community. 

Tax processing has really become great. The IRS has done a fabulous job. It is the problems that have to get resolved afterward 

where things start falling apart, because the agency is not seeing 

itself as a service agency. Another example is, you gave us a Taxpayer Advocate service to help us—not only the taxpayers but the 

practitioner community—resolve problems because these people 

were more sensitive and knew the shortcuts. The IRS has taken 

them away from us. They are cutting their budget. Another example is the IRS Oversight Board. Now, I am talking from an outside 

practitioner. I am not on the inside. I don’t owe anything to anybody. I know a little bit about administration. I have a doctorate 

in that field, and I am here to tell you, from my perspective and 

those of many of my colleagues, the IRS is making it very difficult 

for the Oversight Board to provide oversight. Another example, 

education and training was viewed as a major component of restructuring the IRS. You even had it in your Committee report and 

insisted that the IRS deploy assets to fund education and training 

of its employees. It is not an acceptable program. They don’t deploy 

enough assets to it. Its employees are not trained. When we try to 

deal with them to resolve problems, they cannot resolve them because they do not know how, and they are not even empowered to 

do it, even if some of them did know how. Another example is the 

offer in compromise program. You told the IRS to liberalize it, and 

yet most of us have taken it off the table. We cannot use it because 

the IRS has made it more restrictive. We have well-meaning people 

82 

in the IRS trying to do a job. We respect them, but they have not 

followed congressional intent and the law in administering the 

service through the eyes of a service mission. 

[The prepared statement of Mr. Stevenson follows:] 

Statement of William Stevenson Enrolled Agent and Spokesperson, 

National Council for Taxpayer Advocacy, New York, New York 

Considering any balance between the concepts of service and enforcement presumes that both concepts have equal weight. It is axiomatic to professionals of administrative theory that an organization can have only one primary mission. The 

United States Supreme Court realized in the 1950’s that the concept of ‘separate 

but equal’ was flawed. The United States Congress in the IRS Restructuring and 

Reform Act of 1998 (RRA ’98) also agreed with the notion that there could only be 

one primary mission and ordered the IRS to revise its mission statement to place 

the emphasis on serving the public and meeting taxpayers’ needs. 

Congress’ recognition of the need to have a service-oriented IRS was significant. 

All of the recommendations made by the Commission to Restructure the IRS that 

became the blueprint for RRA’ 98 describes an IRS that is to be built on a foundation of service. Legislating adoption of a primary mission of enforcement would have 

yielded entirely different results in both the Commission’s report and the legislation 

that followed. 

Service should be the foundation of our voluntary tax system. In a democracy we 

will not achieve broad based tax compliance without having service as the primary 

mission of the tax administration agency. The belief that the Internal Revenue Service is a tax collection agency is a myth. The Internal Revenue Service is a tax receiving agency. The major portion of the tax revenues of our nation is collected by employers who are required by law to withhold taxes from the wages of their employees. Tax practitioners of all kinds: Enrolled Agents, Certified Public Accountants, 

Attorneys, commercial tax preparers, payroll tax services and others facilitate the 

process. Practitioners prepare over 60% of all individual tax returns, most employment tax returns and a wide variety of business related returns. In doing so, these 

professionals determine the additional taxes that are paid by taxpayers through 

their calculations of estimated tax payments and balance due tax returns. 

The practitioner community and taxpayers need and deserve a service oriented Internal Revenue Service to nourish and foster our voluntary tax system. Most taxpayers, with the help of practitioners early or timely file tax returns indicating overpaid taxes. These citizens deserve the service of rapid processing and prompt refund 

of their money. Also deserving service are the several million employers who, with 

the help of practitioners, have actually collected the tax from their employees. These 

non paid ‘tax collectors’ deserve service in the form of easy deposit systems; accurate 

accounting for receipts; trouble-free information return procedures and straight forward, post-filing resolution of problems. Practitioners, who are the real compliance 

experts, play a major role in the process of administering our tax laws. They deserve 

the opportunity for liaison with IRS management so that they may understand the 

difficulties IRS employees face when they attempt to service the needs of practitioners’ clients. Liaison activities are more beneficial to the IRS than they are to 

the practitioner community. Yet, opportunities for liaison between the IRS and practitioners are declining. Longstanding and regular forums, panels and mutual education opportunities have been reduced by IRS management officials at national and 

local levels. For example, in 2004 the IRS Nationwide Tax Forums attracted an audience of over 17,000 practitioners who serve almost ten million taxpayers. The Forums provided a conduit of information helpful to practitioners who prepare tax returns and helpful to those who are eligible to represent their clients before the IRS. 

In addition, the IRS Forums provided feedback to the IRS useful in improving the 

effectiveness of its programs and procedures. Additionally, the IRS Forums provided 

‘case resolution’ services where with help from the Taxpayer Advocate Service, practitioners were given the opportunity to bring difficult, yet to be resolved taxpayer 

problem cases for resolution assistance. The Taxpayer Advocate Service employees 

were able to resolve 90% of these cases on site. The Forums are scheduled for this 

year. However, due to budget cuts in service, practitioners understand that the Forums are not being supported by IRS management to the same degree. It is even 

rumored that the Service has determined that case resolution is too expensive to 

devote the resources of the IRS Taxpayer Advocate Service even though its employees remain dedicated to the program. Practitioners have been advised that many of 

the supporting divisions such as Criminal Investigation and Appeals may not be 

sending staff to interact with practitioners. Accordingly, compliance and enforceVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00086 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767
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ment initiatives will not be shared by IRS management with practitioners and the 

opportunity to receive feedback information which might reveal potential problems 

in IRS strategy will be lost. An organization with a primary mission of Service 

would be making different decisions about how it interacts with the professional 

community. 

Another example of a different decision that should have been made is the IRS 

decision to deny access to the electronic account resolution (EAR) services to the 

only practitioners that it tests and licenses—the Enrolled Agent. The Services refuses access to these account resolution services unless applicants file five electronic 

returns a year. Many Enrolled Agents do not process tax returns, but specialize on 

representing taxpayers before various divisions of the IRS. These are the professionals who need the EAR system more than any other. The IRS has lost an opportunity to provide rapid access for account resolution to the most capable account resolvers. 

Everyone understands that noncompliant taxpayers must face enforcement. The 

IRS, however, doesn’t seem to distinguish among those who are temporarily unable 

to comply from those who intentionally fail to comply. Those who are trying to comply should be treated sympathetically and realistically in light of their current inabilities. Those who won’t comply should get the service of prompt enforcement 

measures. In RRA ’98 Congress called for a new mission statement that emphasized service 

as the primary mission for the Internal Revenue Service. Yet, the IRS’ 2005–2009 

Strategic Plan identifies service and enforcement as equal priorities. Their strategic 

plan is in conflict with the principles of administration and possibly violates the law 

and intent of Congress. In fact, it is our understanding that the Service is making 

significant cuts in the budgetary areas that they don’t consider enforcement. 

Congress saw the need to provide taxpayers with a powerful tool to cut through 

the red tape inertia that is endemic to bureaucracies. They gave taxpayers a serviceminded IRS including a Taxpayer Advocate Service sympathetic to hardships and 

taxpayer rights. From a practitioner’s perspective, it appears that IRS has management eliminated service as first priority and marginalized the vital functions of the 

Taxpayer Advocate Service by slashing their budget and leaving their personnel unempowered and demoralized. Most taxpayers will never know what a friend they 

may have had in the Taxpayer Advocate Service, a would be friend that is being 

returned from whence it came. At this crucial time, the National Taxpayer Advocate’s voice inside the IRS must be heeded. Practitioners have high hopes that Congress will respond positively and constructively to the recommendations within her 

annual report and restore the Taxpayer Advocate Service to the original intent of 

Congress. 

As part of its attempt to rebuild public confidence in the tax system, Congress 

created the IRS Oversight Board. The practitioner community considers the Board 

to be acting as its voice in the process of improvement of tax administration. The 

Board is generally responsible for overseeing the IRS in its administration and management of the internal revenue laws. Our country needs an effective Oversight 

Board. It appears, however, that the IRS has made oversight difficult for the Oversight Board. The Service, contrary to Congressional intent, does not seem to want 

the Board to make a real difference any more than it wants the Taxpayer Advocate 

Service to be effective. 

Congress in RRA ’98 directed the IRS to implement an employee training program 

to ensure adequate service training because the need was apparent to change the 

internal structure of the IRS from one that is enforcement driven to one that is 

more responsive to taxpayer service needs. While the IRS believes it has followed 

the letter of the law by providing Congress with such a plan, everyday observations 

reveal that the culture of the agency remains enforcement minded. The IRS’ in-service educational programs in most areas are relatively ineffective, inconsequential 

and unacceptable by even the minimum of standards. Evidence of this is manifest 

by IRS employees involved in telephone and face to face conferences who are unaware of the law and regulations they are paid to administer. 

An organization dedicated to a mission of service would have a robust training 

and education program at every level. Problem solving by under trained staff is preventing both compliant and out-of-compliance taxpayers from efficiently resolving 

their issues efficiently. A service mission requires that IRS staff at all levels be involved in a continuous training program to bolster their abilities to perform their 

functions with a perspective of the real world built on a foundation of technical 

knowledge. The Committee Report from RRA ’98 stated: ‘‘The bill requires the IRS 

to place a high priority on employee training and to adequately fund employee training programs. . . .’’ Also, TIGTA reported on September 29, 2003, that ‘‘. . . the 

training data provided to the IRS Oversight Board by the IRS were not adequate 

84 

for the Board to perform an assessment or to develop a baseline of training in the 

IRS.’’ The apparent lack of commitment to education and training is revealed by the 

lack of resources deployed to fund and support a major effort. Even when the IRS 

adopts service as its primary mission, it will fall short in the delivery due to the 

lack of appropriate funding for its education and training programs. 

Congress legislated an Offer in Compromise (OIC) program years ago and recently 

directed the IRS to make it available to more taxpayers by liberalizing it. In response, the IRS created an obtuse and unrealistic program. It is so flawed that 

many practitioners have removed OIC’s from the box of tools they use to try obtain 

relief for taxpayer’s problems. The OIC program is more restrictive now than it was 

prior to RRA ’98. With a new bankruptcy law on the horizon, practitioners will have 

lost their last outpost of financial mercy on the route to repairing taxpayers’ financial lives. 

In conclusion, There can be no balance between service and enforcement. Service 

is the foundation of enforcement in a voluntary tax system and it must have the 

greatest weight. If service is not the IRS’ primary mission, perhaps the name Internal Revenue Service should be replaced with Internal Revenue Enforcement Agency. 

William Stevenson is president of National Tax Consultants, Inc. (a tax preparation and taxpayer representation firm for individuals and businesses). Bill is an Enrolled Agent, a Certified Financial Planner, and earned a Doctorate in Education 

from Temple University in administration. In addition, he is admitted to practice 

before the United States Tax Court as a non-attorney. He serves on both IRS ‘‘Area’’ 

and New York State Taxation and Finance liaison committees. He is the only Enrolled Agent to serve on the New York State Tax Tribunal’s Advisory Committee 

on Practices and Procedures. Bill is a member of the National Council for Taxpayer 

Advocacy, the National Society of Accountants, the National Association of Enrolled 

Agents, and is a Fellow of the National Tax Practice Institute. He has served a twoyear term on the Commissioner’s Advisory Group, worked closely with the Commission to Restructure the IRS, and meets periodically with IRS and Congressional officials in Washington to recommend changes in procedure as well as to provide the 

staff with feed-back from the practitioner community. Dr. Stevenson has testified 

on numerous occasions before both Houses of Congress, the IRS Oversight Board, 

the Government Accountability Office and the Treasury Inspector General for Tax 

Administration. In 2002, Bill was named ‘‘Accountant of the Year’’ by the National 

Society of Accountants. He is also the spokesperson for the National Council for 

Taxpayer Advocacy. 

f 

Chairman RAMSTAD. Well, thank you, Mr. Stevenson. Finally, 

Mr. Smith, please. 

STATEMENT OF BRAD SMITH, SENIOR VICE PRESIDENT, 

CONSUMER TAX GROUP, INTUIT CORPORATION 

Mr. SMITH. Thank you, Mr. Chairman, Mr. Lewis, Mr. Pomeroy. 

I am appreciative of the opportunity to present Intuit’s views on 

this year’s tax filing season, as well as other issues that we feel 

face our tax system as a whole. Our mission at Intuit is to simplify 

complex financial functions and activities for consumers, for small 

businesses, and for their most trusted advisor, the tax practitioner. 

Our ultimate goal is to actually allow them to take control of their 

financial lives. We are a 21-year-old company. We have industryleading products that you may recognize: Quicken, personal finance 

software; QuickBooks for small businesses; ProSeries and Lacerte 

for the tax practitioner; and also the Nation’s industry-leading consumer tax product, TurboTax. 

First, I would like to begin with a few comments on e-filing. As 

was mentioned earlier, this year the United States will cross that 

important threshold of having over half of all of our individual Federal income tax returns filed electronically. That is a major mileVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00088 Fmt 6633 Sfmt 6602 E:\HR\OC\24767.XXX 24767
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stone. We want to congratulate the Commissioner; the new IRS Director of the Electronic Tax Administration, Bert DuMars; as well 

as recognize the former Director of Electronic Tax Administration, 

Terry Lutes, for having laid the foundation for this tremendous 

success. It is important to note that other countries’ tax systems 

have not achieved nearly as much in such a short period of time. 

For example, Great Britain chose to build and deploy a government-provided tax software system rather than unleashing the private sector in the competitive consumer marketplace. As a result, 

today only 3 percent of British taxpayers are willing to use that 

government system. Now, this is a sharp contrast between our 

American citizen-centric solution and the Great Britain government-centric solution. 

Now, despite our success to date, our focus must be on affirmative efforts to continue to identify and remove the remaining barriers to electronic filing. These barriers range from having to remember your adjusted gross income—for many consumers, that 

term in and of itself is Greek. In addition to that, the fact that you 

have to remember last year’s adjusted gross income to file this 

year’s return is definitely a challenge. In addition to that, you have 

to do other things, like pick a one-time personal identification code, 

or wait 48 hours to actually know whether or not it was electronically received by the IRS. These are just some of the examples that 

represent that we still have opportunities in front of us. The good 

news is, the software in the e-filing industry has all the capabilities 

needed to make e-filing work and go beyond the 50-percent threshold we have reached today and continue to push forward. Once 

again, the key enabler must be a renewed government commitment 

to both modernization as well as the speedy removal of these barriers. 

I would like to briefly comment on the Free File Alliance that 

has come up several times in the afternoon. The former IRS Commissioner Charles Rossotti testified before Congress in 2000 and 

said, and I quote, ‘‘I don’t think there is any gray area about what 

the IRS role is in terms of providing services, because I don’t believe we should provide tax preparation services nor tax software.’’ 

We clearly agree. Intuit is proud to have originated a national program of voluntary deductions of online tax preparation and e-filing 

services. We called this program the Intuit Tax Freedom Project, 

and we launched this program in 1998, becoming the model for 

what is now today the Nation’s Free File Alliance Initiative. This 

initiative was created in 1998 and, once again, formed with private 

and public partnership in 2002 to provide electronic tax preparation and e-filing to lower-income, working poor, disadvantaged, and 

underserved populations. I am proud to say in the 3 years since its 

inception, the program has supplied these services to literally millions of people across the Nation at no cost to the user nor the public treasury. 

Unfortunately, something has happened along the way. The Free 

File program has drifted far from its original purpose. Rather than 

focusing on assisting the underserved with no obligation to purchase any additional products or service, it has now become a universal free service program operating off a national marketing and 

sales platform hosted by the IRS and heavily dependent on ancilVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00089 Fmt 6633 Sfmt 6602 E:\HR\OC\24767.XXX 24767
86 

lary sales of additional products. Now, after a couple of years of 

this trend developing unfettered, others, including Intuit, have 

joined the fray, but we want to be clear. We have concerns—concerns about consumer protection in this environment, concerns 

about the government serving as either a market maker for commercial business in this country or permitting public assets and endorsement to be used for commercial marketing and sales. The 

good news is the Free File Alliance is up for renewal and renegotiation, and this is an opportunity for us to get the program refocused on servicing the lower-income and the underserved taxpayers. 

So, let me conclude by saying it has always been said that voting 

and paying your fair share of taxes are two of the most basic obligations of citizenship. Whatever tax policies are eventually developed over the years in this country, it will be important to retain 

the citizen-centric character of voluntary compliance that is uniquely American, preserving the personal participation of our people in 

these most basic processes and obligations of individual citizenship. 

It helps keep government on its toes, and it helps keep our citizens 

in charge. Thank you. 

[The prepared statement of Mr. Smith follows:] 

Statement of Brad Smith Senior Vice President, Consumer Tax Group, 

Intuit Corporation 

Chairman Ramstad and Members of the Subcommittee, I am Brad Smith, Senior 

Vice President of Intuit, responsible for our Consumer Tax Group. Thank you for 

the opportunity to present Intuit’s views on this year’s tax filing season, the IRS 

budget, and other issues facing our tax system. 

Our mission at Intuit is to make complex financial functions and activities easy 

for consumers, small businesses, and accountants helping them to simplify and take 

control of their financial lives and better manage the financial lives of their clients. 

A 21-year-old company, Intuit’s market-leading products include Quicken, 

QuickBooks, the ProSeries and Lacerte suites of tax and accounting software for accountants, and, of course, the leading consumer tax software, TurboTax. 

The private sector invention of tax software has reduced much of the pain and 

complexity of tax compliance for average Americans, while bringing accurate preparation and speedy filing of returns within the economic reach of all. In addition, Intuit is proud to have originated a national program of voluntary donation of free 

online tax preparation and e-filing services for lower income, disadvantaged and underserved taxpayers across the country, as well as for our active duty military. The 

Intuit Tax Freedom Project, begun in 1998, became the model for today’s industrywide Free File Alliance initiative, a national public-private partnership between the 

private sector and the IRS that was created in 2002 and has donated millions of 

tax returns to the needy. And likewise, a Free File Alliance has now been created 

in almost 20 States, once again providing free services for those who need them 

most, at no cost to either the government or the individual. 

Let me begin my testimony today by addressing the current income tax filing season. 

Filing Season 2005 Success 

The 2005 filing season has gone very smoothly with few exceptions. The working 

relationship between the IRS and the tax software industry continues to improve 

each year. As the IRS now describes it, there is an eco-system of support for the 

American taxpayer that involves the cooperative and complementary roles of the 

IRS and the private sector, working together to serve our citizens. 

The IRS has reported that electronic filing is up over 7% year-to-date, with a total 

of over 50 million returns accepted so far. At this rate, it is likely that over 50% 

of individual American taxpayers will fulfill their obligation this year via electronic 

filing. This represents a tremendous milestone for the IRS and industry along the 

road to achieving the 80% goal set by Congress in 1998. 

Just this year, e-file growth at Intuit has been dramatic. Intuit has produced over 

one quarter of the e-filed returns received by the IRS, having electronically filed 

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over 28 million returns through the end of March—a growth rate in excess of 21% 

over last year. 

We congratulate the new Director of the Electronic Tax Administration, Bert 

DuMars, for his leadership in ensuring the success of the electronic filing season. 

We would also like to recognize the former Director of ETA, Terry Lutes, for his 

many years of exceptional leadership, which continue in his new role as Associate 

Chief Information Officer at the IRS. 

As we cross the 50% e-filing threshold in theUnited States, the significance of this 

progress cannot be understated, and it can be directly attributed to the productivity 

of the partnership between government and industry to drive toward this national 

objective for our American citizen-centric tax system. 

In comparison, tax systems elsewhere around the world have not fared as well 

nor achieved as much in this same period of time. One often-cited example is the 

United Kingdom, where the government set a 50% e-filing objective at the same 

time we set ours at 80%. However, the UK chose to build and deploy a governmentprovided tax software system rather than unleashing the private sector in the competitive consumer marketplace. As a result, today only about 3% of British taxpayers are willing to use that government’s online tax system, and as a result, just 

last summer the British tax agency, Inland Revenue, quietly lowered their national 

long-term e-filing objective down to only 25%. The sharp contrast between the failure of that government-centric solution, and the success of the American citizen-centric solution, is dramatic, and we’re very proud to be part of the remarkable success 

story here in the United States. 

Ways to Improve and Accomplish More 

Although much has been accomplished in the drive toward electronic filing as the 

preferred method of tax compliance in the United States, we still have further to 

go. 

Today, it is still easier to mail a tax return than to electronically file one. But 

this is not a matter of cost. The filing of paper returns still requires the cost of either postage, special delivery, registered mail or express services. In contrast, there 

are free electronic tax preparation and e-filing alternatives widely and readily available. And so our focus must be on continued affirmative efforts to identify and remove the remaining barriers to electronic filing, and we should do so as expeditiously as possible. 

If cost is not the issue, then what are the real impediments to electronic filing? 

One of the obstacles is time and effort. As modern software tools have reduced the 

time it takes to self-prepare a simple return down to a half hour, the process of electronic filing commonly takes another 50% of that time, or an additional fifteen minutes, just to transmit the return. Here are some of the reasons why electronic filing 

is still unnecessarily difficult: 

• Taxpayers need to enter up to 20 additional figures from their W–2, just to electronically file; 

• Taxpayers need to electronically sign their return using their previous year’s 

Adjusted Gross Income number, when a great many taxpayers can neither understand the concept of what AGI is, nor remember what last year’s AGI number was; many taxpayers approximate what they think their income was in the 

previous year, effectively making up a number; 

• The number one reason e-filed returns are rejected by the IRS is a mismatch 

of what the taxpayer enters as their previous year’s AGI vs. the number the 

IRS has in their database; 

• Taxpayers must make up and use a Personal Identification Number (PIN), a 

number that they’ll never use again; 

• Once the taxpayer transmits their return, they then need to wait 24–48 hours 

before they know whether their return has been accepted or rejected; this is in 

sharp contrast to commercial transactions in electronic commerce which are 

generally instantaneous; 

• If the taxpayer’s electronic return is rejected (which happens to between 14 and 

19% of e-filed returns for various reasons), they need to repeat the entire process over again; many simply give up and print and mail their returns; 

• Many taxpayers are not able to e-file due to late law changes that result in a 

late release of IRS forms; for example, filers who donated over $500 dollars in 

non-cash contributions to a charity were not able to electronically file until late 

in February due to the late release of form 8283 by the government, driven by 

the late enactment of the changes to the law; 

• Approximately 20% of tax filers owe a balance due, and many of these taxpayers believe that they will have to pay instantly if they electronically file, and 

88 

therefore choose to file by paper to slow down payment and improve family cash 

flow. 

In addition to these obstacles that can be removed to facilitate greater taxpayer 

reliance on e-filing, there are important barriers which must also be removed to encourage greater e-filing by the professional tax preparer and accountant community. 

Major expansion of e-filing by professional tax practitioners must take place in order 

to substantially improve today’s e-filing numbers; in order to do this, the government must: 

• Eliminate the awkward and archaic requirements that stand in the way of expanding registration of tax professionals as authorized e-filers; most professional tax practitioners (73%) are one-person operations for whom the current 

process of e-file registration is burdensome and unattractive; • The current reporting agent enrollment process for e-filing takes up to 30 days 

and is paper based and subject to error and rework; the process does not use 

electronic signatures, and requires manual entry of information both at the IRS 

and at the small businesses; this must be modernized; • E-filing processes must be improved to take into consideration the workflow 

needs of practitioners, eliminate the need for rework, and recognize that they 

are in a business that must work efficiently if they are to earn a living. E-filing 

must be at least as easy for a practitioner as paper filing. 

All of these obstacles must be addressed and removed, effectively and expeditiously, if we are to accelerate the national transition to electronic filing as the predominant method of Voluntary Compliance in the American tax system. 

Beyond barrier removal, there are also affirmative steps that can be taken which 

could contribute in significant ways to the growth and acceptance of e-filing. Primary examples would include: 

• Expand educational and public information efforts to promote the benefits of efiling and help taxpayers overcome misconceptions; for example, the top reasons 

that our customers e-file are to get a faster refund and an acknowledgement 

from the IRS confirming receipt of their return, while the top reason that people 

don’t e-file relates to worries about security and also fear of being targeted for 

audit 

• Public awareness efforts must be redoubled in reassuring public confidence in 

the security of electronic filing, and that e-filing in no way increases the 

chances of audit, and indeed may reduce such chances due to a reduction in 

errors in returns. 

• Add meaningful benefits for the 20% of tax filers who do not have the attraction 

of getting a refund; such ideas include: 

• Extended time to pay—consider offering all e-filers additional time to pay 

their taxes due; 

• It has been proposed by several Administrations that a small tax credit be 

offered for those who electronically file; it is time to take that step; 

• Work with the banking industry to encourage balance due payment by major 

credit card with no convenience fee; 

• Current solutions such as Opay and Link2Gov charge users a 2.49% 

convenience fee; 

• In contrast, our learnings from this filing season indicate that there is pent 

up demand for a no-convenience-fee option; this year in partnership with 

the Discover Card we waived the convenience fee for the balance due 

payment option and saw 5-fold growth in consumer adoption. 

In addition, expanded public-private partnership between government and industry will be an essential element of taking e-filing to the next level. Congress and 

the IRS should look to existing vehicles such as a well-focused ‘‘free file’’ program 

and the Electronic Tax Administration Advisory Committee (ETAAC) to drive a collaboration strategy: 

• Work jointly with industry to simplify the e-file use experience; 

• Work jointly with industry to eliminate and reduce e-file rejects (for example, 

having the ability to ping the IRS’ database to proactively detect issues that 

might result in a rejected return could save time, resources and wasted effort, 

which could benefit everyone); 

• Remove barriers to facilitate small business e-filing, e-payment and other transactions; 

• Enhance coordination between the IRS, states and industry: 

• The Joint Tactical Advisory Group between the IRS and the state Federation 

of Tax Administration is a good concept to focus energy at a working level 

89 

on Fed/State issues, but Industry has no seat at the table; that void needs 

to be rectified, as all three parties together can accomplish much more than 

any two alone; • The current national Free File Alliance program today is a federal-only 

Agreement; as a result, some 20 states have had to create their own lookalike free file program for free state returns to assist lower income, disadvantaged and underserved citizens in their jurisdictions; many states have found 

that building, deploying, and operating their own tax software systems wasn’t 

the optimal use of scarce budget dollars and drew little public acceptance or 

participation; as a result, many states have turned to the Free File Alliance 

solution instead; however, the absence of the states from the federal program 

has created a complex and awkward substitute strategy, and reduced company participation in the state programs; to correct this deficiency, the renegotiation of the federal Free File Agreement this year should include dialogue with states aimed at finding ways to facilitate state participation in coordinated free file programs, and likewise encourage industry participation in 

the state programs. 

If an updated national e-filing strategy is approached with a new sense of commitment and innovation, substantial additional growth in e-filing is still possible and 

could be achieved in a foreseeable timeframe, just as the first 50% milestone was 

reached in a relatively short period of time. The only question is how serious we 

are about driving e-filing even further as the preferred method of Voluntary Compliance in this country. Substantially greater growth is achievable if there is a genuine 

commitment to making it happen. 

Tax Services to Assist those in Need 

The Free File Alliance program began as an innovative solution to the public interest objective of providing ready access to electronic tax preparation and e-filing 

for lower income individuals and families, the working poor, disadvantaged, underprivileged, and underserved taxpayer populations at no cost to either the taxpayer 

or the public treasury. A voluntary public-private partnership between the IRS and 

the software industry, the current Free File Alliance program had the objective of 

making free electronic tax preparation and filing available to 60% of American taxpayers. The ability to assist the needy and underserved would be made possible by 

commercial sales of online tax preparation and e-filing to the rest of the taxpaying 

public. And at typical costs of $20 per tax return, web-based tax software and efiling had already driven the costs of tax compliance down to very low levels, within 

the reach of almost everyone. 

The commitment of the private sector to donate electronic returns and filing to 

those in need enabled government to completely avoid the potential cost of trying 

to build and provide its own tax software products, which countries like the United 

Kingdom have discovered to be a failed and expensive strategy. After spending hundreds of millions of Pounds Sterling building, deploying, operating and advertising 

the Inland Revenue’s Self-Assessment OnLine tax software service, UK taxpayer 

adoption has not exceeded 3%, and the Chancellor of the Exchequer has reported 

to the House of Commons that the cost of the system still exceeded $ 50 per return 

after several years of operation. This government-centric solution stands in sharp 

contrast to the U.S. estimated cost of.75 cents a return for our government receiving 

and processing a privately prepared and electronically filed return in this country, 

employing our citizen-centric system to get the job done efficiently and inexpensively. 

The adoption of the private-sector-provided Free File solution in the United States 

allowed the IRS to instead focus its investment on critical infrastructure modernization, enabling those unique and specialized operations and services that only government can provide. As then-IRS Commissioner Charles Rossotti said in Congressional testimony: 

‘‘I don’t think there is any gray area about what the IRS role is in terms of providing services, because I don’t believe we should provide tax preparation services or tax software.’’ 

Agreement was reached between industry and government in July 2002, through 

the auspices of the Electronic Tax Federal Advisory Committee (ETAAC): the industry would provide free access to consumer electronic tax services to segments of the 

population underserved and under-represented among electronic tax filers, and 

those with the greatest financial need. As a part of the agreement, the government 

would not seek to duplicate private sector investments or services. The agreement 

was published in the Federal Register in August 2002, and received more than 700 

public comments, which ran 6-to-1 in favor of the innovative proposal. 

90 

In the three years since the Free File Alliance project was launched, millions of 

taxpayers have received free electronic tax returns and free electronic filing. The 

IRS has reported that the Free File Alliance program has significantly contributed 

to the growth in e-filing over that time period. Unfortunately, something else has 

happened. The current Free File Alliance program has drifted very far from its 

original public service purpose and objective. 

Rather than being dedicated to assisting the working poor, disadvantaged, and 

underserved, the Free File Alliance has now become a ‘‘universal-free’’ program, operating off a national marketing and sales platform hosted by the IRS, where participating companies depend on the sales of other products and services to the free 

return recipients in order to make it possible to provide the federal returns for free, 

such as sales of a basic staple like state tax returns. This kind of economic interdependency was never supposed to be the business model for free file. The original 

idea, of great merit, was for industry to have the ability to donate services to those 

in need as a result of their ongoing competitive commercial sales to the vast bulk 

of customers in the regular marketplace, where companies would normally be selling their services in substantial quantities to the general public. That original free 

file business model, enabling public service donation to the truly needy through a 

philanthropic model, was in the public interest and must be restored. 

After several years of this new universal-free trend developing unfettered within 

Free File Alliance program, others, including Intuit, have individually found it necessary to join the fray in competitive response. However, we and others have expressed a range of concerns about the interests of low income consumers in this 

kind of free-for-all environment, and concerns as well about the government serving 

as either the market-maker for commercial business in this country, or permitting 

public assets and endorsement to be used for commercial marketing and sales purposes. Finally, the absence of the states from a place at the table for discussion with 

the Federal Government and industry in the Free File Alliance program limits the 

potential public benefits from the program since state tax filers, including low income participants, are being charged for tax preparation under the current model. 

The original public service concept of a free file initiative had great merit. It was 

an unprecedented public service initiative to help those least able to enjoy the benefits of modern electronic commerce in this country. We believe a private-sector-provided free file program can still have great merit, but any public-private partnership 

must focus on helping the underserved and underprivileged, with appropriate and 

sensible rules, governance and accountability, in which the IRS must play a key, 

active, and engaged program management role in cooperation with the private sector. 

Indeed, recent budgetary decisions by government underscore the need for an improved and refocused free file program to be successful and stable for years to come. 

The inordinate costs of government providing TeleFile have long been a practical 

concern, and more recent decisions to cut back significantly on traditional bricksand-mortar IRS Walk-In assistance centers, underscores the crucial role a well-focused free file program can play in providing assistance to the working poor, to those 

in need, to the disadvantaged, to the elderly on fixed incomes, and to various other 

underserved taxpayer populations. This dedicated purpose of voluntary public service to assist those in need must be restored as the purpose and mission of free file, and should be accomplished well before the beginning of the next tax season. 

The current Free File program agreement between IRS and industry is up for renegotiation this year, and that milestone represents the opportunity to establish an 

improved program for the purpose of providing a philanthropic tax preparation and 

e-filing service program for those in our society who need it most, harnessing the 

investments, innovations and capabilities of the private sector to achieve important 

public service objectives. A midcourse correction in this program is urgently needed, 

indeed overdue, to restore this founding and defining purpose. We pledge ourselves 

to actively support that important objective, and strongly urge Congress and the 

IRS to do the same, restoring this valuable initiative to its original purpose and 

promise, so it can serve the public interest for years to come. 

Looking Ahead 

The Congressional policy decision to move the United States toward an electronicfiling tax culture was not only the right direction, but as we look ahead should be 

thought of in much broader terms about the whole process of taxation in the American economy: 

• As states increasingly adopt Simplified Sales Tax legislation, the path forward 

is clearly to enable electronic filing of sales tax reports by small businesses 

across the country to the respective jurisdictions, eventually enabling all forms 

of sales to be compliant, whether businesses are of the traditional ‘‘bricks and 

91 

mortar’’ variety or are conducted over the Internet. Software will even further 

simplify the complexity of different sales tax rates across jurisdictions, making 

compliance practical and easy. Such basic technologies can likewise make it possible for thousands of web-based small businesses to track and report income 

from their internet transactions. 

If part of future federal taxation were to eventually include either some form 

of a Value-Added or Sales Tax, the process of compliance could be greatly simplified through software and electronic filing that would be available through 

the competitive commercial marketplace. Indeed, all of these tools are well-within industry’s capability to provide to American taxpayers. Whatever the future 

tax compliance needs of consumers and small businesses may be, the software 

industry can make them simple, fast, and inexpensive. 

At the same time, the ability of industry to invent and bring to market easy 

software tools for tax compliance should never be an excuse for building excessive complexity into the U.S. tax code. Tax simplification benefits everyone and 

is the right policy direction. • There is also a huge opportunity to expand small business e-filing beyond income tax and into the employment and sales tax areas. Our data show that 

while some small businesses are e-paying federal taxes (about 40%) significantly fewer are e-filing federal forms, only 15%. More importantly, these small 

businesses would also strongly prefer to integrate their e-filing with their accounting software. This e-filing integration with accounting software has benefits both to small business and the government. The small business will benefit 

from accuracy, ease of use, and time-savings. The government will benefit from 

increased e-filing participation, lower costs, and increased accuracy. 

There are a couple of key barriers to small businesses adopting e-filing. 

• First, there is no integrated methodology to e-file from within accounting software. 

• Second, the government agency enrollment mechanisms are complex, lengthy, 

and paper-based. For companies such as Intuit, that are working to offer payroll e-filing, the barriers are similar—no automated enrollment mechanisms, 

no industry standards, complexity of dealing with 50 different states and the 

federal government, and the lack of a joint Federal/State gateway for employment taxes. Manual processes are too costly and lead to higher prices for 

small business and, therefore, less usage. 

We recommend several steps to increase small business employment tax e-filing and payment, including the development of the following: 

1. A joint Federal/State gateway for employment taxes and forms. 

2. Completely automated enrollment for federal and state employment taxes efiling. 

3. Completely automated filings. (For example, the SSA requires W–2s to be 

manually uploaded to a web site by payroll operators, and there is no automated server-to-server (computer-to-computer) connection.) 

E-Filing can be a win-win for small business and government, helping everybody save time and money. Industry can enable efficient and accurate e-filing for 

almost a million small businesses. Taking steps such as the joint Federal/State gateway, and completely automating enrollment and filings, will help us all realize this 

vision faster. 

Summary Thoughts 

The fact is that the technology industry that invented income tax software can 

also greatly simplify and facilitate whatever tax system needs we may have in the 

future, for both consumers and small business, where the vast bulk of compliance 

burdens would otherwise lie. Having said this, it is also clear from our experience 

with millions of taxpayer customers that there is extensive complexity in the tax 

system that would plainly benefit from simplification and clarification in the best 

interest of the nation, our citizens, and the government itself. 

Some of the most common difficulty today comes from the use of what may seem 

to be basic concepts in the current tax code, but which actually represent great confusion for taxpayers, such as ‘‘Adjusted Gross Income,’’ a term which many find inexplicable. Similarly, the multiplicity of current retirement and other specialized 

savings vehicles are likely underutilized today due to practical confusion and uncertainty as to the tax status, treatment, rules and differences of the various alternatives. Likewise, the multiplicity of current tax credits leaves many taxpayers mystified, uncertain which may really apply to them or what the rules may be, which 

may result in under-claiming of credits for which the taxpayer may be eligible. We 

92 

in the tax software and electronic financial services industry significantly help taxpayers sift through the complexity of the current tax code, and minimize their tax 

liability to only that which they truly owe, but confusion and uncertainty remains. 

Other examples include the Earned Income Tax Credit, and non-cash charitable 

deductions, which are each becoming more difficult for eligible citizens to claim as 

these shift to more paper intensive processes. These are areas of the code that 

would benefit a great deal from fresh thinking that would bring them into fuller 

conformity with the nation’s statutory policy preference for electronic tax administration—that is, to fully apply electronic filing to the process of claiming these credits and deductions, rather continuing a growing presumption that they must be 

claimed via paper, which can substantially raise costs and difficulty for citizens. The 

bottom line is that real movement toward statutory and regulatory reduction of 

complexity is in everyone’s interest, but broader eligibility for all elements of the 

code to be available for electronic filing can be an important part of that practical 

simplification for everyone. 

Notwithstanding these opportunities for improvement, easy-to-use software and efiling has already enabled millions of individuals, families, and small businesses to 

deal with taxes with a much greater degree of simplicity, at much lower cost, as 

a central part of taking personal control of their finances. And looking ahead, the 

next generation of highly computer-literate young men and women entering the 

workforce will be the first generation in history to never file a paper tax return. In 

fact, the tech-savvy generation is already using the fast and inexpensive electronic 

tools of web-based tax preparation and e-filing to meet their obligation, viewing this 

as an integrated part of how they manage and control their personal finances. They 

are the future of tax compliance in this country, and the leading edge of a 

generational change that will help the nation not only meet but exceed the original 

80% e-filing objective. 

It has always been said that voting and paying your fair share of taxes are two 

of the most basic obligations of citizenship. These really are two of the essential 

ways we directly participate in our democracy, the ways by which we touch our government and hold it accountable—even to understand the costs of our government. 

Just this week, in remarks delivered before a tax policy conference at Urban Institute, the IRS Taxpayer Advocate Nina Olson said how important it is to retain the 

role of an active, engaged citizenry in the process of annual tax compliance in the 

culture of the United States. Some others have tried to suggest that the ultimate 

answer for the United States tax structure is to put the government in charge, from 

cradle to grave, not only collecting taxes, enforcing compliance, auditing returns, 

and writing and administering tax regulations, but also acting as the citizen’s tax 

preparer at the outset of the process, effectively removing the taxpayer from the 

equation altogether through a Return-Free Tax System. 

Some have estimated a revenue boon, as is being experimented by the California 

Franchise Tax Board in that state right now, pursuing a strategy that assumes putting government in charge of both ends of the tax process—automatic return preparation at the front end, and revenue collection and enforcement at the back end— 

will produce significantly higher revenue receipts from taxpayers overall. Some have 

suggested that the tax collector might have little motivation to point out all the deductions, exemptions and credits a citizen might be entitled to, resulting in an unfair individual tax burden. But the removal of the citizen from the process would 

have other downsides beyond the obvious risk of paying higher taxes. As Nina Olson 

observed: 

‘‘I don’t think the IRS and the government really give credence to that ritual act. 

For many, many individuals it’s the only time they sit down and look at what 

happened to them financially over the last year, and I wouldn’t want to lose that 

in a Return-Free System, because for the broader financial health of the country, 

that’s an important ritual.’’ 

At this same tax policy conference this week, Eric Toder of the Urban Institute 

echoed the Taxpayer Advocate’s advice and conclusions: 

‘‘There’s something healthy about that. I don’t think it should be complicated, 

but I think there’s something positive about the citizenship ( seeing what they 

pay annually).’’ 

We agree. Managing your taxes is an integral element of managing your personal 

finances, part of both financial literacy and achieving financial self-reliance. Indeed, 

in whatever tax policies are adopted over the years in this country, it will be vitally 

important to retain the citizen-centric character of American Voluntary Compliance 

that is so unique to our national history and culture, preserving the personal participation of our people in these most basic processes and obligations of individual 

93 

citizenship. It helps keep our government accountable and on its toes, and our citizens in charge. 

f 

Chairman RAMSTAD. Thank you, Mr. Smith. I am going to adhere to the 5-minute rule myself, so I would like to ask each of you 

experts—truly we have five of the best and brightest tax experts 

in this town—in a minute or less, because I only have 5 minutes, 

if you could identify the single most important reform Congress 

should enact to simplify the Tax Code. I will start with you, Mr. 

Gideon. 

Mr. GIDEON. I think it is easy and short. Get rid of the AMT. 

Chairman RAMSTAD. Mr. Purcell? 

Mr. PURCELL. Well, I would certainly echo that, but also there 

is a significant series of overlapping definitional terms. Last year, 

Congress addressed the one definition of a child, which makes life 

easier, will make life easier. We have identified those types of 

things over the years. So, that would certainly help implement simplification across the board. 

Chairman RAMSTAD. Thank you, Mr. Purcell. Mr. Degen? 

Mr. DEGEN. I will go back to what I said about the plain language. If I was writing the Tax Code—I will give you an example 

because researchers recently, based on a post on a tax web board— 

these are catch-up provisions, so people that are 50 or older, if they 

want to contribute an extra $3,000. If I was writing the Code, I 

would have said, ‘‘If you are 50 or older and you participate in a 

401(k) or 403(b), a SARSEP or a simple IRA, or a 457 plan, you 

can put an extra $3,000 in your plan.’’ Does the Code say that? No. 

You start in section 414(d) where catch-ups are defined. That sends 

you to 414(u). section 414(u) now sends you to 402(d)(3). section 

402(d)(3) sends you—you have to look at 402(h), and then that 

sends you back somewhere in 408. I may have some of those numbers wrong, but you gather the drift of my conversation. So, I think 

we could really serve the public and get rid of some of that deadwood which was mentioned before. 

Chairman RAMSTAD. Your point, Mr. Degen, is very well taken 

and very well illustrated by you. Mr. Stevenson? 

Mr. STEVENSON. You expect me to follow that? 

[Laughter.] 

Chairman RAMSTAD. I think he has lectured on that before. 

Mr. STEVENSON. Standard deductions for Schedule C, 1120 S’s, 

partnership returns, keep standard deductions at a level that is acceptable, and if the taxpayer wants to go above it, then they have 

got to take the chance of being audited. By the way, I have ten revenue-raiser concepts that I have copyrighted that I have provided 

to your staff in case you are interested, but we have to do a deal 

to release the copyright. 

Chairman RAMSTAD. Thank you. 

Mr. STEVENSON. Only kidding. 

Chairman RAMSTAD. Thank you. Mr. Smith, please. 

Mr. SMITH. Mr. Chairman, we would focus the energy and the 

efforts on simplifying tax credits and retirement and education savings vehicles. 

94 

Chairman RAMSTAD. I want to take the remaining time. Mr. 

Degen, I believe, talked about the need—I don’t think that is an 

overstatement—for the registration, limited registration of paid 

preparers. In my home State of Minnesota, I have heard some real 

horror stories of unscrupulous preparers preying on recent immigrants, particularly from Somalia. We have the second-largest Somalian population now in the country, and some of these people 

have been treated just outright fraudulently. Do you believe, like 

your barber and like your wife’s manicurist, that simple registration with a number of continuing education courses—what do you 

foresee there? 

Mr. DEGEN. I think, Mr. Chairman, the thing we want to do is 

keep it as simple as possible without creating a new system. As I 

mentioned in my testimony, there is a system in place now. It may 

have to be modified to some degree, but absolutely we would anticipate and hope that when this program began—we call it enrollment of tax preparers—that we would definitely want to have continuing education requirements. It is absolutely essential. Also, 

what is very, very important is there has to be an enforcement action. Currently right now in Circular 230, the Office of Professional 

Responsibility can censure, sanction, suspend, or disbar—that is 

the wrong word. I should not use that word, but get rid of either 

an attorney, a CPA, or an enrolled agent if they perform unethical 

practices. You could go home right now and start doing tax returns, 

and if you screw them up, the IRS could not do anything about— 

unless you were fraudulent, but that is what we want to stop. 

Chairman RAMSTAD. I think it is alarming. According to our 

figures, there are approximately 1.2 million tax preparers that 

have no formal training and are not required to adhere to any professional standards. Thank you again, gentlemen. I appreciate your 

testimony. I now recognize the distinguished Ranking Member. 

Mr. LEWIS. Thank you very much, Mr. Chairman. Thank you, 

gentlemen, for being here today. Mr. Gideon, do you think the IRS 

is funded and staffed so they can appropriately deal with tax shelter abuse, tax evasion by large corporations, and welfare taxpayers? Do you think there is more lost revenue in this area or by 

those claiming EITC? 

Mr. GIDEON. I wouldn’t be capable of speculating on where 

more lost revenue would occur between those two. I would simply 

say that from prior experience at the IRS, it is important that 

there be a balanced program. In other words, the IRS, in order to 

do its job, has to have the resources to perform adequate enforcement tasks across all areas. If it is missing—in other words, if it 

is not enforcing the law in any sector of the economy, we are going 

to have a problem because people will figure that out pretty quickly. So, I think the important problem for appropriators is achieving 

balance, and it is important to stay balanced across all areas. 

Mr. LEWIS. Thank you. Mr. Purcell, I think in your testimony 

you answered this question, but I would like for you to just state 

it again maybe for the record. Does your organization think the 

IRS should cut taxpayer service in the coming year as proposed by 

the President’s budget? 

Mr. PURCELL. When we prepared our comments, we had not 

seen the suggestion that the TACs be abolished or be cut back, and 

95 

so we did not address that specifically. We are concerned that the 

taxpayer service must also be provided as well as enforcement efforts. So, I think we would be in favor of maintaining service as 

much as possible, given the payback that you have from service, 

and recognizing that low-income people generally are the ones who 

would benefit most from that personal touch of service. They need 

that type of service, so, yes, I think we would be in favor of that. 

Mr. LEWIS. Thank you, Mr. Purcell. Mr. Smith, why does your 

company refuse to offer an RAL to low-income customers? 

Mr. SMITH. Mr. Lewis, we are very familiar with RALs, but we 

don’t offer them because our customers aren’t interested in them. 

In fact, several years ago, we moved away from RALs. We do feel, 

however, that there is a challenge in the United States, particularly for low-income families, and it is unbanked, and we think 

there are creative alternatives to help individuals who don’t have 

banking relationships today get access to tools. In fact, in the last 

week there has been a lot of press around a program that we are 

actually working with several people in the industry to try to provide a reverse Automated Teller Machine (ATM) card that basically 

allowed a lower-income family to be able to take their refund, put 

it directly on this ATM card, and pay their bills, do their grocery 

shopping, or other things. We think there are many other avenues 

beyond RALs today that we are interested in pursuing. 

Mr. LEWIS. Thank you very much. Thank you, Mr. Chairman. 

Chairman RAMSTAD. The gentleman from North Dakota. 

Mr. POMEROY. I thank the Chairman. Very interesting panel, 

and each of you did a superb job, and I appreciate it. Mr. Gideon, 

you are a tax lawyer? 

Mr. GIDEON. Yes, sir. 

Mr. POMEROY. Are you familiar with this Free File relationship? 

Mr. GIDEON. Actually, I have not been as familiar with it as 

others clearly are here, but I learned about it when I testified before the Oversight Board, and I filed my daughter’s tax return with 

it about 2 days ago. 

[Laughter.] 

Mr. POMEROY. That is sufficient background. What I want to 

ask is if in your view the Committee’s inquiry into aggregate data 

on products sold by a Free File participant would be violative of 

taxpayer confidentiality information. 

Mr. GIDEON. Well, I think that the Committee ought to be able 

to get aggregate data. I think there is always a concern about data 

that would be identifying that would invade anyone’s privacy 

needs. 

Mr. POMEROY. Absolutely. 

Mr. GIDEON. On the other hand, the Committee gets aggregate 

data from the IRS. It gets aggregate data from many other sources. 

While care would have to be exercised, it seems to me, it certainly 

would be reasonable for you to get aggregate data from those who 

participate in this program. 

Mr. POMEROY. Is Michael Cavanaugh in the room? I have a letter that I want to introduce for the record of the Committee’s inquiry to Mr. Cavanaugh, the manager for the Free File Alliance, 

96 

and his response, wherein they totally stiff the Committee in getting information, hiding behind taxpayer confidentiality. 

[The information follows:] 

Committee on Ways and Means 

Subcommittee on Oversight

Washington, DC 20515 

March 4, 2003 

Mr. Michael F. Cavanagh 

Free File Alliance 

600 Cameron Street, 

Suite 309 

Alexandria, VA 22314 

Dear Mr. Cavanagh: 

Thank you for testifying at the recent Ways and Means Oversight Subcommittee 

hearing on the Free File Program. I commend you and your Alliance Members for 

providing taxpayers, nationwide, with a great public service. As I stated at the hearing, it is exciting to see this kind of public-private partnership in action for the 2003 

tax return filing season. 

I am writing to follow-up on our discussion at the hearing. Thank you for agreeing 

to survey your association Members on use of the Free File Program and add-on 

products/services purchased by taxpayers seeking free tax return filing through 

www.irs.gov. Based on testimony at the hearing, I believe that the following information would be useful: 

• the number of filers (out of 78 million eligible); 

• the number of filers by various income levels 

• the number of filers claiming the EITC; 

• the total number and amount of product sales/services sold (including specific 

information on (1) the number/amount of tax refund anticipation loans sold, 

amounts charged for such loans and related services, and the number of ‘‘direct 

deposit indicators’’ provided by the IRS, (2) the number and amount of state returns sold, and (3) the number and amount of other product sales/services sold 

by type; and, 

• the number of taxpayers entering the website for free filing services that did 

not qualify for free services (and the percentage that purchased Federal return 

services). 

I would like this information to cover the current tax return filing season (January-April 15th) and I request an informal report from you by the end of May 2003. 

(I have made a similar request of IRS Acting Commissioner Wenzel and suggested 

that the IRS’ work incorporate some of your survey results.) 

I appreciate your commitment to the success of the Free File Program. Your survey will be most helpful to me in understanding taxpayers’ experiences in using the 

new Free File Program this year and how it might be expanded and/or improved 

for the future. 

Thank you again for your assistance. If you have any questions, please contact 

Beth Vance of the Committee staff at (202) 225–4021 or A.J. Wojciak of my Washington Office staff at (202) 225–2611. 

Sincerely, 

Earl Pomeroy 

Ranking Member 

Free File Alliance 

Alexandria, Virginia 22314 

June 5, 2003 

Hon. Earl Pomeroy 

Committee on Ways and Means 

U.S. House of Representatives 

Washington, D.C. 20515 

Dear Congressman Pomeroy: 

On March 4, 2003, you requested certain information regarding the Free File Program. This letter is a preliminary response, based on the conclusion of the first season of the Free File Program. 

97 

1The number of filers by various income levels; the number of file’s claiming the EITC; the 

total number and amount of product sales/services sold (including specific information on (1) the 

number/amount of tax refund anticipation loans sold, amounts charged for such loans and related services. and the number of ‘‘direct deposit indicators’’ provided by the IRS, (2) the number 

and amount of state returns sold, and (3) the number and amount of other product sales/services 

sold by type; and the number of taxpayers entering the website for free filing services whose 

personally identifiable taxpayer profile did not qualify for free services (and the percentage that 

purchased Federal return services). 

In response to your final question, approximately 2.7 million taxpayers utilized 

the free tax preparation and e-filing services from the 17 Member companies. We 

are very proud that the number of returns provided substantially exceeded the IRS’ 

well considered pre-season estimates. It is a base for continued success. We believe 

the value of the service to taxpayers saved them tens of millions of dollars, and that 

the IRS avoided costs of hundreds of millions of dollars. 

As to your remaining questions, we have spent a significant amount of time considering how to meet your request, and have met several times with the IRS to review the issue, because IRS privacy restrictions are such a significant barrier to reporting the information you seek. Modem data base technology can normally enable 

the collection of certain types of customer data, provided it is done in a manner consistent with law, regulation, a company’s own published privacy policies, and the 

data collection capabilities of individual company systems. However, that is not true 

of companies that provide tax preparation or e-file services. The legal and policy restrictions protecting the privacy of taxpayers impose strict limitations on service 

providers which substantially exceed those imposed even for similar types of financial services data under appropriately restrictive laws such as Title V of GrammLeach-Bliley. Much of the taxpayer information you have sought 1 in your request 

is protected from collection or disclosure by longstanding law and associated IRS 

regulations. Therefore, our Member companies cannot lawfully examine, compile or 

report the taxpayer information you are seeking without the lawful consent of the 

subject taxpayers. Under IRS Regulation 7216, taxpayer ‘‘consent’’ must be obtained 

before returns or collecting taxpayer private data. 

In addition, the 7216-compliant privacy policies published by Alliance Member 

companies constitute a condition of the terms of service under which the individual 

customer transactions were conducted. Our FFA companies did not, and as a practical matter could not, seek each of the 2.7 million separate consents that would be 

necessary to permit the companies to review, collect and report the taxpayer information you seek. Even if the establishment of such individual consents to disclosure 

of taxpayer information were feasible, it is unclear how many of the 2.7 million individuals would respond to the disclosure request, or grant permission. Given the 

practical limitations to such an undertaking, our Members have no previous experience which would be predictive of the likely taxpayer response. It would, of course, 

be additionally unlawful for the Alliance management staff to have collected such 

taxpayer information from each of the companies, since the Alliance staff is not in 

privity with the customer taxpayers to seek their lawful consent. 

IRS may be able to provide you some aspects of the taxpayer information you 

wish to review, from its unique legal position as the revenue agency of the United 

States and the holder of much individual taxpayer information, but even here we 

are not sure that legal privacy requirements may not also restrict the disclosure of 

taxpayer information by the IRS itself.. The legal interpretation of applicable Federal rules, policies and procedures as they pertain to disclosure of private taxpayer 

information is a subject best pursued directly with the IRS General Counsel. 

We look forward to working with your office and Committee to make the Free File 

Alliance a continued success. Your support of the Free File option is important to 

us. We remain available to be of ongoing assistance as you conduct your Oversight 

of this important public service initiative. 

Sincerely, 

f 

Michael F. Cavanaugh 

Mr. POMEROY. I will send another letter to Mr. Cavanaugh, or 

the Free File Alliance, in the event Mr. Cavanaugh is no longer 

with this association, asking once again for aggregate data so that 

we might observe the marketing practices of these Free File partners. 

98 

Mr. Smith, I commend Intuit for your testimony, which I think 

is very candid and direct. It is not often to have a self-critique 

moved forward by a private sector participant in a program, and 

I frankly take some of your testimony to be a self-critique, not of 

Intuit, but of the industry, in terms of the drift of the original incentive of providing these services to taxpayers, to now much more 

of a profit motive, ‘‘sell them stuff ’’ type of circumstance. Would 

you describe basically what you mean in this portion of your testimony that is found—you do not have page numbers, but that portion of your testimony that alludes to that? 

Mr. SMITH. Yes, Mr. Pomeroy, I would be happy to. When this 

program was originally launched—actually, prior to the program, 

when we launched the Intuit Tax Freedom Project, we had very 

specific qualifications to have the program focused on underprivileged, underserved, lower-income, active military, and other select 

citizens in the country. Unfortunately, what has happened, as a result of the last 3 years in this public-private partnership, is that 

you have new companies coming into the Free File Alliance and actually seeing it as an IRS-hosted platform to enter into the business and then be able to get product into the hands of a consumer 

with a free lead offer and then sell additional products. This is 

completely contrary to the spirit of the program. It is contrary to 

the program we have had in existence since 1998. We resisted this 

and have worked with the alliance and the IRS in the off seasons 

for the last 3 years. Unfortunately, this year we found ourselves in 

a situation, competitively, where we had no alternative but to enter 

into the game. 

Mr. POMEROY. Do you believe the IRS has actively exercised 

oversight for the entrepreneurial practices of its partners relative 

to U.S. taxpayers? 

Mr. SMITH. Mr. Pomeroy, I believe that the IRS has an opportunity to take it further. There is only so much private industry 

can do before it begins to step toward the lines of the Sherman Act 

and any areas in antitrust. The good news is the IRS, by not only 

the laws of the country but also by the alliance voting unanimously, has given the IRS the ability to govern this program more 

tightly. Unfortunately, up to this point, they haven’t been willing 

to do that, and we are confident as we go into this year’s renegotiation that that will be addressed. 

Mr. POMEROY. Tell me about the renegotiation. Who is that between? 

Mr. SMITH. At this point in time, the IRS is meeting with each 

of the individual alliance Members to better understand their 

needs. It has historically been between the executive director of the 

Free File Alliance, who was Mike Cavanaugh, who has resigned at 

this point, and the IRS. So, at this point each individual company 

is meeting with the IRS, and we are looking forward to a defined 

process to get it back on the table. 

Mr. POMEROY. Mr. Chairman, I would ask that you consider 

having a hearing, an oversight hearing, to bring in the IRS and 

bringing in Free File partners at this critical time of renegotiation. 

I think we need to get a handle on what is taking place relative 

to industry practices, and what is in the Service’s mind as they sit 

down with private sector partners. I want them to be looking—I 

99 

want them to be seeking information in terms of what are the private sector activities that these companies are doing with taxpayers. Basically they are entering into the relationship on an IRS 

platform, and I believe there is at least the impression conveyed 

that there is almost an endorsement of these services. I very much 

want to hear from the IRS in terms of the safeguards that they exercise relative to consumer protections. We heard the Commissioner say, well, they don’t regulate these products. They may not, 

but they have got—they don’t regulate the products as a bank lender. On the other hand, these products come into contact with the 

taxpayer by virtue of the IRS, so they surely have some oversight 

responsibilities. I trust that they are doing something, but I want 

to hear more about what they are doing. 

In addition, I want to acquire a better understanding about what 

is being sold, about whether or not product mix is roughly consistent across the private sector participants. For example, if we 

have a private sector participant that has got a ton of refund loans 

relative to its overall business, I would be highly suspicious of the 

marketing practices of that private sector partner. It alarms me 

deeply that it does not seem like the IRS has not even inquired as 

to this aggregate data, because I think some—it would seem to me 

that that would be basic information the IRS would want, and to 

be rebuffed by the alliance, as we were in 2003, is, quite frankly, 

very irritating. I appreciate the forthright testimony Intuit has 

brought us today, and I really do think, Mr. Chairman and Ranking Member, that this should be a matter of further inquiry. 

Mr. LEWIS. On this point that Mr. Pomeroy is raising, maybe 

Mr. Smith could give us some of the worst, outlandish examples. 

Mr. SMITH. I am sorry, Mr. Lewis. Examples of the up-selling 

that may be occurring? 

Mr. LEWIS. Yes. 

Mr. SMITH. This year, for example, the growth in the alliance 

participation has gone from roughly a dozen Members last year to 

literally over 20. If you go back in time and you look at how long 

these businesses have been in existence, I think you are going to 

find them ranging from companies like ourselves, who have been 

in business for decades, to companies that literally have started in 

the last year. Unfortunately, when you start—— 

Mr. LEWIS. Are these sort of fly-by-night? 

Mr. SMITH. Well, Mr. Lewis, I would say that—— 

Mr. LEWIS. You do not want say anything about—— 

[Laughter.] 

Mr. SMITH. Thank you for—— 

Mr. LEWIS. I understand. I understand. 

Mr. SMITH. Right. So, the ultimate concern that we have is that 

you have companies out there who do not make a living at doing 

this or have not done this for years and have not learned the proper ways to actually do tax preparation software and e-filing. The 

other concern we have is that they make their money today—you 

very seldom find them in the paid market. You only find them in 

the Free File Alliance where they have a pseudo-endorsement from 

the IRS, where they are using the IRS’ basic platform as a sales 

and marketing platform, and they are bringing consumers in for 

100 

free, and then they are selling additional products. That was not 

the intent. So, outlandish examples go from RALs—— 

Mr. POMEROY. Like what? What products? 

Mr. SMITH. Like RALs, access to IRAs, access to buying additional products and services that they may sell, refund transfers. 

Mr. LEWIS. Are you saying this is a rip-off of taxpayers? You are 

not saying that? 

Mr. SMITH. No, sir, not at all. In fact, I will tell you that the 

Free File Alliance, its philosophy is right on target. There have 

been millions and millions of consumers who have been able to leverage this Free File Alliance to get access to consumer tax software. Unfortunately, because of the way the program is today and 

it is not being governed, it is getting out of control, and it is putting a lot of people at risk, particularly the consumer. 

Mr. POMEROY. Mr. Chairman, you have been most indulgent, 

but I would just make a final observation. If it is incorrect, you can 

correct me. So, the IRS—is there a due diligence requirement in 

terms of participating on this platform? 

Mr. SMITH. There is. Yes, Mr. Pomeroy, there is. 

Mr. POMEROY. There is no due diligence relative to side products offered? 

Mr. SMITH. There are operating philosophies in the operating 

agreement that the adherence of—actually governing those philosophies has been less than diligent. 

Mr. POMEROY. Is there an inspection by the IRS of the products 

prior to their marketing? 

Mr. SMITH. There is an inspection of each of the offerings that 

come into the Free File Alliance. Yes, there is. 

Mr. POMEROY. Is that by the alliance or the IRS? 

Mr. SMITH. Excuse me 1 second. Thank you, sir. It is with the 

IRS. There are third parties that will look at some of the products 

as well, but it is basically just around the offer itself. It is not necessarily around the product and the functionality of the product. 

Chairman RAMSTAD. Well, thank you again—— 

Mr. POMEROY. Finally, there is not a review of the product, and 

then there is not a review of the aggregate sales numbers? 

Mr. SMITH. That is correct, sir. 

Mr. POMEROY. Mr. Chairman, what do you think about further 

inquiry on that? 

Chairman RAMSTAD. Hearing what I have just heard, the 

Chairman will certainly take your suggestion under advisement. I 

want to thank the five distinguished Members of this panel for 

your counsel, your testimony, and your patience as well. Is there 

any other business to come before the Subcommittee? 

[No response.] 

Chairman RAMSTAD. No further business. The hearing is adjourned. 

[Whereupon, at 5:25 p.m., the hearing was adjourned.] 

[Submissions for the record follow:] 

101 

Statement of Colleen M. Kelley, National Treasury Employees Union 

‘‘2005 Tax Return Filing Season and the IRS Budget for Fiscal Year 2006’’ 

NTEU represents l50,000 federal employees in 30 federal agencies and departments, including the men and women who work at the Internal Revenue Service. 

I appreciate the opportunity to provide the Subcommittee with comments on the IRS 

budget for fiscal year 2006. 

There are several items in the Administration’s IRS budget that NTEU believes 

would be detrimental to the IRS’ mission. The two most egregious items include the 

Administration’s plans to contract out tax collection to private collection agencies 

starting this summer, and an inadequate budget request that will prevent the IRS 

from continuing to improve its customer service record while bolstering enforcement 

efforts. 

Budget 

The President’s FY 2006 IRS budget proposal is woefully inadequate to provide 

the resources necessary to meet its enforcement goals to reduce the outstanding 

U.S. tax gap. I commend the Administration for acknowledging in its Budget in 

Brief that the ‘‘IRS yields more than four dollars in direct revenue from its enforcement efforts for every dollar invested in its total budget.’’ But I must criticize the 

Administration for failing to request a budget that would enable the IRS to meet 

the enforcement challenges it faces with its $350 billion annual tax gap. 

The IRS brought in $5.5 billion more in FY ’04 than it did in FY ’03 through enforcement efforts. This represents a 15% increase. It makes good business sense to 

fund the Agency at an amount where it can continue to see a similar return on investment. Unfortunately, the President’s budget does not make good business sense. 

The IRS needs an appropriation that anticipates required expenses such as congressionally imposed pay raises and rent increases. Part of the President’s IRS 

budget request for enforcement will be used to cover inflationary costs. Of the $446 

million proposed for new enforcement investments, $182 million will be needed just 

to keep enforcement at its current levels. 

Furthermore, the way in which the Administration proposes to enhance the enforcement budget will mean cuts to other parts of the IRS budget—such as taxpayer 

assistance. The President’s budget calls for a cut of 1,385 service personnel—87 percent of whom directly assist taxpayers and tax professionals. The IRS has taken 

great strides to improve taxpayer service over the past few years and has been quite 

successful in making significant progress. The Service must not let the pendulum 

swing in the other direction and neglect service so that it can focus on enforcement. 

Service and enforcement must go hand in hand toward increasing taxpayer compliance and shrinking the tax gap. 

NTEU strongly supports the IRS Oversight Board’s proposed budget recommendation of $11.6 billion for FY ’06—a nine percent increase over the President’s budget 

recommendation and a thirteen percent increase over the FY ’05 appropriation. I 

urge the Subcommittee to also support the Board’s recommendation. 

Private Tax Collection 

NTEU strongly opposes the Administration’s plan to privatize IRS debt collection, 

as authorized by Congress last year in H.R. 4520, American Jobs Creation Act of 

2004. Under the statute, the IRS would be permitted to hire private sector debt collectors and pay them a bounty of up to 25 percent of the money they collect. Let 

me be clear: NTEU opposes this short-sighted proposal, anticipates its complete failure as witnessed in a similar 1996 pilot program and will work towards its repeal. 

This proposal would risk the loss of confidentiality of millions of taxpayers’ private information, would subject taxpayers to the abusive tactics of private debt collectors, and would cost U.S. citizens much more money than if IRS employees did 

the job. 

One of the most often heard arguments in favor of the use of private collection 

agencies is that if they are paid out of the proceeds of what they collect, it increases 

the IRS’ enforcement capabilities without having to increase appropriations. Numerous Congressional supporters said they would prefer to have tax collection done by 

federal employees, but would go along with the use of private collection agencies 

solely because it avoids the difficult issue of getting Congress to approve additional 

appropriations for the IRS. 

The statute that gives the IRS the authority to use private collection agencies 

(PCAs) allows 25 percent of collected revenue to be returned to the collection companies as payment and 25 percent to be retained by the IRS for enforcement efforts, 

thereby circumventing the appropriations process altogether. 

102 

There is nothing magical about revenues collected by private collection companies. 

If those revenues could be dedicated directly to contract payments and IRS enforcement efforts, there is no reason some small portion of other revenues collected 

couldn’t be dedicated to IRS enforcement efforts. This would allow for increased enforcement by IRS employees, which most people indicate is the preferable route and 

eliminate large payments (up to 25% of collections) to private collection companies, 

significantly increasing net revenue to the General Treasury. While legislation 

would be required to allow for this kind of dedication of revenue, I believe the precedent has now been set with the private collection agency funding provisions. Congress should consider supporting this approach as a common sense way to make real 

progress in closing the tax gap, lowering our deficits and making more funding 

available for our Nation’s critical needs. 

According to GAO’s May 2003 testimony before the House Treasury Appropriations Subcommittee (GAO–03–732T), one major concern the IRS must address prior 

to implementing tax collection outsourcing is the ability to identify ‘‘delinquent 

debts with the highest probability of resolution through PCA contacts. Earlier pilot 

efforts to study the use of PCAs in 1996 and 1997 were hindered, in part, because 

the IRS was unable to do this—While IRS proposes using the ‘‘case selection analytics’’ to identify appropriate cases, the analytical model has not been developed.’’ 

It appears as though the IRS has not yet addressed case selection. According to 

the IRS’ February 15, 2005 ‘‘Filing and Payment Compliance Modernization Briefing: The Use of Private Collection Agencies,’’ there are five major issue areas that 

still need to be addressed before handing work over to the PCAs. One of the issue 

areas is selecting the workload for PCAs (called Filing and Payment Compliance), 

which will be part of the Business Systems Modernization Program. Since case selection was a major obstacle for the IRS in its 1996 pilot program, the IRS should 

ensure that the technology is in place prior to handing over any work to the PCAs. 

Furthermore, the IRS does not have the technology in place to ensure that taxpayer information is kept secure and confidential when it is handed over to the 

PCAs. The IRS expects to hand over taxpayer information, including Social Security 

number, to the private collection companies. 

Recent security breaches at three data brokerage firms here in the U.S. should 

alarm every Member of Congress and put into question the IRS’ plans for moving 

forward with this privatization plan. ChoicePoint compromised the personal information of 145,000 Americans. At LexisNexis, thieves were able to access 32,000 

records including Social Security numbers and drivers licenses. And Bank of America recently reported it has lost personal data—including Social Security numbers 

and account information—on 1.2 million federal employees, including some members 

of the Senate. These are companies that are in the business of trading—and securing—personal information. If they aren’t able to secure confidential consumer information, I have little faith that a private debt collection company will be able to 

guarantee U.S. taxpayers that their information will remain secure. 

I would urge the Subcommittee to work with your colleagues to repeal this illfated proposal. Additionally, I would urge the Subcommittee to require the IRS to 

perform cost comparisons and closely track the contractors’ costs. This is the only 

way that taxpayers can be certain their tax dollars are being spent wisely. 

Customer Service Cuts 

The President’s budget proposes to cut $134,103,000 and 1,205 positions from customer service, with Taxpayer Assistance Centers (TACs) targeted for drastic reductions. IRS Taxpayer Assistance Centers are taxpayers’ source for personal, face-toface tax help. Taxpayers who have complex issues, need to resolve a tax problem, 

or are more comfortable talking with someone in person can visit a local Taxpayer 

Assistance Center. IRS representatives in these offices can help with inquiries or 

adjustments to tax accounts, payment plans for those who owe tax and cannot pay 

the full amount, questions about IRS letters and notices, and levies on wages or 

bank accounts. 

These cuts will mean that minorities and low-income taxpayers, who rely on the 

Centers to help with language barriers, the earned-income tax credit and general 

tax preparation, will see the tax services they rely on cut. As Janet Spragens, law 

professor and director of American University College of Law’s Federal Tax Clinic, 

notes in her testimony before the IRS Oversight Board (February 1, 2005): 

‘‘. . . these taxpayers, many of whom have limited or no proficiency in English, are 

generally not part of the information age. They are not Internet connected. . . . They 

tend to be helped better through local walk-in offices and opportunities for face-toface meetings than with an organizational structure based on specialization of function, remote offices, mailed documents, telephone trees with automated selections and 

electronic transfers.’’ 

103 

Even the IRS Oversight Board raises concerns of the IRS’ plan to eliminate additional customer service personnel. In its FY2006 IRS Budget Special Report (March 

2005), the Board states its concerns: 

‘‘Increasing enforcement resources at the expense of service resources is a trend that 

can lead to a system that fails to meet the needs of all honest taxpayers.’’ 

The IRS claims that taxpayers will continue to have access to tax forms and information through on-line access, telephone assistance and volunteer tax preparation. 

Unfortunately, many taxpayers who use the walk-in centers have little or no proficiency in English and are not part of the electronic information age. Tax forms on 

the Internet and phone trees do them little to no good. They rely on face-to-face contact with their local Taxpayer Assistance Centers to help them comply with various 

complexities of the tax code. 

While the agency has not yet provided specific information either to NTEU or to 

affected employees, it is my understanding that the agency is reviewing options that 

include closing either 105 TACs, affecting 528 employees, or 67 TACs, affecting 516 

employees. Either way, the plan is a significant step backward in the ability of the 

IRS to do its job effectively. 

The IRS has suggested that private tax assistance programs using volunteers can 

fill the void that will be created by the cutbacks. While volunteer taxpayer assistance organizations play an extremely helpful role in assisting taxpayers to meet 

their tax obligations, it is foolhardy for the agency to rely on volunteers to do work 

that should be performed by trained and accountable federal employees. Volunteers 

claim there’s already a shortage of computers and other resources to help every taxpayer who seeks assistance, and that situation will only worsen if the IRS follows 

through with its proposed cuts to customer service. 

Furthermore, as the IRS is cutting back walk-in customer service operations, it 

is also planning to close six of its call sites in Boston, Houston, Chicago Des Moines, 

Wichita, and Omaha. Especially hard hit will be the Boston, Houston and Chicago 

facilities where nearly 200 employees could be affected. These are facilities where 

the employees receive taxpayers’ inquiries and respond to their tax questions. 

Congress must commit to funding the IRS at adequate levels so the IRS is not 

made to choose between bolstering enforcement and providing the superior service 

our taxpayers expect and deserve. I urge the Subcommittee to again take the budget 

recommendation of the IRS Oversight Board, prohibit the IRS’ proposed cuts in customer service and require the Service to maintain all current Taxpayer Assistance 

Centers. 

Conclusion 

On behalf of the dedicated federal employees NTEU represents, I am proud to 

submit these views for the hearing record. I encourage the Oversight Subcommittee 

to make a strong investment in the federal workforce by supporting a strong budget 

for the IRS; repealing the IRS’ authority to privatize tax collection; and prohibiting 

the IRS from closing up to one-quarter of its Taxpayer Assistance Centers. 

Without a doubt, the frontline employees are committed to working with management and Congress to increase efficiency and customer satisfaction. NTEU is committed to striking a balance between taxpayer satisfaction, business results and employee satisfaction. I encourage Congress to join us in this commitment. 

f 

Statement of Christine C. Bauman, University of Wisconsin-Milwaukee, and 

Katrina L. Mantzke, Northern Illinois University 

AN EDUCATION AND ENFORCEMENT APPROACH TO DEALING WITH 

UNSCRUPULOUS TAX PREPARERS 

ABSTRACT 

In both her 2002 and 2003 Annual Reports to Congress, the National Taxpayer 

Advocate (NTA) proposed national registration, examination, certification, and enforcement requirements for all Federal Tax Return Preparers (FTRP). An FTRP is 

defined as someone, other than an attorney, CPA, or enrolled agent, who prepares 

more than five federal tax returns in a calendar year. This proposal was primarily 

motivated by the NTA’s experience in dealing with taxpayers who were exploited 

by unscrupulous tax preparers, especially with respect to the earned income credit 

(EIC). Although the IRS believes that all taxpayers should have access to quality 

tax return preparation, it contends that it is premature to consider a legislative 

104 

1 Internal Revenue Service. Statistics of Income Data, 2002. 2 U.S. Government Accounting Office. Paid tax preparers: most taxpayers believe they benefit, 

but some are poorly served. GAO–03–610T, April 1, 2003. The GAO is quick to note that its survey only measures taxpayer perceptions. Since many taxpayers use paid preparers because they 

do not understand the tax laws, they are ill-equipped to truly evaluate their paid preparers’ 

work. As such, the results of the GAO survey may overstate the actual quality of the services 

being provided. 3 U.S. Government Accounting Office. Tax deductions: further estimates of taxpayers who may 

have overpaid federal taxes by not itemizing, GAO–02–509, March 29, 2002. 4Treasury Inspector General for Tax Administration. Analysis of statistical information for returns with potentially unclaimed additional child tax credit. Washington, D.C., January 2003, 

Ref. Number: 2003–40–046. 5 Internal Revenue Service, Department of the Treasury. 2002. Compliance estimates for 

earned income tax credit claimed on 1999 returns. Washington, D.C.: February 28, 2002. 6 Berube, A., A. Kim, B. Forman, and M. Burns. May 2002. The price of paying taxes: How 

tax preparation and refund loan fees erode the benefits of the EITC. Center for Urban & Metropolitan Policy, The Brookings Institute and the Progressive Policy Institute. 

remedy to tax preparer problems since the full extent of the problem is unknown 

and the related financial impact on limited IRS resources has not been quantified. 

The purpose of this paper is to examine the proposed regulation of FTRPs by reviewing the development of similar regulatory proposals over the past several decades, outlining current and proposed federal regulation of tax preparers, discussing 

state regulation of tax preparers, describing concerns with increased regulation, and 

offering alternative recommendations to regulation, specifically education and enforcement. 

AN EDUCATION AND ENFORCEMENT APPROACH TO DEALING WITH 

UNSCRUPULOUS TAX PREPARERS 

In its 90 years of existence, the U.S. income tax has evolved into a complex taxation scheme. As a result, taxpayers bear not only the burden of their taxes but also 

the burden of complying with a complex and often confusing taxation system. Not 

surprisingly, IRS Statistics of Income Data 1 show over 60% of all individual 2001 

income tax returns were prepared by federal tax return preparers (FTRP). A tax 

preparer is defined under Internal Revenue Code (IRC) Section 7701(a)(36) as any 

person who prepares any U.S. income tax return or any claim for refund of U.S. income tax for compensation. This definition also includes any person who employs 

one or more persons to prepare such tax returns. 

A recent U.S. Government Accounting Office (GAO) survey found that 77% of taxpayers that used paid preparers were generally confident that they did not pay more 

than their share of taxes. However, anecdotal evidence indicates that some taxpayers are poorly served by their FTRPs.2 Unfortunately, little data exists on the 

overall quality of the services provided by FTRPs to the population of taxpayers 

using their services. Nevertheless, the quality of these services can be inferred. The 

GAO estimates that over 2 million taxpayers overpaid their 1998 taxes by $945 million because they used the standard deduction instead of itemizing. Since half of all 

tax returns are prepared by FTRPs, the GAO concluded that these data raise questions regarding the quality of service provided by FTRPs.3 Similar arguments can 

be made with respect to tax credits available to taxpayers. The Treasury Inspector 

General for Tax Administration (TIGTA) estimated that 230,000 taxpayers who 

used FTRPs for their 2001 tax returns appeared to be eligible to claim the additional child tax credit but did not.4 Similarly, the IRS estimated that a subset of 

1999 tax returns claimed $11 billion more in EIC than was permissible, while another subset of 1999 tax returns claimed $710 million less EIC than was permissible.5 Since more than 65 percent of tax returns claiming EIC for 1999 were filed 

by FTRPs, it is likely that some of these EIC errors relate to services provided by 

FTRPs. 

While most tax preparers are reputable, there is a concern that some FTRPs prey 

on taxpayers. According to a May 2002 Brookings Institute and Progressive Policy 

Institute Report 6, the vast majority of paid tax preparation services for individuals 

are provided by a disparate array of unaffiliated professionals including certified 

public accountants, attorneys, and enrolled agents, as well as fly-by-night amateurs. 

Since there are no national educational or professional standards for tax preparers, 

the tax preparation industry is fragmented, unregulated, and primarily seasonal. 

This observation is corroborated by Treasury Regulation Section 301.7701–15(a)(3) 

which states that ‘‘a person may be an income tax return preparer without regard 

to educational qualifications and professional status requirements.’’ Similarly, many 

preparers are ill-equipped to deal with the ever-increasing complexity of tax laws. 

105 

7 Circular 230 provisions apply to attorneys, certified public accountants, and enrolled agents. 

8Prior to 1995, the National Society of Accountants was called the National Society of Public 

Accountants. 9 Anonymous. 1972. NSPA’s eight-point program for regulating tax return preparers. The National Public Accountant, Vol.17, No.5, May, pp. 16–18. 10Shapiro, L. 1995. Commercial tax return preparers. The National Public Accountant, Vol. 

40, Sept., p. 7. 11See supra note 10. 

As a result, the issue of improved regulation of tax preparers has been hotly debated over the past three decades. 

In both her 2002 and 2003 Annual Reports to Congress, the NTA recommends 

that Congress enact a registration, examination, certification, and enforcement program for FTRPs. An FTRP is defined in the proposal as someone, other than an attorney, CPA, or enrolled agent, who prepares more than five federal tax returns in 

a calendar year and satisfies registration, examination, and certification requirements. The NTA has convened a cross-functional team to explore the feasibility of 

requiring annual certification and professional education for all commercial preparers not currently covered by Treasury Department Circular 230 (31 C.F.R. Part 

10).7

The proposed regulation of FTRPs is not a novel suggestion. Such regulation has 

been considered numerous times during the last 30 years without subsequent 

changes to the status quo. The purpose of this paper is to examine the currently 

proposed FTRP regulation by reviewing the history of former proposals, outlining 

current and proposed federal regulation of tax preparers, discussing state regulation 

of tax preparers, describing concerns with increased regulation, and offering alternative recommendations. 

HISTORY OF PROPOSED TAX PREPARER REGULATION 

As early as 1972, the National Society of Accountants (NSA) 8 called for increased 

regulation of tax preparers.9 The NSA presented the IRS with an eight-point plan 

focused primarily on the mandatory registration of every individual providing tax 

preparation services for a fee. The NSA argued that incompetent and irresponsible 

tax preparers would be easier to identify once they were registered. Once identified, 

the NSA argued that these preparers would then be held accountable for their work, 

thereby protecting American taxpayers. The NSA plan did not require any competence qualifications for initial registration. However, registration renewal would 

require preparers to participate in IRS prescribed continuing education, reported in 

three-year intervals. The plan called for penalties for those preparers who did not 

comply. Preparing tax returns without a registration or with an invalid registration 

would be a misdemeanor subject to fine and/or imprisonment upon conviction. Similarly, the IRS would have the power to revoke or suspend registrations for appropriate cause. 

There is no evidence that the IRS did anything with the NSA plan proposed in 

the 1970s. Yet, the issue of regulating tax preparers did not die. In 1989, the Commissioner’s Advisory Group (CAG) within the IRS studied the issue.10 The CAG’s 

report outlined the concerns many had about tax preparers and summarized the 

penalties to which these individuals were subject. The report weighed the pros and 

cons of a regulatory/registration program and concluded that such a program should 

be established. Shortly after this recommendation was made, Congress busied itself 

with changes to the IRC’s tax preparer and accuracy related penalties, and the 

Treasury Department made changes to the regulations governing practice before the 

IRS. Accordingly, the CAG’s recommendations were shelved. 

In 1994–1995, the issue resurfaced. Following up on its concept-oriented report 

from the 1980s, the CAG now made specific recommendations for a formal regulation/registration program.11 The program called for the registration of all tax preparers as defined by IRC Section 7701(a)(36) that were not already covered by the 

regulations outlined in Circular 230. While initial registration would not require 

proof of continuing professional education (CPE), subsequent registration renewal 

would require proof of CPE. The report was presented to the IRS Commissioner for 

consideration but did not result in any changes to the tax preparation industry. 

Most recently, Senator Bingaman (Democrat, New Mexico) sponsored the ‘‘Low Income Taxpayer Protection Act of 2003.’’ Among other things, this bill would have 

required the registration of tax preparers and refund anticipation loan (RAL) providers, and the prohibition of the payment of refunds to tax preparers and RAL providers that fail to provide their registration numbers. On March 31, 2003, this bill 

was referred to the Senate Finance Committee. To date, there is no evidence that 

this bill progressed any further in the legislative process. 

106 

12Gutierrez, T. 2001. Return preparer penalties: A comprehensive review. The CPA Journal, 

Vol. 71, Issue 6, June, pp. 34–43. 13 Neuder, L. 2002. IRSAC praises Commissioner Rossotti’s recent programs. CCH, 

2002TaxDay, October 23. 14See supra note 13. 15 Raby, B. and W. L. Raby. 2002. Tax practitioner standards and professional self-discipline. 

Tax Notes Today, October 25. 

EXISTING FEDERAL REGULATION OF TAX PREPARERS 

The IRS is empowered to deal with incompetent and irresponsible tax preparers 

via existing laws. Various code sections assess penalties based on the content of tax 

returns compiled by paid preparers. IRC Section 6694 imposes penalties on tax preparers for understatements of tax due to unrealistic positions. IRC Section 6701 imposes penalties on tax preparers for aiding and abetting taxpayers in the understatement of tax. Finally, IRC Section 6702 imposes penalties on tax preparers who 

file frivolous income tax returns on behalf of their clients. 

Other code sections assess penalties on tax preparers for their actions in compiling tax returns. IRC Section 6695 assesses a litany of penalties on tax preparers, 

including penalties for failure to provide the taxpayer with a copy of his/her tax return, failure to sign the tax return, failure to furnish the preparer’s identification 

number, and failure to be diligent in determining eligibility for EIC. IRC Section 

6713 imposes penalties on tax preparers for disclosing taxpayer information or using 

such information for purposes other than tax return preparation. Gutierrez 12 presents a thorough discussion of each of the foregoing provisions and their legislative 

history. 

The Internal Revenue Code also provides for civil and criminal sanctions with respect to the preparation of tax returns. From a civil perspective, IRC Section 7407 

permits the Secretary of the Treasury to bring a civil action against a preparer to 

enjoin him/her from preparing tax returns if he/she has engaged in any conduct subject to the penalties discussed above or the following criminal penalties. IRC Section 

7201 assesses criminal penalties on taxpayers and their return preparers who willfully attempt to evade taxes. IRC Sections 7206 and 7207 assess criminal penalties 

on the making of fraudulent or false statements, the willful aiding, assisting, counseling or advising in the preparation or presentation of fraudulent or false statement, and the delivery or disclosure of a fraudulent or false statement. Finally, IRC 

Section 7216 assesses criminal penalties on tax preparers who disclose or use taxpayer information for purposes other than the preparation of the tax return. 

It is interesting to note that the only substantive change made to the IRC penalties for tax preparers since the CAG’s last report in 1995 was the addition of Section 6695(g), due diligence requirements with respect to EIC. This change suggests 

that problems exist with the administration of the EIC. In addition, there is significant evidence that the extensive penalty provisions for tax preparers are not being 

enforced. 

Failure to Enforce Tax Preparer Penalties 

On October 18, 2002, the IRS Advisory Council (IRSAC) presented a ‘‘General Report’’ at a public forum expressing concern with the underutilization of tax preparer 

penalties given tax preparation error rates.13 IRSAC members of the IRS Wage and 

Investment Subgroup were concerned about the relative scarcity of preparer penalties in recent years. For example, in 2001, only 248 paid preparers were assessed 

the $100 penalty for violating due diligence requirements regarding EIC. Further, 

a mere 3,000 preparers were assessed a $50 penalty under IRC Section 6695(a)-(f). 

About 4,000 preparers were assessed the $250 penalty for negligent return preparation. A $1,000 penalty for deliberate or willful return errors was imposed on about 

3,000 preparers. The Subgroup expressed similar concern with the low number of 

criminal sanctions compared to reported error rates on EIC returns. 

IRSAC concluded that the low rate of tax preparer sanctions imposed for preparer 

malfeasance creates the perception in the non-enrolled (not subject to Circular 230) 

tax community that negligent or willful errors on returns carry a limited risk of 

penalty sanctions. The IRSAC panel urged the IRS Wage and Investment group to 

review its current allocation of resources and its strategies for imposing sanctions 

against non-enrolled, paid preparers.14

The IRS’s disciplinary authority is the de facto source of tax practice standards 

that all tax practitioners have in common, whether they be CPAs, attorneys, enrolled agents, or unenrolled preparers.15 Thus, the failure to enforce current regulation of tax preparers raises the concern about how additional regulation will succeed. 

107 

16Sager, W. 1995. Why regulation and registration of commercial tax return preparers is a 

bad idea. The National Public Accountant, Vol. 40, December, pp. 34–35. 

PROPOSED FEDERAL REGULATION OF TAX PREPARERS 

The NTA’s 2002 Annual Report recommended that Congress enact a registration, 

examination, certification, and enforcement program for FTRPs. The FTRP program 

would include the following components: 

(1) A requirement that all persons who prepare more than five federal tax returns 

for a fee must register with the IRS. The IRS would be authorized to impose a per 

return penalty for failure to register, absent reasonable cause for the failure. 

(2) A requirement that the IRS develop a series of examinations designed to test 

the technical knowledge and competency of unenrolled return preparers to prepare 

federal tax returns. 

(3) A requirement that all persons who prepare more than five federal tax returns 

for a fee must pass, in their first year of preparing such returns, an initial examination testing their technical knowledge and competency to prepare individual and/or 

business tax returns. 

(4) A requirement that the IRS annually certify as FTRP those unenrolled paid 

preparers who have successfully passed the required examinations and are authorized to prepare federal tax returns for a fee. 

(5) Authorization for the IRS to conduct a public information and consumer education campaign, utilizing paid advertising, to inform the public of the requirements 

that paid preparers must (1) sign the return prepared for a fee; and (2) display their 

FTRP registration card, which demonstrates current skill and competency in federal 

tax return preparation. 

(6) Authorization for the IRS to maintain a public list of FTRP who are registered 

and certified, registered but not certified, and whose registration has been revoked. 

(7) Authorization for the IRS to notify any taxpayer about the fact that his or her 

return was prepared by an unenrolled return preparer who is not registered or by 

a FTRP who is registered but not certified. 

In her 2003 Annual Report to Congress, the NTA makes 15 recommendations 

with respect to FTRPs. Topping this list is the call for a registration, examination, 

certification, and enforcement program for FTRPs. This recommendation echoes the 

primary recommendation made in the NTA’s 2002 report. The next 10 recommendations call for new or increased penalties for preparer wrong-doing. Recommendation 

#12 calls for a study of the accuracy of tax returns prepared in conjunction with the 

cross-marketing of other consumer products and services. Recommendation #13 requires the appointment of consumer protection advocates to the IRS’ Electronic Tax 

Administration Advisory Committee. Recommendation #14 calls for the FTRP to 

identify his/her return preparer category (e.g., attorney, CPA, enrolled agent, or 

unenrolled preparer), and recommendation #15 encompasses taxpayer education regarding their rights and responsibilities in dealing with FTRPs. 

STATE REGULATION OF TAX PREPARERS 

While the issue of improved regulation of tax preparers has been kicked around 

at the federal level for years with no real resolution, the states have been similarly 

reluctant to address the issue. In recent years, licensing laws were proposed but 

were not enacted in Florida, Illinois and Texas.16 However, the exceptions to this 

general rule are California and Oregon. 

California 

Since July 1997, the California Tax Education Council (CTEC) has regulated tax 

preparers in the state. Compliance with the California Tax Preparers Act (California 

Business and Professions Code, Chapter 14, Sections 22250–22259) requires completing a qualifying education tax course, obtaining a surety bond, and obtaining a 

certificate of completion from the CTEC. Failure to comply with these rules is a misdemeanor, punishable by fine and/or imprisonment. 

While California law governs tax preparers practicing in California, a private institution handles the enforcement of this law. The CTEC is an industry association 

that establishes the standards against which professional tax education is measured 

and approves educators that meet these standards. The CTEC’s other responsibilities include verifying and registering paid preparers who meet California’s education and/or experience requirements. To date, the CTEC has not published statistics regarding its enforcement efforts. 

Oregon 

While California has established education and registration requirements for its 

tax preparers, Oregon has gone much further with its regulation of tax preparers. 

108 

17 U.S. Government Accounting Office. Tax administration: most taxpayers believe they benefit 

from paid tax preparers, but oversight for IRS is a challenge. GAO–04–70, October, 2003. 18 National Taxpayer Advocate Report to Congress. 2002. pp. 216–217. 19See supra note 18. pp. 69–72. 20See supra note 17. p. 25. 21 In January 2003, the new Office of Professional Responsibility for Tax Practitioners (OPR) 

replaced the old Director of Practice. OPR has a core staff of approximately 35. 22See supra note 17. p. 22. 

For the past thirty years, the Oregon State Board of Tax Practitioners (the Board) 

has required instate tax preparers to be licensed (http://www.open.org/ortaxbrd/). 

This licensing program requires preparers to demonstrate their competence via examination. Once licensed, tax preparers must comply with continuing education requirements on an annual basis. 

Oregon’s licensing program was established with the primary goal of protecting 

taxpayers from incompetent and unethical tax return preparers. While this is still 

one of the Board’s primary goals, issues surrounding identity theft have accounted 

for many of the Board’s investigations in recent years. The Board is continually 

working to improve the efficiency and effectiveness of the program, including the 

education of Oregon taxpayers. The Board utilizes a variety of outlets to spread the 

word about this program, including public service announcements, press releases, 

and print and television ads. The Board also benefits from industry associations 

communicating information about the program to their members. 

Oregon’s Board differs from the California Tax Education Council in that it is a 

governmental agency, with all board members being appointed by the Governor and 

approved by the Senate. The Board’s other responsibilities include investigating taxpayer complaints and when appropriate, assessing civil penalties, suspending or revoking licenses, and requiring the payment of restitution to harmed consumers. The 

Board also works with other governmental authorities to bring criminal charges 

when warranted. To date, the Board has not published statistics regarding its enforcement efforts. 

CONCERNS WITH A REGULATORY APPROACH 

By all indications, it appears that U.S. tax system is at least somewhat impaired 

by problems caused by FTRPs. However, evaluating proposals for increased regulation is hampered by the lack of systematic evidence of the extent of the problem 

and the effectiveness of existing regulation.17 As such, it is not clear that increased 

regulation is the answer. 

Identification and Quantification of the Problem 

It is very difficult, if not impossible, to solve a problem before determining what 

the problem truly is. In recommending increased regulation for tax preparers, the 

NTA does not specifically identify the problem with tax preparers nor does she 

quantify the cost of this problem.18 The only statistics that are presented relate to 

returns claiming the EIC. In identifying EIC return preparation as a problem area, 

the NTA quotes various statistics regarding errors encountered on EIC returns 19, but acknowledges that there is no consistent data regarding the number and types 

of errors on returns, tracked by type of tax preparer. Consequently, it appears that 

the broad-reaching proposals to regulate tax preparers are based on anecdotal evidence of emotionally charged taxpayers and tax advisors rather than statistical evidence of error rates and noncompliance. Without knowing the source of the problem 

and its size, it does not follow that increased regulation is necessarily the correct 

fix. 

Unfortunately, it appears that quantifying the problems associated with unscrupulous tax preparers might be an insurmountable task. The GAO notes repeatedly 

in its recent studies that ‘‘examples of problematic preparer behavior are easy to 

find but reliable estimates of the number of taxpayers affected by the problems do 

not exist and would be difficult, perhaps impossible, to develop’’.20 Interestingly, the 

GAO noted that nothing suggested that the percentage of taxpayers affected by unscrupulous tax preparers is large. The GAO also noted that the IRS has several offices responsible for taking action against problem paid preparers including the 

newly formed Office of Professional Responsibility.21 Therefore, it would be illogical 

to create a new regulatory system when a newly formed IRS office has already been 

charged with this responsibility. 

In concluding its report, the GAO did not make any recommendations but stated 

that expanded regulation of tax preparers is a judgment call that Congress and IRS 

management must make together, after considering 1) the benefits and costs to taxpayers, 2) that the IRS is not in the consumer protection business, and 3) the related implications for IRS resources.22

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23 Internal Revenue Service Position Paper. 2003. Regulation of federal tax return preparers. 24See supra note 23. 25See supra note 17. p. 16. 26Gary, K. A. 2003. CI division increases productivity, IRS official says. Tax Notes Today, October 30. 

The Cost of Increased Regulation 

Although the cost of increased regulation has not been estimated, there is little 

doubt that it will be a costly venture. Not surprisingly, the IRS indicated it had insufficient resources to administer a FTRP program as outlined in the proposed legislation and could not support a legislative remedy to the problem. The NTA estimates that there may be up to 600,000 FTRPs that would be covered by the legislative proposal. While specific costs have not yet been projected, the IRS looked at existing procedures that govern practice before the IRS as well as other areas that 

require high volume processing of information. If the proposed regulation of FTRPs 

has at least the same if not more processing and monitoring requirements, the IRS 

hypothesized that increased regulation would require the creation of a new mini 

submission processing operation with operating systems to process applications, certification, test results, etc. 

According to the IRS, significant additional resources would be required. 

IRS Concerns with Proposed Regulation 

The IRS in its formal response 23 to the NTA on the FTRP proposal outlines concerns similar to those listed previously. The IRS specifically cites five concerns 

namely that licensing of professionals has been a states’ rights issue; public perception, opportunity cost, enforcement, and added taxpayer cost. 

ALTERNATIVE RECOMMENDATIONS 

Instead of regulation, we posit that increased enforcement of existing preparer 

sanctions and increased taxpayer education will help to mitigate the problems 

caused by FTRPs. Then, in the event that increased regulation is seriously considered, steps must be taken to identify and quantify the problem. The state regulatory 

programs should then be evaluated to determine if those programs are effective and 

if so, how a similar system could be effectively implemented at the federal level. 

Increased Enforcement 

Paid returns preparers are currently subject to criminal and civil penalties for a 

wide range of inappropriate behavior. However, there is a dearth in the enforcement 

of existing regulations. The lack of tax preparer penalty enforcement cannot be ignored as a contributing factor to problems with tax preparers. 

If additional resources were to become available, IRS prefers to increase enforcement of the current return preparer penalty provisions, thus encouraging higher 

professional standards of practitioners and unenrolled return preparers.24

The IRS’s Small Business/Self-Employment (SB/SE) division is responsible for assessing and collecting monetary penalties against any paid tax preparer who does 

not comply with tax laws in return filing. For calendar years 2001 and 2002, SB/ 

SE assessed about $2.4 million in penalties and collected 12 percent of them, including all or some portion of penalties from 44 percent of penalized preparers.25 While 

a reprioritization on enforcement and collection may help to curb abuse, SB/SE stated that its priorities are focused on abusive tax schemes and it cannot afford to 

make relatively low dollar paid preparer cases a priority. 

The GAO also noted that the monetary amounts of preparer penalties, although 

small in comparison to IRS’s other compliance efforts, may not reflect the overall 

importance that penalties play as a deterrent to unscrupulous tax preparers. According to the Internal Revenue Manual, penalty assertion is the key enforcement 

vehicle for noncompliant preparers. However, the GAO duly noted that the IRS may 

actually be sending preparers a mixed message about whether poor performance by 

preparers will be tolerated when penalties are assessed but not collected. 

Alternative enforcement methods should also be employed. According to Richard 

Speier Jr., former acting deputy chief of IRS Criminal Investigation Unit, low-income individuals are swindled by tax preparers who guarantee them greater returns. Speier states that ‘‘the best way to address [abusive preparers] is with undercovers.’’ CI has instituted a ‘‘return-preparer shopping’’ task force whereby undercover agents are assigned to get word-of-mouth referrals to these tax preparers during tax filing season.26

Over the past two decades, numerous studies have researched the effectiveness of preparer penalties from different perspectives. Jackson and 

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27 Jackson, B. and S. Jones. 1985. Salience of tax evasion penalties versus detection risk. Journal of the American Taxation Association 6 (Spring): 7–17. 28 Carnes, G. and T. Englebrecht. 1995. An investigation of the effect of detection risk perceptions, penalty sanctions, and income visibility on tax compliance. Journal of the American Taxation Association 17 (Spring): 26–41. 29 Cuccia, A. 1994. Tax preparers: Integrating economic and psychological factors. Journal of 

the American Taxation Association 16 (Spring): 41–66. 30 Anderson, S. and A. Cuccia. 2000. A closer examination of the economic incentives created 

by tax return preparer penalties. Journal of the American Taxation Association 22 (Spring): 56– 

77. 31Taxpayers must access the IRS website or other IRS resources such as Tax Topic 254, ‘‘How 

to Choose a Paid Tax Preparer,’’ to learn about their rights and responsibilities. 32 Bergman, J. 2003. Dad, daughter get prison for slavery claim. Milwaukee Journal Sentinel, 

October 25. 

Jones 27 provide evidence that the magnitude of the penalty may be more 

important than the risk of detection in developing an effective penalty system. A decade later, Carnes and Englebrecht 28 modeled the penalty sanctions included in the Internal Revenue Code. They found that even low levels of penalty sanctions influence compliance behavior, suggesting that 

penalties can successfully deter noncompliance. Research has also considered the effect that penalties have on the aggressiveness of tax advice. 

Cuccia 29 found that increasing sanctions on preparers caused CPAs to invest more effort in finding tax savings for their clients and had little effect 

on the aggressiveness of their interpretations of ambiguous tax issues. In 

contrast, Anderson and Cuccia 30 studied experimental markets that incorporated competition and moral hazard and found that increased penalties 

resulted in a reduction of aggressive advice. While the extant literature has 

studied different aspects of preparer penalties, a synthesis of the literature 

suggests that penalty sanctions do have a positive influence on tax preparer behavior. Thus, academic research supports our contention that increased enforcement of existing penalties would better address the problems associated with paid preparers than would increased regulation of 

that group. 

Taxpayer Education is Paramount 

While the foregoing discussion focuses on the supply side of the equation (i.e., regulation of FTRPs supplying these services), the demand side (i.e., taxpayers demand 

for these services) should also be addressed. Educating taxpayers about their rights 

may prove to be equally effective in deterring unscrupulous FTRPs. Similarly, taxpayer education may prove to be the most fruitful use of resources since taxpayers 

cannot be ruled out as contributing to the problems seen with tax compliance (e.g., 

by providing incorrect/incomplete information; by active complicity in avoiding 

taxes, etc.). Finally, the taxpayer is ultimately responsible for his/her tax return and 

what it reports, regardless of any tax preparer involvement. Therefore, it would 

seem logical that any efforts to deal with the problems surrounding tax preparation 

start with the taxpayers themselves. 

Currently, taxpayers must be proactive in determining their rights and responsibilities with respect to the tax returns they file.31 In April 2001, the NTA recommended that the IRS do more to build public awareness regarding taxpayer 

rights and responsibilities. She suggested that the IRS include a consumer alert in 

appropriate brochures and publications. This alert should state in plain language 

that taxpayers that pay for return preparation should receive a copy of their return 

signed by the preparer. The message should also clearly state, ‘‘If they don’t sign, 

don’t pay.’’ Public service announcements could then be used to reinforce that message and toll-free phone numbers could be established for reporting tax preparers 

who refused to sign returns. 

The NTA has suggested that regulation is necessary because return preparer penalties are not sufficient to combat the problem. In light of the enormous profits to 

be made, the NTA’s goal is to get the ‘‘bottom feeders’’ out of the industry. Those 

who lack proficiency and knowledge in return preparation harm taxpayers in a 

number of ways, in the form of significant adjustments to taxpayers’ accounts, errors made in filing status, exemptions and credits, and preparation based on outdated tax provisions. However, the IRS used education and enforcement, not preparer regulation, in a successful education campaign to address inappropriate slavery reparation claims and to reduce unscrupulous tax preparers operating in this 

area. The IRS indicated that more than 80,000 tax returns were filed in 2001 seeking fictitious slavery tax credits totaling $2.7 billion.32 IRS estimated that $30 million was mistakenly paid out in slave reparations in 2000 and part of 2001. HowVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00114 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767
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33See supra note 23. 34 Internal Revenue Service. Fact Sheet, FS–2004–10. 2004. Return preparer fraud. 35 Internal Revenue Service. Fact Sheet, FS–2004–08. 2004. IRS outlines EITC eligibility for 

2003 tax year. 36 Internal Revenue Service. News Release, IR–2004–12. 2004. IRS urges taxpayers to review 

EITC eligibility. 37 Internal Revenue Service. 2002. IRS Release No. FS–2002–07. National research program— 

fact sheet. 

ever, the Service reports a significant drop in reparation claims attributable to 

stepped up scrutiny of tax returns and an aggressive media campaign targeting 

scam artists promising to secure these phony tax credits for taxpayers. 

The IRS recognizes that it faces a particularly difficult challenge in getting information to and identifying the needs of unenrolled tax return preparers. A current 

IRS effort to test the effect of education materials on those preparers who prepare 

EIC returns may provide a model of how to meet this challenge. This effort centers 

on a pilot program that sends a brochure to three groups of EIC preparers and then 

compares their subsequent rates of errors over three years to groups with similar 

characteristics who did not get the brochure. The brochure, with a desired outcome 

of reducing errors and improving EIC compliance, includes material on tax law 

changes, due diligence and information on where to get further EIC information.33

In addition to these efforts, the IRS has several education and outreach projects 

that educate taxpayers about unscrupulous tax preparers. IRS Fact Sheet 2004– 

10 34 urges taxpayers to be very careful when choosing a tax preparer by stating 

that taxpayers should ‘‘be as careful as you would in choosing a doctor or a lawyer. 

It is important to know that even if someone else prepares your return, you are ultimately responsible for all the information on the tax return.’’ The fact sheet offers 

‘‘Helpful hints when choosing a return preparer,’’ including ‘‘Use a reputable tax 

professional that signs your return and provides you with a copy for your records.’’ 

Taxpayers hearing claims from preparers offering larger refunds than other preparers are encouraged to check it out with a trusted tax professional or the IRS before getting involved. The fact sheet also lists examples of four tax return preparers 

sentenced to prison. 

IRS Fact Sheet 2004–08 35 is directed at taxpayers claiming the EIC. It reminds 

these taxpayers that ‘‘the vast majority of EIC claimants allow a third-party to prepare their taxes. If you allow someone to prepare your taxes, make sure you seek 

out reputable tax professionals. Regardless of who completes your tax form, you are 

responsible for its accuracy.’’ 

IRS New Release 2004–12 36 is also directed at taxpayers that are eligible for EIC. 

This release states that ‘‘EIC is an important program, and you should check to see 

if you qualify. EIC rules can be complicated so you should carefully review the 

qualifications. Know, don’t guess, if you are qualified. If in doubt, contact the IRS 

or its volunteer partners for help. If someone prepares your taxes, seek out a reputable professional who understands EIC rules and who will avoid common mistakes.’’ 

Identity and Quantify the Problem 

If Congress and the IRS do embrace increased tax preparer regulation, the existing problems must first be identified and quantified. The IRS National Research 

Program (NRP) provides a timely opportunity to take the necessary first step. 

The NRP is a comprehensive effort by the IRS to measure payment, filing and 

reporting compliance for different types of taxes and different sets of taxpayers.37

The NRP began collecting data on individual taxpayers in September 2002. In addition to the information that will be collected to serve the NRP, this program could 

also collect information regarding tax preparers for subsequent analysis regarding 

preparer performance. By focusing on tax preparers rather than individual taxpayers, the IRS may make more effective use of its limited resources. In addition 

to the NRP data, it seems the IRS could perform more statistical sampling of signed 

and unsigned tax returns identifying high error rates. For the ‘‘invisible tax preparer,’’ the IRS may consider using geographic error rates to highlight unscrupulous 

preparers. 

In the event that increased regulation is imposed, such regulation will need to include penalties for failure to register. The IRS notes that without such penalties, 

it is likely that many of these preparers will simply ignore regulatory provisions and 

continue their business as usual. Alternatively, many unscrupulous tax preparers 

could go underground (making their detection extremely difficult) offering their 

services at a lower cost, not signing tax forms, and evading any subsequent enforcement activities. This would make IRS enforcement that much more difficult and resource intensive. 

112 

38See supra note 17. 39See supra note 18. p. 226. 40See supra note 23. 41Miller, K. 2003. ABA Tax Section Meeting: Taxpayer Advocate plugs enrolled agent registration. Tax Notes Today, September 16. 42See supra note 17. 

Learn from State Regulation 

In addition to studying this issue at the Federal level, a rigorous investigation of 

Oregon’s and California’s programs could provide useful insights for the proposed 

Federal regulation. The GAO noted in its study that neither state has systematically evaluated the effectiveness of its regulation efforts, so little is known for certain about the successes and challenges of these programs.38

Based on the foregoing, it is surprising that the NTA believes Oregon’s program 

has significantly improved the accuracy of tax returns. For the 1999 tax year, the 

NTA looked at the number of tax returns containing errors to the total number of 

returns filed. The NTA found that the error rate of tax preparers in Oregon was 

30 to 60% lower than those of the other states when Oregon is compared to states 

similar in size. In her 2002 report to Congress,39 the NTA concluded that this statistic is ‘‘compelling support for registering tax preparers.’’ However, neither the IRS 

nor the GAO concurs with this position. A simple comparison of error rates between 

states lacks the rigor necessary to draw inferences regarding the overall effectiveness of the Oregon program. 

The IRS Position Paper 40 duly notes that neither California nor Oregon has data 

on the effectiveness of their programs and California specifically noted the difficulty 

in identifying unregistered preparers. It remains an empirical question whether or 

not California and Oregon’s efforts at tax preparer regulation are effective. The IRS 

indicated intent to continue dialogue with these states as their experience could provide important information to guide future Federal action in this area. 

SUMMARY REMARKS 

For several years, the NTA has proposed national registration, examination, certification, and enforcement requirements for all FTRPs, including unenrolled tax 

preparers. However, given the lack of quantification of the problem, cost/benefit justification, and the documented failure to enforce paid tax preparer penalty provisions already in place, the proposed legislation does not appear justified at this 

time. 

As a supplement to regulation, the NTA has also advocated an extensive campaign to educate taxpayers about using certified return preparers. She cites some 

low-cost solutions to help reduce low-income taxpayers’ reliance on unenrolled preparers. One is to get Congress to including funding for return preparation services 

in grants to low-income taxpayer clinics. Another is to underwrite programs on computer and financial literacy for low-income taxpayers. ‘‘There are 20,000 answers 

that government could come up with—. If it cared to, to address this problem,’’ 

Olson said.41

An initial approach to addressing the unscrupulous tax preparer problem 

is focusing on education and enforcement. The IRS has been extremely successful through education and outreach in drastically reducing slavery reparation claims over a short period of time. In addition, both the IRS and 

the GAO note that the Service needs to establish an effective enforcement 

program to show taxpayers and tax return preparers that they must comply with the law. The education campaign used in Oregon could serve as 

a starting point for a national campaign. In his response dated October 28, 

2003 to the GAO report 42 on paid tax preparers, IRS Commissioner 

Everson indicates that the IRS has formed a multi-functional work group 

to improve communications between functions and develop a national return preparer strategy. These education and enforcement strategies should 

be given a reasonable time to be implemented and evaluated before revisiting national regulation of unenrolled tax preparers. 

f 

Statement of Gerald E. Scorse, New York, New York 

This is my third submission for the record urging the closing of a particular loophole in the personal income tax law. No loophole is desirable, but some are small 

and relatively innocuous; by contrast, this one is large and especially offensive. 

113 

Wages are reported by a third party to the IRS. The same goes for interest and 

dividends, and various types of miscellaneous income. But capital gains income is 

exempt from this standard reporting requirement, and instead is self-reported. 

This is inequitable and costly. Why should wages be reported to the IRS, and not 

capital gains? At a time of soaring budget deficits, why should double-digit billions 

be lost every year because of this loophole? 

There is no good reason; what’s more, the loophole could be easily closed. 

I invite the Subcommittee, the full Committee and the House at large to read 

‘‘Searching for Tax Fairness,’’ below, which explores the issue and suggests an obvious and simple solution. 

Thank you (for the third time) for the opportunity to make a submission. 

Searching for Tax Fairness 

If you haven’t read James Surowiecki’s The Wisdom of Crowds, get ready for a 

surprise. 

In a book that’s part math, part psychology and part common sense, Surowiecki 

upends the popular belief that individuals are smarter than groups. Not so, he says. 

When it comes to solving problems, look to the group for dead-on answers. 

Paying taxes, Surowiecki states, ‘‘is a classic example of a cooperation problem’’. 

Everyone benefits from the services that taxes provide, but this is true whether or 

not they pay any taxes. Therefore, why pay? 

In Surowiecki’s view, taxpayers ante up in large part because they believe that 

others are doing likewise. Americans, according to historian Margaret Levi, are 

‘‘contingent consenters’’. Few of us are thrilled to pay taxes, but we don’t mind paying our share as long as we’re sure that the folks next door are paying theirs. 

But hold on. What makes us believe that our fellow citizens are giving the taxman 

his due? Are we being chumps, or does something in the system give us the assurance we need? 

The answer arrives like clockwork every tax season. It’s the blizzard of W–2s and 

1099s sent out by employers, banks, brokerage houses and mutual funds, telling us 

how much we made the year before in wages, interest, dividends and other forms 

of income. Each bears the reminder, ‘‘This information is being furnished to the Internal Revenue Service.’’ 

It’s this third-party reporting that forms the linchpin of our ‘‘voluntary’’ tax system. It is the lodestar that keeps us on the straight and narrow, and tells us that 

we’re all in the same boat. 

But hold on one more time. There’s a gold mine of unearned income that has its 

own set of rules, that isn’t ‘‘furnished to the Internal Revenue Service.’’ This rich 

vein is capital gains income from the sale of stocks, bonds and mutual funds. None 

of this income is reported by a third party to the IRS, though you could easily think 

it is. 

To explain: The IRS does get reports of proceeds from stock, bond and mutual 

fund sales. But the agency isn’t told what these holdings cost to begin with, or when 

they were bought. In tax-speak, income from these transactions is ‘‘self-reported’’; 

the figures don’t come from a third party, they come from the taxpayer. 

This is unfair on its face, and porous tax policy besides. 

A major IRS study found that misreporting rises sharply with self-reporting, 

climbing to more than 12 times the rate for income reported by third parties. Other 

government and scholarly studies have produced similar results. Kim Bloomquist, 

a senior economist with the IRS, makes the point the other way around: ‘‘One of 

the few generally accepted facts in the literature on tax compliance economics is the 

existence of a positive relationship between transaction visibility and reporting compliance.’’ 

There’s no question that the self-reporting of capital gains costs the U.S. Treasury; the only question is how much. Unless we’re a nation of angels, the figure likely hits the double-digit billions every year. On top of that there’s the multiplier effect: states and cities which simply plug federal totals into their tax returns get 

short-changed as well. 

The solution is only half a step away, staring us in the face and daring us to put 

it in place. 

Brokerage houses and mutual funds routinely track their customers’ basis prices, 

purchase dates and realized capital gains, and report the information to them. With 

little more than the click of a mouse, the same data could be reported to the IRS 

at tax time. 

Circle back to Surowiecki: ‘‘Getting people to pay taxes is a collective problem. We 

know what the goal is: everyone should pay their fair share—.’’ Just last month, 

IRS Commissioner Mark W. Everson sounded a similar note when he told the NaVerDate Aug 31 2005 03:43 Mar 09, 2006 Jkt 024767 PO 00000 Frm 00117 Fmt 6633 Sfmt 6621 E:\HR\OC\24767.XXX 24767
114 

tional Press Club, ‘‘Average Americans pay their taxes honestly and accurately, and 

have every right to be confident that when they do, their neighbors—are doing the 

same.’’ 

It’s time to put more reality into Everson’s rhetoric; it’s time to treat capital gains 

income the same as wage income, and have it reported by third parties. 

Just ask any crowd. 

SOURCES 

Bloomquist, Kim M. ‘‘Trends as Changes in Variance: The Case of Tax Noncompliance,’’ presented at the IRS Research Conference, June 2003. Bloomquist is Senior Economist, Office of 

Research, IRS. His paper cites the agency’s major study, and several others, on the relationship 

between tax compliance, third-party reporting (‘‘matchable income’’) and self-reporting (‘‘nonmatchable income’’). The article is accessible online: go to Google, search for ‘‘Kim M. 

Bloomquist,’’ and click on the third link, which is the title of the paper. See pp. 2–3. 

Everson, Mark W. Speech at the National Press Club, Washington, D.C., March 15, 2005. 

Surowiecki, James M. The Wisdom of Crowds: Why the Many Are Smarter Than the Few and 

How Collective Wisdom Shapes Business, Economies, Societies and Nations. Doubleday, 2004. 

The quote in paragraph 3 is from p. 137; in paragraph 4, from p. 138; in the next-to-last paragraph, from p. 141. 

Note: Capital gains distributions by mutual funds are a technical exception to the rule; they 

are the only capital gains reported by a third party. 

Supplemental Sheet 

I make this submission on my own behalf as a taxpayer and a citizen of the 

United States of America. I represent no-one other than myself. 

Æ