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49–992 2009

TAX RETURN FILING SEASON, INTERNAL 

REVENUE SERVICE OPERATIONS, FISCAL 

YEAR 2009 BUDGET PROPOSALS, AND THE 

IRS NATIONAL TAXPAYER ADVOCATES ANNUAL 

REPORT 

HEARING 

BEFORE THE

SUBCOMMITTEE ON OVERSIGHT 

OF THE

COMMITTEE ON WAYS AND MEANS 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED TENTH CONGRESS 

SECOND SESSION 

MARCH 13, 2008 

Serial No. 110–75 

Printed for the use of the Committee on Ways and Means 

( 

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COMMITTEE ON WAYS AND MEANS 

CHARLES B. RANGEL, New York, Chairman 

FORTNEY PETE STARK, California 

SANDER M. LEVIN, Michigan 

JIM MCDERMOTT, Washington 

JOHN LEWIS, Georgia 

RICHARD E. NEAL, Massachusetts 

MICHAEL R. MCNULTY, New York 

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 

EARL BLUMENAUER, Oregon 

RON KIND, Wisconsin 

BILL PASCRELL JR., New Jersey 

SHELLEY BERKLEY, Nevada 

JOSEPH CROWLEY, New York 

CHRIS VAN HOLLEN, Maryland 

KENDRICK MEEK, Florida 

ALLYSON Y. SCHWARTZ, Pennsylvania 

ARTUR DAVIS, Alabama 

JIM MCCRERY, Louisiana 

WALLY HERGER, California 

DAVE CAMP, Michigan 

JIM RAMSTAD, Minnesota 

SAM JOHNSON, Texas 

PHIL ENGLISH, Pennsylvania 

JERRY WELLER, Illinois 

KENNY HULSHOF, Missouri 

RON LEWIS, Kentucky 

KEVIN BRADY, Texas 

THOMAS M. REYNOLDS, New York 

PAUL RYAN, Wisconsin 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

JON PORTER, Nevada 

Janice Mays, Chief Counsel and Staff Director 

Brett Loper, Minority Staff Director 

SUBCOMMITTEE ON OVERSIGHT

JOHN LEWIS, Georgia, Chairman 

JOHN S. TANNER, Tennessee 

RICHARD E. NEAL, Massachusetts 

XAVIER BECERRA, California 

STEPHANIE TUBBS JONES, Ohio 

RON KIND, Wisconsin 

BILL PASCRELL JR., New Jersey 

JOSEPH CROWLEY, New York 

JIM RAMSTAD, Minnesota 

ERIC CANTOR, Virginia 

JOHN LINDER, Georgia 

DEVIN NUNES, California 

PAT TIBERI, Ohio 

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. 

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C O N T E N T S 

Page 

Advisory of March 5, 2008, announcing the hearing ............................................ 2 

WITNESSES 

Linda Stiff, Acting Commissioner, Internal Revenue Service .............................. 6 

Nina E. Olson, National Taxpayer Advocate, Internal Revenue Service ............ 30 

SUBMISSIONS FOR THE RECORD 

Benson S. Goldstein, Statement ............................................................................. 100 

Colleen M. Kelley, Statement ................................................................................. 106 

Gerald E. Scorse, Statement ................................................................................... 112 

IRS Oversight Board, Statement ............................................................................ 113 

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(1) 

TAX RETURN FILING SEASON, INTERNAL 

REVENUE SERVICE OPERATIONS, FISCAL 

YEAR 2009 BUDGET PROPOSALS, AND THE 

IRS NATIONAL TAXPAYER ADVOCATES 

ANNUAL 

REPORT 

THURSDAY, MARCH 13, 2008 

U.S. HOUSE OF REPRESENTATIVES, 

COMMITTEE ON WAYS AND MEANS, 

SUBCOMMITTEE ON OVERSIGHT

Washington, DC. 

The Subcommittee met, pursuant to notice, at 10:10 a.m., in 

room 1100, Longworth House Office Building, Hon. John Lewis 

(Chairman of the Subcommittee) presiding. 

[The advisory announcing the hearing follows:] 

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ADVISORY 

FROM THE COMMITTEE ON WAYS AND MEANS 

SUBCOMMITTEE ON OVERSIGHT 

FOR IMMEDIATE RELEASE CONTACT: (202) 225–5522 

March 06, 2008 

OV–7 

Lewis Announces a Hearing on the Tax Return 

Filing Season, Internal Revenue Service Operations, Fiscal Year 2009 Budget Proposals, and 

the IRS National Taxpayer Advocate’s Annual 

Report 

House Ways and Means Oversight Subcommittee Chairman John Lewis (D–GA) 

today announced that the Subcommittee on Oversight will hold a hearing on the 

2008 tax return filing season, IRS operations, the fiscal year 2009 budget proposals, 

and the National Taxpayer Advocate’s Annual Report. The hearing will take 

place on Thursday, March 13, 2008, at 10:00 a.m., in the main Committee 

hearing room, 1100 Longworth House Office Building. 

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

hearing will be from invited witnesses only. Acting Commissioner Linda Stiff, Internal Revenue Service, and Nina E. Olson, National Taxpayer Advocate, have been 

invited to testify. However, any individual or organization not scheduled for an oral 

appearance may submit a written statement for consideration by the Committee and 

for inclusion in the printed record of the hearing. 

FOCUS OF THE HEARING: 

In 2007, the Internal Revenue Service (‘‘IRS’’) collected $2.7 trillion in taxes and 

processed nearly 250 million tax returns, including 140 million individual income 

tax returns. The Subcommittee will discuss the current tax return filing season with 

a focus on taxpayer service and assistance, earned income tax credit outreach, and 

the status of economic stimulus payments. 

The Subcommittee also will review IRS operations not related to the filing season. 

Specifically, the Subcommittee will look at examination rates, collection activities, 

the tax gap, electronic filing, and protection of taxpayer information. In July 2007, 

the IRS established a new office to focus on data protection and identity theft, including phishing schemes and online fraud. The Subcommittee will discuss activities 

of this office to notify and assist potential victims of identity theft and data loss incidents. 

As part of its consideration of IRS operations, the Subcommittee will discuss the 

Administration’s fiscal year 2009 proposed budget for the IRS of $11.4 billion, an 

increase of 4.3 percent over the fiscal year 2008 level. The Subcommittee will examine the Administration’s priorities with respect to taxpayer services, enforcement, 

operations support, and business systems modernization. Further, the Subcommittee will consider the Administration’s compliance initiatives and budget proposals to close the tax gap. 

Finally, the position of National Taxpayer Advocate was established by the 1996 

Taxpayer Bill of Rights (Public Law 104–168). The purpose of the Taxpayer Advocate is to provide an independent system to address taxpayer problems not resolved 

by normal channels and to propose changes in the administrative practices of the 

IRS. The Taxpayer Advocate must submit a report each year to the House Committee on Ways and Means and the Senate Committee on Finance. The National 

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Taxpayer Advocate will highlight key issues and recommendations from the December 2007 Report to Congress. 

In announcing the hearing, Chairman Lewis said, ‘‘The IRS must enforce our 

tax laws, but it also needs to make taxpayer service a priority so that we 

maximize the numbers of taxpayers who voluntarily comply with our tax 

laws. The Congress must ensure that the IRS operates efficiently and fairly 

for all Americans.’’ 

DETAILS FOR SUBMISSION OF WRITTEN COMMENTS: 

Please Note: Any person(s) and/or organization(s) wishing to submit comments 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 ‘‘110th Congress’’ from the menu entitled, ‘‘Committee Hearings’’ (http://waysandmeans.house.gov/Hearings.asp?congress=18). 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, March 27, 2008. 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 

summiteers 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. 

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Chairman LEWIS. Good morning. The hearing of the Subcommittee will come to order. 

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Today the Subcommittee on Oversight is holding its annual hearing on IRS operations. 

This morning we will examine the current tax return filing season, the IRS budget, and Taxpayer Advocates Annual Report. 

We’re very pleased to have Linda Stiff, the IRS Acting Commissioner, and Nina Olson, the National Taxpayer Advocate appear before this Subcommittee. I welcome you both. 

I look forward to hearing your views about what needs to be done 

to serve the needs of taxpayers, and to improve taxpayer compliance. 

I have reviewed the administration’s proposed budget, and many 

of us this morning would like to discuss whether it strikes the right 

balance between taxpayer service and enforcement. We have a tax gap of more than $345 billion. We need to explore 

ways to increase compliance by taxpayers. The Subcommittee on 

Oversight values the views of the witnesses and we want to ensure 

the fairness of our tax system. 

I would like to commend the IRS on the work done this filing 

season. I know your workload has increased this year as you prepare to get tax rebates into the hands of people who are suffering. 

Many people who don’t normally file a tax return will have to file 

a tax return this year in order to receive their tax rebate checks. 

These people will need help in filing their returns, and I know you 

will help. 

I have followed your plans to educate taxpayers about the tax rebate checks. I am hopeful that the IRS will make sure that all taxpayers who are eligible for this benefit receive the service they 

need to complete and file their returns. 

Finally, I do not know how much longer you will be serving as 

Acting Commissioner, Madam Commissioner of the IRS, Ms. Stiff, 

so I would like to take this chance to thank you for all of your good 

work, on behalf of Members of this Committee, on behalf of the 

Congress and the American people. It has been a pleasure to work 

with you, and you are always welcome back. 

Chairman LEWIS. I am pleased to recognize the distinguished 

Ranking Member, my dear friend, Mr. Ramstad, for his opening 

statement. 

[The prepared statement of Chairman Lewis follows:] 

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Mr. RAMSTAD. Thank you, Mr. Chairman. Thank you for your 

leadership of this Subcommittee and for calling this important 

hearing today. 

I certainly appreciate seeing the Acting Commissioner, as well as 

the taxpayer advocate, and appreciate the fact that you’re doing, 

both of you, tough jobs, very well, from everything I can ascertain. 

The IRS certainly has its work cut out for you and your colleagues at the service, commissioner. The filing season, I know, is 

very different from previous years, with two special challenges— 

the late passage of the AMT patch and the enactment of the economic stimulus legislation. 

I know that both added greatly to your workload on top of what 

was already going to be a busy filing statement, and that’s—filing 

season—and that’s an understatement, I know. 

The IRS, when I look at the magnitude of your mission, it’s really staggering to this mere mortal, when you think that you’re going 

to be processing more than $2.5 trillion in tax receipts and pay 

hundreds of billions of dollars in refunds to more than 110 million 

taxpayers. You obviously have a big assignment ahead of you. 

Of course, once the filing season is over, then the service will cal- culate, process, and mail more than $100 billion worth of stimulus 

payments as required by the Stimulus Act. 

The reason for mentioning the magnitude of your mission is, I 

think you’ll agree that the IRS, I think everyone will agree, must 

balance service with enforcement, and I hope to hear today that the 

impact of foregoing collection revenue is not serious, is not—that 

we’re not foregoing too much in collection revenues in lieu of using 

employees in the service function. 

But I just want to say finally that I’m still concerned about the 

tax gap. I’m glad the President’s budget proposes several initiatives 

to close that gap and additional resources toward IRS enforcement 

efforts. 

I remember last year’s hearing on the filing season and the IRS, 

we had this discussion, as well as several other hearings, and I 

know that that was asked for by the service, that is, more resources toward enforcement, and those will hopefully be forthcoming. 

So, thank you again for being here today. Thank you again for 

the jobs that you both do. I certainly look forward to your testimony. 

I yield back. 

Chairman LEWIS. Thank you, Mr. Ramstad. 

Now, we will hear from our witnesses. I ask that you limit your 

testimony to 10 minutes. Without objection, your entire statement 

will be included in the record. 

It is now my pleasure to introduce the Acting Commissioner of 

the Internal Revenue Service, Linda Stiff. 

Welcome. 

STATEMENT OF LINDA STIFF, ACTING COMMISSIONER, 

INTERNAL REVENUE SERVICE 

Ms. STIFF. Good morning, Chairman Lewis, Ranking Member 

Ramstad, and Members of the Subcommittee. Thank you for the 

opportunity to be here today. 

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My name is Linda Stiff, and I have served as the Acting Commissioner of the IRS since last September. I am a career IRS employee, having started as a revenue agent more than 27 years ago. 

— My written statement provides information on a number of 

IRS programs and activities, and I will be happy to respond to 

questions about any of those. However, in the brief time I have 

today, I would like to mention three key areas that I think are of 

interest to the Subcommittee. 

First, allow me to update you on the progress we have made on 

the economic stimulus program enacted by Congress in early February. 

Through extraordinary planning efforts and the dedication of the 

IRS work force, we are poised to deliver not only the filing season 

but to distribute stimulus checks just as soon as we complete the 

current filing season. 

We expect the first checks to be deposited electronically in taxpayer bank accounts in the first week of May, and for the first 

checks to be mailed to taxpayers who did not choose the direct deposit option in the second week of May. 

We are making every effort to keep taxpayers informed about the 

stimulus payments. We have posted a special section on IRS.gov 

designed to answer questions and provide updated information. 

This month, we are sending letters to all taxpayers reminding 

them that they must file a 2007 tax return in order to be eligible 

for a stimulus payment. 

In late March, we will send a special mailing to recipients of Social Security and Veterans Affairs benefits, because those benefits 

are generally non-taxable and those recipients may not ordinarily 

be required to file a tax return. 

We are reaching out to the Department of Veterans Affairs, the 

Social Security Administration, and private groups, such as AARP, 

to ask that they assist us in reaching those who may be eligible 

for the stimulus payment but who may not be otherwise required 

to file a 2007 return. 

To assist those individuals, we have created a sample Form 

1040–A, with information on how to fill out just a few lines that 

will enable eligible people to receive the stimulus payment. 

The second major point I wish to touch on is the current filing 

season. 

We are positioned to deliver yet another successful tax filing season. We are on target to process more than 140 million individual 

tax returns and issue more than $225 billion in tax refunds in the 

coming weeks. 

I am pleased to report that, based on early results, the number 

of returns filed electronically is once again higher than at the same 

point a year ago; the number of taxpayers using Free File is also 

on the rise, up almost 12 percent compared to the same point in 

time last year. 

I am also pleased to say that we were able to reprogram our systems to accommodate the AMT patch that was enacted late last 

year, and we were able to do that far quicker than I could have 

ever imagined. 

That is a credit to the hard work of a number of IRS employees 

who worked nights, weekends, and even holidays. 

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As a result, we were able to allow most AMT-impacted taxpayers 

to begin filing in January and all others by February 11th. 

At the IRS, the most fundamental premise of our compliance efforts involves balancing taxpayer service with our enforcement programs. Last year, we provided services to more than 332 million 

taxpayers. That was an increase of 10 percent year over year. 

We have leveraged technology, improved processes, and enhanced 

work force training to not only increase our service capacity but to 

significantly increase the quality of the service to ranges in excess 

of the 90 percentile. 

This was accomplished across the many service channels that we 

provided at the IRS. 

We saw an 11-percent increase in visits to IRS.gov for tax return 

information. 

On Web services, an application where you and your constituents 

can go online and track the status of your refund with the ′′Where’s 

My Refund′′ feature, we served more than 32 million taxpayers accessing that last year. That was a 30-percent increase over the 

prior year. 

Through our automated self-assist telephone services and telephone assistors, we served 500,000 more taxpayers than we did the 

prior year. 

We served 1 million additional taxpayers through our field assistance sites and community-based volunteer efforts. 

I am pleased to report to you today that we are positioned to deliver these services again this year in a quality manner during the 

current filing season. 

The third topic I want to touch on is the President’s 2009 Budget request for the IRS. This year’s request is an increase of $469 million over the budget approved last year. 

Guided by the IRS Tax Gap strategy, this increase will enable 

the IRS to strengthen enforcement programs to address compliance 

by small businesses, the self-employed, and large corporations. 

It will allow us to expand our ongoing research of filing, payment, and reporting compliance levels. 

This budget request will allow us to expand our efforts to identify 

and address issues relating to globalization and offshore activities. 

Additionally, the funding will allow the IRS to expand our document matching programs and to implement the legislative proposals to reduce the tax gap, submitted as a part of that budget. 

We are confident at the IRS that we can do this while maintaining a strong taxpayer service program that will allow us to continue making progress in implementing the Taxpayer Assistance 

Blueprint. 

In closing, I would also like to share with you the continuing 

progress being made in modernizing IRS systems. 

CADE, the replacement to the Masterfile system, is processing 

almost a quarter of the returns filed thus far this year. 

This means that those accounts are being settled in a 24-hour 

cycle, comparable to other private sector best practices. 

Refunds for returns processed in CADE are delivered to taxpayers an average of 4 days sooner than those not. Early releases 

to the replacement system for accounts management have been on 

time and delivered functionality as promised. 

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We have improved our management and governance to ensure 

these successes and are well-positioned to deliver new modernized 

capabilities in the coming years. 

Thank you again for the opportunity to appear before you this 

morning, and I am happy to respond to any questions you may 

have. 

[The prepared statement of Linda Stiff follows:] 

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Chairman LEWIS. Madam Commissioner, thank you very much 

for your testimony. 

Ms. Olson, before we recognize you, we may have to interrupt 

your testimony. At 10:30, we would pause for a moment of silence 

with our colleagues on the House floor in memory of our military 

service people. 

Now, it’s my pleasure to introduce the National Taxpayer Advocate, Nina Olson. 

STATEMENT OF NINA E. OLSON, NATIONAL TAXPAYER 

ADVOCATE, INTERNAL REVENUE SERVICE 

Ms. OLSON. Chairman Lewis, Ranking Member Ramstad, and 

Members of the Subcommittee, thank you for inviting me to testify 

today. 

At the outset, I would like to say that the IRS has done an admirable job during this filing season, given all the challenges it is facing. 

What with late year tax law changes and the recently authorized 

economic stimulus payments, the IRS not only must process payments to over 130 million taxpayers who currently file income tax 

returns, but it also must identify and process returns from and 

payments to more than 20 million persons who have no filing requirement. 

The IRS has managed to turn on a dime and deliver this filing 

season without significant glitches, an extraordinary achievement. 

I must note, however, that now that the IRS has demonstrated 

its ability to change processes virtually overnight, I fully expect it 

to adopt and implement some of the recommendations from my annual report to Congress in the same timeframe. I will address some 

of these issues in my following remarks. 

First, in my 2007 annual report to Congress, I mark the 10th anniversary of the IRS Restructuring and Reform Act 1998 by recommending that Congress address taxpayer rights again, by creating 

a true Taxpayer Bill of Rights that incorporates a clear statement 

of taxpayer rights and a clear statement of taxpayer responsibilities. 

Second, I note in my report that identity theft is the number one 

consumer complaint in the United States, far outpacing all others. 

Misuse of another person’s Social Security number or identity 

generally occurs in tax administration in two contexts: first, the filing of a false return to obtain a fraudulent refund; and second, the 

theft and use of another person’s Social Security number, or SSN, 

to obtain employment. 

Regardless of motive, identity theft results in serious consequences for the innocent taxpayer. Such consequences may include the delay or denial of refunds, the assessment of tax debts 

resulting from income reflected on the fraudulent filer’s return, and 

the requirement for victims to prove their identity to the IRS year 

after year. 

The IRS has a duty to these taxpayers to expeditiously determine 

the true owner of the SSN, to restore the integrity of the affected 

taxpayer’s account, and certainly not to exacerbate the victim’s injury. 

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The IRS does not know how many taxpayers are impacted by 

identity theft. Until recently, the Taxpayer Advocate Service was 

the only IRS function tracking identity theft cases. 

Stolen identity cases within TAS have increased by 644 percent 

from fiscal year 2004 to fiscal year 2007, from 447 cases to 3,327 

cases. 

My employees now report that they are receiving calls from senior citizens who filed for the economic stimulus payment after not 

filing for years only to find that someone else had been using their 

SSN on tax returns. 

I applaud the IRS for taking some proactive measures to assist 

victims of identity theft. For example, the IRS recently implemented a tracking system through which an indicator will be 

placed on an identity theft victim’s account once he or she has provided verification of identity theft. 

Unfortunately, the IRS has not issued central guidance to its employees about how to apply the indicator, thereby allowing each 

function to create its own procedures. Moreover, the IRS has no coordinated approach to address an identity theft victim’s issues from 

start to finish. 

I have recommended that the IRS develop a dedicated centralized unit to handle all identity theft cases, and a centralized internal revenue manual to house all identity theft procedures. A centralized unit will be able to identify all trends and systemic problems and can serve as a central contact point for discussions with 

the Social Security Administration to improve processing. 

My third issue involves elderly or disabled persons who receive 

in-home personal and household care under state and local government health and welfare programs. Under current law, the home 

care service recipients in these programs are often treated as common law employers of the caretakers. As such, they are personally 

responsible for reporting, filing, and paying the employment taxes 

on their caretaker’s wages. These tasks may be difficult for an elderly or disabled person. 

As a result, government entities often contract with a variety of 

third parties to handle these tax responsibilities. 

One common arrangement is for the government to hire an intermediary service organization, or ISO. However, these ISOs or other 

third parties sometimes fail to meet these employment tax obligations. 

When that happens, the elderly and disabled home care service 

recipients, as the common law employers, remain liable for the tax, 

interest, and penalties. Such liabilities can result in severe hardship. 

Placing employment tax reporting and payment obligations on elderly and disabled taxpayers who need government assistance for 

in-home care defies logic and does not reflect good tax administration. 

In my written testimony, I make several administrative recommendations in this area, but I believe the simplest and most elegant solution is to amend the Code to provide that a home care 

service worker is the statutory employee of the administrator of the 

program’s funding, be it states, localities, their agencies, or ISOs. 

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By designating these workers as statutory employees, the proposal is neutral as to whether the administrator must treat the 

home care service worker as a common law employee for purposes 

of other employee or retirement benefits, thereby addressing some 

administrators’ concerns. 

Next, in my annual reports to Congress and in prior testimony, 

I have expressed significant concerns about the many aspects of 

private debt collection initiative. 

Today, I will focus on the revenue projections and return on investment. 

The private debt collection program, or PDC, generates about 

$23 million a year in gross revenue. 

After subtracting out the direct costs of the program, $7.65 million, and commissions payable to the collection agencies, about $4.6 

million, the annual net revenue of the PDC program is about $11 

million, which translates to a return on investment, or ROI, of 

about 1.45 to 1. 

If we instead allocated the $7.65 million to the IRS automated 

collection system function, the ROI would be much greater. Even 

using the IRS’ conservative ROI estimate of 13 to 1 for ACS, an 

expenditure of $7.65 million would produce gross revenue of $99.45 

million and net revenue after costs of $91.8 million. 

Very simply, the PDC program will cost the government more 

than $81 million in foregone revenue this year, and the cost is likely to reach nearly half a billion dollars over the next 6 years. 

Since the purpose of the PDC program was to raise revenue, the 

fact that it is costing the government at least $80 million a year 

destroys whatever thin rationale might remain for its existence. It 

is time for this program to end. 

My next issue involves the low-income taxpayer clinic program, 

which Congress funded in 1998 after hearing testimony about the 

problems that low-income and English as a second language taxpayers encounter in obtaining representation and in learning about 

their rights and responsibilities as taxpayers. 

The importance of LITCs is underscored by a recent study by my 

office showing that taxpayers who are represented in earned income tax credit audits were almost twice as likely as unrepresented 

taxpayers to retain all their EITC. 

Despite this program’s demonstrated results, IRS employees who 

talk with taxpayers often are reluctant to refer taxpayers to LITCs. 

Although IRS employees can direct taxpayers to the LITC Web site, 

or Publication 4134, the list of LITCs, or read a list of clinic names 

and phone numbers in the taxpayers’ areas, there is doubt as to 

whether they can refer a taxpayer to a specific LITC. 

Many low-income taxpayers lack access to the Internet, or cannot 

wait to receive a publication by mail before they get help. In light 

of the vital role that representation can play in the outcome of a 

taxpayer’s audit, I urge you to consider legislation expressly authorizing IRS employees to refer low-income taxpayers who do not 

have representation to specific LITCs in their locales. 

Finally, for several years, I have highlighted problems with the 

IRS’ delivery of face-to-face taxpayer service in the taxpayer assistance centers, or TACs. 

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I am pleased that the IRS is now reversing its trend in recent 

years of limiting the types of services in the TACs. Nevertheless, 

many challenges remain. 

In 2001, the IRS committed to opening 118 new TACs over the 

next 8 years. None of these TACs were opened. Today, TAC offices 

adequately serve only 60 percent of the U.S. population and only 

55 percent of TACs are open for 36 to 40 hours per week. During 

the last 3 years, the IRS reduced TAC staffing by 9 percent leaving 

most TAC offices with staffing shortages. 

Although the IRS is now hiring seasonal workers to ease the 

staffing crunch, it should make a firm commitment to providing a 

permanent and sufficient level of staffing. Moreover, the IRS must 

conduct appropriate research to determine the taxpayer service 

needs by geographic and demographic factors in order to identify 

the most appropriate number and placement of TACs. 

Moreover, the IRS is still downplaying its role in tax preparation, 

which is a core service for the tax administrator. For example, the 

IRS has declared returns involving cancelation of debt income out 

of scope for both the TACs and volunteer preparation sites, even 

though these subjects are highly likely to impact the very taxpayers who are eligible for TAC services, whether because of credit 

card forgiveness or home foreclosures. Thus, these low-income taxpayers have no alternative but to pay for return preparation, something they personally cannot afford to do. 

Thank you for this opportunity to testify today. 

[The prepared statement of Nina E. Olson follows:] 

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Chairman LEWIS. Thank you very much, Ms. Olson, for your 

testimony. 

Let me say to Members of the Committee and to our two witnesses and to all of you in the audience, now we will join our colleagues on the floor of the House by observing a moment of silence 

in honor of our troops. 

[A moment of silence was observed.] 

Chairman LEWIS. Madam Commissioner, Ms. Olson reports that 

seniors filing for the rebate checks are finding that someone else 

has been using their Social Security number on tax returns. There 

are also tax rebate scams that target the elderly. 

What can the IRS do to protect seniors? What happens to these 

seniors? Do they receive a rebate check? 

Ms. STIFF. The identity theft issue that I think all of us are facing individually and that has become a concern for other financial 

sector private/public agencies, is certainly a growing area. 

I think in Nina’s testimony and in our documents she says that 

it’s the number one consumer complaint that’s registered with the 

Federal Trade Commission. 

We at the IRS take identity theft very seriously. We have procedures and processes in place when we identify it. 

We encounter two forms of identity theft as tax administrators. 

One is where someone uses your SSN to file a fraudulent return 

to get a refund. In another instance, someone is using your SSN 

to get employment and then the IRS receives a 1099 or a W–2 

showing income that doesn’t belong to you. 

In each of those instances, the taxpayers whose identities are 

stolen become subject to notices, potential bills, and to having to 

work with us to establish, verify, and validate both their identity 

and their address. 

In the past 6 months, we have established an entire organization 

whose sole mission is to help us find ways to strengthen our ability 

to help taxpayers who are victims of identity theft from a tax administration standpoint. 

We have simplified the documentation that’s required and provided taxpayers with the option to fax documentation. 

I think that what we’re finding with stimulus, though not in any 

great number of instances except several Nina has run into already 

is where people haven’t had a filing requirement for years. 

If you’re someone who is prone to stealing another individual’s 

SSN that makes a good target, because such individual is not filing, the ability to be caught and identified as doing something 

criminal is probably somewhat reduced. 

So as we’re finding these situations, we’re trying to deal with 

them on an individual basis. We’re reaching out. We’ve told those 

seniors to contact us. 

We have procedures in place both in the Tax Advocate Service 

and on the IRS side that will enable us to work with those seniors 

to ensure that we get their identities verified in our database and 

that they do indeed receive their stimulus payments. 

Chairman LEWIS. Madam Commissioner, have the rebate 

checks affected taxpayer service this filing season? 

Let me just ask, before you respond, why did the IRS shift collection employees to answer the telephone? 

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It’s my understanding that the GAO estimates that the foregoing 

revenue from shifting the collection employees to answer the phone 

would be $681 million. 

Ms. STIFF. Let me provide some context for what we’re facing 

as an agency. 

When the stimulus laws were enacted and we said we would be 

able to get the stimulus checks in play in May, I think everyone 

was of a like mind that sooner was better than later, if the goal 

was to stimulate the economy. 

Then we’re faced with dealing with taxpayers regarding economic 

stimulus checks, at the same time that we’re dealing with taxpayers who are trying to file their tax returns. 

Let me just context that. 

134 million individual returns that we’ll process between now and the end of April; $225 billion in refund checks that we want 

to issue to 100 million taxpayers. 

In any given year, during filing season, we hear from about 60 

million of those taxpayers on our phone lines, seeking assistance, 

either through the self-assisted automated phone lines or a personal assistor to help them navigate the tax system. 

Now, we’ve got 135 million taxpayers plus maybe 20 million Social Security recipients and Veterans’ Affairs benefits recipients 

who are expecting stimulus payments. 

From the time Congress enacted the stimulus provision, up until 

as recently as yesterday, we have been receiving 50,000-plus calls 

from taxpayers on a daily basis wanting to talk about other stimulus, and we can only imagine those numbers increasing the closer 

it gets to May 2nd. 

So, now we’ve got the convergence of trying to handle the increased stimulus calls at the same time that we’re answering refund calls. 

We believed it was important, still believe that it’s important 

that a senior citizen, a recipient of Veterans’ Affairs benefits, or 

any other taxpayer for that matter, should be able to call us and 

get a question answered so they can do what they need to do to 

receive their stimulus payment. 

In order to expand our ability to answer telephones for those taxpayers in this compressed timeframe that we’re all dealing with, 

we looked to our Automated Collection System, our telephone collection operation, because that operation operates on the same 

phone lines that our customer service does, and we’re able to 

switch them over on an hour-to-hour basis to supplement our tollfree tax assistance to taxpayers. 

So, we worked with the Taxpayer Advocate and we worked with 

our compliance operations, and we made a decision to train our 

ACS assistors to provide that assistance if needed. 

We’re monitoring hour-by-hour, day-by-day, and only supplementing as the traffic demands it. 

The estimate you have is the top end. If we needed all of those 

people to answer calls every hour of the day, it would be up to a 

$600 million loss on the collections side. 

But thus far, we have been on the low side of the demand. We’re 

only having to migrate people over on occasion, as opposed to all 

day long. 

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So, we’re actually hoping that the impact on the lost revenues 

will be significantly less, but I think, more importantly, it’s imperative that taxpayers trying to file their returns or get their stimulus 

payments get the answers to the questions that they have so that 

they can get those checks in May and June. 

That was the basis of our thinking. 

Chairman LEWIS. Thank you very much, Madam Commissioner. 

Ms. Olson, just one question for you. 

Could you tell Members of the Committee why it is so important 

that the IRS be allowed to refer low-income, including EITC taxpayers, for assistance to low-income tax clinics? Why is that so important? 

Ms. OLSON. Well, as you know, the low-income taxpayer clinics 

provide representation to taxpayers in controversies. 

We did a study that showed that low-income taxpayers who are 

audited by the IRS for earned income credit, that in those exams, 

if they are represented, they are nearly twice as likely to get the 

earned income tax credit and get almost twice as much earned income tax credit than unrepresented taxpayers. 

So, it’s clear that representation helps these taxpayers navigate 

our audit procedures. 

We feel it’s very important for taxpayers, when they are low-income, and they may not be able to navigate the IRS, they may 

speak different languages as their primary language, that getting 

representation really assists them in getting the right answer from 

the IRS, rather than a default answer that is not the correct answer. 

So, the IRS employees who have the taxpayer on the phone, we 

really want them to be able to say, ′′You live in this area, and there 

is a low-income taxpayer clinic that serves this area, and they have 

language capabilities, they have translators that can speak your 

language, so let me give you the phone number of this, the intake 

number for that clinic.’’ 

We just think that that will improve tax administration overall, 

and get the right answer for these taxpayers. 

Right now, a lot of times, they’re getting an answer in an audit 

or a collection issue because—that’s the wrong answer—because 

they just don’t know the right things to give us in terms of information. 

Chairman LEWIS. Thank you very much, Ms. Olson. 

We have one non-Subcommittee Member, Mr. Pomeroy, who is a 

Member of the full Committee, and we welcome him here this 

morning to participate in the questioning. 

Now, it is my pleasure to turn to Ranking Member Ramstad for 

his questions. 

Mr. RAMSTAD. Thank you, Mr. Chairman. 

Mr. Chairman, at the request of Mr. Johnson, who had to leave 

the hearing, I would ask unanimous consent that Mr. Johnson’s 

questions be submitted, of these two witnesses, be submitted for 

the record. 

Chairman LEWIS. Without objection. 

[The information follows:] 

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Mr. RAMSTAD. Commissioner Stiff, Ms. Olson raised the issue 

of the IRS’ private collection program, the PCA program, for collecting delinquent tax debts. 

Your predecessors have testified before this Committee that even 

if the IRS were given more resources to hire enforcement employees, it wouldn’t be used to collect the type of debt currently being 

collected by the PCA program. 

Instead, IRS employees, according to your predecessors, would be 

used for more complex, higher priority cases. 

Is this still the case? 

Ms. STIFF. Yes, it is. 

Mr. RAMSTAD. Then it seems to me there’s not really a choice 

between using IRS employees and using private collection agencies 

to collect this debt. 

Isn’t the real choice whether we use private collection agencies 

or let these tax debts go uncollected? 

Ms. STIFF. Well, I think, to respond to that, and maybe to clarify to what Nina included in her testimony, is that the cost that 

the IRS incurs to support the PCAs is not a choice of $7 million 

to spend on this or on that. 

The PCA work is paying for itself on an annual basis. The cost 

to start the program will be recovered in late 2010. 

What we’re doing is, through the PCA program, collecting thus 

far I think roughly $43 million that, as you pointed out, otherwise 

wouldn’t be collected, because the competition isn’t—it’s not a 

choice, they’re not mutually exclusive. 

Mr. RAMSTAD. So, do you concur then with the finding of the— 

of our own non-partisan Joint Committee on Taxation, which believes that IRS employees would not be used to collect this debt, 

and therefore if we terminate the PCA program, it would reduce 

tax revenues by, again, according to the Joint Committee on Taxation, it would reduce tax revenues by over $1 billion during the 

next 10 years? 

Ms. STIFF. I can’t confirm their projection there, but we would 

lose what it is that we’re getting each year, and the Treasury, the 

FISC is getting 50 percent of what’s collected. 

Mr. RAMSTAD. Do you have those numbers? 

Ms. STIFF. I can get it to you back. I’ll have to follow up. 

Mr. RAMSTAD. Very well. 

I certainly hope we don’t take a step backward in our efforts to 

close the tax gap by eliminating a program that’s obviously working and has, according to the surveys that we all saw, has enormous taxpayer satisfaction ratings, certainly ratings infinitesimally 

higher than this body, which is unfortunate. I don’t say that in a 

humorous vein at all. 

So, would you care to respond, Ms. Olson? 

Ms. OLSON. Thank you, sir. 

In point of fact, the IRS has a test underway right now that is 

testing what would happen if we used IRS employees to collect this 

very debt, because my contention is that for less money, we would 

be more productive with the same cases. 

It’s just the IRS’ policy call that they don’t want to use its employees to collect this debt, which I do not support that call. 

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Second, the IRS is running out of cases to send to the PCAs, and 

as I speak right now, the IRS is looking at other cases that the IRS 

is working right now, preparer penalty cases, ACS, actual cases in 

ACS inventory that they want to ship out to the private debt collection agencies, which are not the cases upon which the Congress authorized this program. Congress was told that the PCAs would only 

get easy cases. 

Finally, in terms of the tax gap, our projections show, and these 

are the actual numbers from the IRS’ private debt collection program, that the net revenue from the PCA program is only about 

$11 million a year. 

We have a $345 billion annual tax gap, and when you do the 

chart that shows the 345 billion and then the 11 million, the 11 

million is a blip on the—it doesn’t even show up as a blip on the 

radar screen. 

So, I just remain completely unconvinced that this program is 

worth the expenditure of the resources and the risk that we have 

in sending taxpayer information into the hands of parties other 

than IRS employees. 

Mr. RAMSTAD. Well, certainly, in response, the Joint Committee 

on Taxation disagrees with your assertions. 

They believe that terminating the program would reduce tax revenues by over $1 billion in the next 10 years. So there’s obviously 

a disagreement there. 

I think we—I just hope we don’t eliminate a program that, in my 

judgment, everything I’ve seen, all the—in trying to look at it objectively, all the evidence points to the fact that it’s working. 

So anyway, I just hope we continue to collect those revenues, and 

I hope they do total over $1 billion over the next 10 years, because 

we need to do everything possible to close the tax gap. 

With that, Mr. Chairman, I’ll yield back. 

Chairman LEWIS. Thank you. 

I want all of the Members to be aware that we’re going to be operating under the Gibbons Rule, so no one would think I’m not 

being conscious and peaceful and nonviolent. Okay? 

[Laughter.] 

Chairman LEWIS. Mr. Tanner is now recognized for his questions. 

Mr. TANNER. Thank you, Mr. Chairman. I’m glad you’re gong 

to be peaceful and nonviolent, since I’m sitting next to you. 

[Laughter.] 

Mr. TANNER. Madam Secretary, we’ll be voting on the budget 

resolution later today, I assume, and we have, the blue dogs have 

endorsed the budget, and section 401 provides some additional 

money for tax compliance, what my friend, Mr. Ramstad, was saying with respect to the tax gap. 

I’m told that it could be as much as 13 percent of the budget, or 

about $350 billion a year. 

Considering the fact that we are borrowing in all of our names 

from foreign sources over $500 million a day, primarily going to 

wartime expenditures of 10 to 23 billion dollars a month in Iraq, 

I think it becomes a matter of patriotism for people to pay what 

they legally and fairly owe under the law. 

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I guess people have been grumbling about paying taxes since the 

18th century, and certainly I’m not immune to that. We all pay 

whatever it is we legally and equitably and fairly owe. 

I would be curious. In that budget resolution, there’s an addi- tional appropriation of $490 million for this purpose of tax compliance. 

Do you have, if we can make this happen, plans, and if so, could 

you give us an idea of what they might be? 

Ms. STIFF. The budget request that you have before you, as I 

outlined in my opening statement, will allow us to expand our compliance efforts and our enforcement programs in a number of areas. 

We have a Tax Gap Report, we have a Taxpayer Service Blueprint, and we have a Modernization Vision and Strategy. 

Those documents guide our investments, whether they are in enforcement services or technology. With any additional funding, we 

would guide those investments by the priorities that are outlined 

in those documents. 

But we’re focused on reducing non-compliance in the small business arena, and among large corporations and high-wealth individuals, and particularly as a result of globalization, we are looking 

at offshore transactions. 

I can tell you that, for every dollar invested in IRS enforcement 

programs, we get on average a 5 to 1 return on investment. 

Mr. TANNER. I appreciate you mentioning the offshore business. 

We tried to do something with that with respect to paying for the 

AMT fix, as you know, and were unsuccessful. Maybe you’ll have 

more success than we did. 

Thank you very much. 

Chairman LEWIS. Now we turn to Mr. Linder for questions. 

Mr. LINDER. Thank you, Mr. Chairman. 

Madam Commissioner, welcome. Ms. Olson, welcome. 

With all these phone calls you’re getting from 60 million people 

looking for help on their tax returns, how many are getting an accurate response? 

Ms. STIFF. We’ve undertaken significant efforts in recent years 

to improve the accuracy of our responses. 

Last year, and again this year, the quality, meaning the accuracy 

and the timeliness of the responses, is in the 90 percentiles, both 

on the phones and at walk-in sites. 

That’s a significantly improved number than where we were even 

3 years ago. 

Mr. LINDER. Five or 6 years ago, you were at 50 percent. 

Ms. STIFF. Like I said, we’ve had all hands on deck, a number 

of efforts, both leveraging technology, training, and working with 

our employees and our customers to get those numbers up into the 

90 percentiles. 

Mr. LINDER. How much are you spending to reach out to people 

with respect to the stimulus? 

Ms. STIFF. Well, I think the appropriation that Congress enacted for stimulus for IRS was about $202 million, and I don’t 

know that I have the exact number on outreach. 

I suspect that it’s probably almost 50 percent of that total appropriation. 

Mr. LINDER. Wasn’t the first letter about $43 million? 

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Ms. STIFF. Yes, sir, it was. 

Mr. LINDER. Okay. Of the $100 billion in underreporting by 

businesses, how much of that is small business? 

Ms. STIFF. Well, our research data shows us—it’s quite interesting, and you’ve probably heard the statistic before—it says that 

where we have information reporting, we have about a 95 percentplus compliance rate with what happens on the tax returns. 

On small businesses, particularly where they’re not subject to 

third party information reporting, we’re getting about 53 cents on 

the dollar. 

Mr. LINDER. What is the compliance rate of the big box companies? The Wal-Marts, the Sam’s, the—— 

Ms. STIFF. Well, our tax gap data in the corporate arena has not 

been refreshed as currently as the other numbers that I just gave 

you, but I think the estimates of corporate noncompliance are north 

of $30 billion annually. 

Mr. LINDER. You have about 200 million filers now, isn’t that 

about right? 

Ms. STIFF. About 140 million individual filers—— 

Mr. LINDER. But then you have business filers. That’s about 

200, isn’t it? 

Ms. STIFF. Mm-hmm. 

Mr. LINDER. Would you have better compliance if you had 40 

million filers instead of 200 million filers? 

The way you’re arguing here argues for a pure consumption tax 

as opposed to an income tax, where you could reduce the number 

of filers from 200 million to 40 million, you’d have big box companies collecting 50 percent of all the revenues, you’d have 3.6 percent of all the companies in America collecting 87 percent of all the 

revenues. 

If they were honest, you’d have a better collection rate than the 

IRS currently has. 

Ms. STIFF. I certainly couldn’t weigh in on that probably one 

way or the other with my lack of experience. 

I know that that’s a discussion that appears every time we talk 

about tax reform, and probably one that will continue. 

Mr. LINDER. Do you, as an agency, pay any attention or have 

any policy staff looking into more efficient collection systems? 

Ms. STIFF. More efficient collection system? 

Mr. LINDER. Systems, yeah. 

Ms. STIFF. I’m not sure what you mean by that. 

We are constantly looking at improving our collection of delinquent taxes and taxes due, but from a policy perspective of looking 

at the broader tax system, I think that Treasury’s Office of Tax 

Policy undertakes that work. 

Mr. LINDER. Thank you for your help. Thank you. 

Chairman LEWIS. Now we turn to Mr. Neal for questions. 

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

Welcome, to our panelists. 

Commissioner Stiff, a number of us have become concerned that 

one prominent defense contractor, KBR, has been able to skirt payroll tax liability for American workers in Iraq via an offshore subsidiary. 

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Can you tell the Committee whether the IRS was ever contacted 

by any official at the Defense Department alerting you to the fact 

that the company and its workers would not be making payroll tax 

payments? 

Ms. STIFF. Sir, I’m unable to comment on any specific case. 

Let me say that we’re certainly familiar with the issues surrounding that case. We understand that employment taxes is an 

area where we have to stay vigilant to improve compliance. 

We’ve increased our employment tax programs, enforcement efforts, and audits significantly in the last 24 months. We continue 

to do that. 

The issues in the case you raised clearly reflect the changing 

world, with globalization, and more and more workers doing business in foreign countries, and how transactions are structured and 

the legality of those transactions, and certainly we continue to, as 

I said be vigilant in trying to stay on top of those emerging issues. 

Mr. NEAL. I appreciate the second part of your answer, but my 

response to that would be, we will have a bill for Iraq of more than 

$1 trillion, by conservative estimates, and so the follow-up question 

would go like this: 

In a similar vein, has the IRS opined in any fashion as to whether U.S. citizen workers of these war contractors are employees or 

independent contractors for income and employment tax purposes? 

Ms. STIFF. We wouldn’t have opined, broadly speaking. 

We have a 20-factor test that we use to determine if someone is 

an independent contractor versus an employee, and it’s a case-bycase determination, taxpayer-by-taxpayer decision when you look 

at it, and it’s a complex area, because even when one makes those 

determinations, you have to step back and look at the application, 

if appropriate, of section 530 in the Tax Code. 

Mr. NEAL. But would you consider off shoring, in these instances here, to be a tax avoidance scheme? 

Ms. STIFF. I don’t, without the specific facts and circumstances 

of an individual case, and I couldn’t say, broadly speaking, that it’s 

tax avoidance. 

Mr. NEAL. Well, a sign on the side of the building with no employees inside—— 

Ms. STIFF. Not in and of itself would I say that’s tax evasion. 

I would have to look at the—— 

Mr. NEAL. I didn’t say evasion, I said avoidance. 

Ms. STIFF. Avoidance. 

I don’t even know that that would suggest that there’s avoidance 

in and of itself. 

I’d have to look at the facts and circumstances and the legality 

that governed what was reported on the tax return versus what 

was not reported. 

Mr. NEAL. A more specific question. 

A constituent company, which has recently been bought by a Canadian entity, asked me if I understood the reporting and filing requirements for visiting executives. 

I didn’t, but now that I do, I have some questions about their utilization and effectiveness. 

Apparently, once an executive exceeds $3,000 in U.S.-sourced 

earnings, he or she must file a Form 1040 non-resident form. 

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For some visiting executives, a week or two of meetings here in 

New York, Boston, or L.A. would trigger that threshold. 

I wonder if you could tell the Committee what the compliance 

rate is. 

Do you believe that all foreigners visiting the U.S. on business 

which exceed this threshold are filing with the IRS, and if so are 

these filings useful for the IRS office in your efforts to close the tax 

gap? 

Ms. STIFF. Let me take the latter first. 

The filings are definitely useful. We were receiving roughly 

650,000 a year, plus or minus a few, in each of the last 3 years. 

What I can’t tell you sitting here today is what the compliance 

rate is, because I don’t know the universe that should be filing. 

We’re undertaking research to look at that. 

As I mentioned earlier, as we see globalization, and we see more 

and more work done cross-border, these issues are taking on a 

greater life than perhaps they had in other decades. 

So we are looking at that. 

Mr. NEAL. Would you judge this to be a priority for enforcement? 

Ms. STIFF. It’s a priority. 

Particularly, we’ve redone our international focus this past year, 

and our priorities, and this is certainly one of the ones that’s being 

worked while we sit here today. 

Mr. NEAL. As to determine whether or not it’s worthwhile? 

Ms. STIFF. I don’t know the answer to that yet, because I don’t 

know what the compliance levels are. 

We’re going to have to incur some cost and research to determine 

whether this is a significant issue or if most people are indeed complying. 

Mr. NEAL. Might I suggest that, given the irony of your respective responses to the two questions I raised, that having a sign on 

a building that indicates that it’s an address when it really is not 

is probably more of a priority in terms of enforcement than the idea 

of a visiting executive who is here for a week at a time, and the 

enthusiasm with which we demonstrate our pursuit of those revenues is something that the Committee, along the IRS, needs to examine. 

Ms. STIFF. Well, and let me assure you that we recognize the 

issues, particularly in the employment tax arena. 

We’ve tripled our efforts there in the last 24 months. It’s on our 

radar screen. 

Mr. NEAL. Thank you. 

Chairman LEWIS. Thank you very much. 

Now, we recognize Mr. Kind for his questions. 

Mr. KIND. Thank you, Mr. Chairman. 

Ms. Olson, thank you for your testimony here today. 

Ms. Stiff, let me start with you, and I want to follow up with 

something that Mr. Lindner just touched upon briefly with you, 

and that’s the IRS notification letters that are going out in regards 

to the tax rebates. 

When I started, you know, reading these articles that appeared 

in the paper over the last week or so, my reaction was kind of similar to everyone else who I think was looking at this. 

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You know, $42 million for the first notification letter going out 

this month, just how necessary is this, and doesn’t this strike you 

as an incredible waste of taxpayer dollars? 

I certainly understand the need to do some outreach with those 

who would qualify for the rebate checks that normally wouldn’t 

have to file a return, because all this is based on tax filings. 

But we’re talking about the vast majority of Americans receiving 

the rebate checks are those who have always filed returns, they’re 

going to file a return this time. 

Isn’t there a way that the IRS can do a better job of targeting 

and still save taxpayer dollars, rather than a blanket notification 

procedure? 

It’s my understanding, in reading the IRS letter that’s going out 

this month, is it’s not just one notification, but everyone is going 

to be receiving a second notification after eligibility has been determined already, and it just seems to be incredible redundancy and 

an unnecessary expenditure of tax dollars. 

As you indicate in your testimony, you’ve established your own 

Web site with information. 

Most of us have already established a Web site with information 

about the tax rebates and who would qualify. I know my office is 

doing some outreach in the District, too, to help people if they have 

questions. 

I think there are better ways, and more efficient ways for us to 

get the notice out there, but without just a blanket dual notification system for something that they don’t even have to react to. 

They just file a return and this stuff goes out automatically. 

Could you help me with this a little bit? 

Ms. STIFF. Sure. Those are fair questions. 

Considering all of the discussions that we had as we crafted our 

strategy for informing and educating taxpayers as to the stimulus, 

let me just share with you what drove our decision. 

I’m never one to say there’s not a better way to do anything, because I’m confident there is, and we’ll find it. 

But at the time that we made this decision, what we were looking at is the scenario that I described earlier. 

This stimulus payment is overlapping with the filing season. We 

have 60 million calls coming in, and now we’ve got 135,050,000 

calls already before any notice has gone out, of taxpayers calling 

every day. 

Then we look back to our experience. In 2001, we did rebates. 

Mind you, that was identical to the situation you just described. 

There was no Social Security, no VA recipients. It was taxpayers 

who filed and knew they would receive a stimulus payment. 

We got 27 million calls in June and July, which caused our system to crash and be shut down. We weren’t able to answer anyone’s calls for a period of time. 

Recognizing what happened in 2001, and that we were now going 

to overlay the same economic stimulus of facts in an April–May 

timeframe—when we’re at the peak of our filing season—with an 

added 20 million potential non-filers trying to get in, we made the 

decision. We were very fortunate that the Congress supported that 

decision in the appropriation, that was a risk too great to take, and 

that by mailing this notice to taxpayers, if we could somehow give 

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them enough information that they didn’t feel the need to call, that 

we were going to be ahead of the game. 

The second notice is one for recordkeeping requirements, and it’s 

to individual taxpayers, specifying what the amount of their rebate 

was, how it was calculated, so that they’ll have that for subsequent 

year recordation. 

But had it not been—— 

Mr. KIND. Why would they need that? Because the rebate is not 

going to be taxed in the—— 

Ms. STIFF. Many of them won’t get their full rebate this year, 

and you provided a true-up the following year. They’ll need that information for their recordkeeping. I think most taxpayers want 

that. 

So that was the convergence of facts, and like I said, maybe a 

good call or a bad call, but we felt it was the prudent call, given 

the risk and the prior experience that we had. 

Mr. KIND. Maybe I’m just underestimating the power of free 

money out there, and what that does to people—— 

Ms. STIFF. Yes. 

Mr. KIND [continuing]. In motivating them to make phone calls 

and that, but it just seems to be incredible overlap, and if the 42 

million applies for the March mailings, I assume it’s also going to 

apply for the subsequent mailing that’s going to go out, the second 

one. 

Ms. STIFF. I think it’s approximately the same. 

Mr. KIND. Is that right? 

Ms. STIFF. I think it’s a little less the second time around. 

Mr. KIND. Well, if you’re going to go ahead do this, was there 

any thought given to including a paragraph about identity theft in 

it? 

Because as Ms. Olson, you know, testified, this could be a very 

major issue that’s going to arise with these rebate checks, and 

identity theft, there’s simple steps that taxpayers can take in order 

to protect themselves from this. 

Ms. STIFF. I think that’s an excellent suggestion, and I only 

wish I had thought of it or we had done it on the front end. 

I don’t think, when we were planning the mailings that we were 

moving in real-time, but were instead just trying to be responsive 

to getting the checks out in May. I’m not sure that we scoped the 

identity theft as something that we needed to put in that letter. 

But what we are doing now is working with the Taxpayer Advocate, working with AARP, working with every newspaper, and public service announcements, to get the message out. 

Mr. KIND. Well, I see my time has expired, and I may follow up 

with your office in regards to that, but one other issue, and I’ll follow up because I don’t have time, is the slow turnaround time as 

far as the AMT fix, and whether we’ve got a problem with the computer system at the IRS. 

Why can’t we get something changed quicker than what we encountered? 

I know we fixed it late last year, but there was a lot of concern 

that, with the late date, this was going to slow down the whole 

AMT calculation. 

Ms. STIFF. Are you wanting me to respond—— 

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Mr. KIND. No, no—— 

Ms. STIFF [continuing]. Come back on the record? 

Mr. KIND [continuing]. No. If there’s a second round, if I’m still 

here, I may ask about that. 

Thank you. 

Ms. STIFF. Thank you. 

Mr. KIND. Thank you, Mr. Chairman. 

Chairman LEWIS. Thank you very much. 

Now we turn to Mr. Tiberi for his questions. 

Mr. TIBERI. Thank you, Mr. Chairman. Thank you for having 

this hearing today. 

A couple questions of Ms. Olson. 

We have in the United States today an online system, a Free File 

system, and my understanding is that at this point in time, this 

year, it is up 14 percent, yet some have advocated getting rid of 

that system and going to a system where the IRS does all filing online, self-administered. 

I believe you’re an advocate of doing that. I’d like your comments 

on that. 

At the same time, the system in Britain, which today is administered by the British government, the online system completely, is 

looking at going to the American system of having a Free File online system for taxpayers, as well. In America, that’s for taxpayers 

whose AGI is under about $54,000 a year. 

My question to you is, why should we eliminate a system that 

appears to be working? 

Ms. OLSON. Well, I would first challenge the statement that it 

appears to be working, with all due respect, but let me try to describe my thinking about electronic tax returns. 

I believe that the government has a responsibility to develop a 

free portal for electronic filing for all taxpayers, so that no taxpayer 

has to pay $14.95 or $19.95, or whatever it is, just for the act of 

electronic filing. 

That’s silly. They’ll spend 42 cents to use a stamp rather than 

pay $14.95, myself included. 

I also believe that the IRS, the government, should provide the 

electronic equivalent of a paper 1040 and what is available in 

paper that the government publishes in electronic format. 

So, I envision, you know, a 1040 with fill-in blanks and math, because people make math errors when they do it on paper, and for 

each line, you would click on the line to get linked to the instructions, not spiffy things that all the software has, but instructions, 

and if in the instructions we refer to an IRS publication, then we 

link to that publication. 

These are all things that taxpayers can have on paper on their 

desks in front of them if they go to that trouble. 

Then, taxpayers who are not happy with that, as I think many 

taxpayers would like the bells and whistles that the other software 

programs have and the links to their bookkeeping software, and all 

that, then they can go out and purchase those other products. 

I think that where the government goes awry with the Free File 

alliance is first of all, it’s a closed shop. Free File gets to decide 

who gets to be in that alliance. 

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So, just this past filing season, we had a non-profit program that 

had developed an excellent, very modest, but right to the point program for free e-filing, and free tax preparation, and was used by 

thousands of taxpayers, and they petitioned Free File to be part of 

the Free File alliance, and Free File alliance decided no, they 

couldn’t be part of that alliance, and I don’t really understand their 

rationale. 

We also have found that listing all of these programs on Free 

File, it’s not clear what they offer up front. 

Taxpayers get part of the way through, and find out that what 

they need is not part of that program, and they have to purchase 

that from the program in order to get the full capability. For example, a Schedule C. Some of the programs do not allow, you know, 

listing more dependency exemptions than a certain number, so if 

you have X number of kids, you know, you can’t include them. 

That’s very confusing to the taxpayers, and I think you see that 

in the low numbers of taxpayers are using on the Free File alliance. Even though Free File had a 14-percent increase this year, 

they had a decline last year, and the numbers have been in the 3 

million to 4 million usage, when you have 130 million taxpayers. 

Mr. TIBERI. Thank you. 

Let me ask you one other question, because my time is expiring. 

Ms. OLSON. Sorry. 

Mr. TIBERI. The issue that the Chairman talked about earlier 

at the very beginning, about seniors being targeted, I had heard 

that actually, with respect to the EITC, with respect to the refund, 

the rebate coming up, that some predators are going after people, 

saying, ′′I’ll take a percentage of your return, I’ll give you some of 

it up front if you can sign it over to me, your refund to me or your 

tax rebate to me.’’ 

Is there anything that this Committee can do or this Congress 

can do to stop that from happening, or that the IRS can do? 

Ms. OLSON. I don’t know how you stop it. 

That is pure fraud, and there—you know, wherever there’s 

money involved, there are going to be people messing with that. 

But the IRS has a very good, you know, publicity campaign about 

these schemes and scams, as we see them, and certainly criminal 

investigation is trying to monitor these schemes and scams to the 

extent that we can find them, and they’re doing a very good job, 

in my opinion. 

I would also suggest that, you know, we can get you information 

about these scams so you can put them into your newsletters and 

on your Web sites, because—and as you’re talking to the press, the 

more awareness that the public has about not buying into these 

things—they come in as e-mails, and you click on them, and it 

looks legitimate. 

Mr. TIBERI. Thank you. Thank you, Mr. Chairman. 

Chairman LEWIS. Thank you very much. 

Now we turn to Mr. Pascrell for his questioning. 

Mr. PASCRELL. Thank you, Mr. Chairman. 

I want to thank the commissioner. I want to thank Ms. Olson for 

being here today, always astute. 

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Commissioner, in September of 2006, the IRS began turning over 

thousands of taxpayer files, which include private and sensitive 

taxpayer information, to private sector debt collectors. 

Under the IRS plan—— 

[Interruption to the proceedings.] 

Mr. PASCRELL. Isn’t that great? Isn’t that wonderful? It’s like 

a Greek chorus. 

Under the IRS plan, the private collection agencies are allowed 

to keep up to 24 percent of what they collect, depending on the size 

of the case. 

But in testimony before Congress, IRS officials have repeatedly 

acknowledged that using private collection companies to collect 

Federal taxes is more expensive than having IRS do the work 

itself. 

According to the IRS, the return on investment from using IRS 

employees to collect these taxes is 13 to 1, while the ROI for the 

TCAs is just 3 to 1. 

In addition, according to the IRS, after commission payments to the PCAs totaling more than $5.5 million, the net revenue generated by private collectors for 2007 was just $20 million. Today, after spending $71 million in startup and ongoing maintenance costs through the end of fiscal year 2007, the IRS private tax 

collection program has lost $50 million. 

Now, given the drastic disparity in the return on investment between the private contractors and the IRS employees, and the dismal performance of private collectors to date, do you believe it 

makes sense for the IRS to continue to pay private collectors almost 25 cents for every dollar collected on the easiest cases in 

which IRS employees could collect much more cost effectively? 

Do you believe we should continue with that practice? 

Ms. STIFF. Sir, private collection agencies are self-funded. 

I’m not faced with $7 million on the table, and a choice of whether to spend it for PCAs or for IRS employees. There’s not $7 million. PCAs are self-funded through their collection processes. 

I think that we’ve been very candid in saying that IRS employees 

would have a higher return on investment for $7 million that 

comes from the PCA program, but the choice has never been one 

or the other. 

Mr. PASCRELL. Well, why should there even be a choice, then, 

if that is the record? Why don’t we simply support, provide the resources, and have enough of IRS employees to do the job? 

If we’re not getting the return that we expect or we can get from 

the public employees, why in God’s name are we continuing this 

process? 

Ms. STIFF. Well, I think that’s a question—— 

Mr. PASCRELL. Educate me. 

Ms. STIFF [continuing]. That’s a question to be debated here, in 

that our job is to administer this program as effectively, as efficiently——- 

Mr. PASCRELL. Madam Commissioner, the debate is not that, 

because every IRS person that’s come before us has never, ever 

contradicted those numbers which I provided in the basis of my 

question. 

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Are you debating—— 

Ms. STIFF. No, I’m not debating the numbers. What I’m saying—— 

Mr. PASCRELL. Okay, if we’re not debating the numbers, then 

why are we continuing the practice? 

Ms. STIFF. This is a collection tool that the Congress authorized 

the IRS to use, and it is bringing in $20 million. 

Mr. PASCRELL. This is ideologically driven, there’s no two ways 

about it. 

This process should be ended and ended immediately. It is a 

waste of taxpayers’ money. I believe that it is wrong to continue. 

My second question is this: 

Since 1995, the total number of IRS employees has been cut by 

more than 27,000. 

Do you believe these staffing reductions have hampered the service efforts to close the tax gap? What’s your opinion? 

Ms. STIFF. Since 2000, we have achieved double digit improvements in our productivity, and we’ve gotten our audit coverage up 

to where it was through technology, better management, and better 

training. 

We saw dollars collected through the tax system last year—as a 

direct result of IRS intervention—increase to almost $60 billion, 

from 33 billion in 2003, record numbers. 

So, I think that we’re using the resources that were given in a 

way that is producing the end result in the return at a higher rate 

than we’ve ever seen before. 

Mr. PASCRELL. Yet the amount of—the number of people and 

the amount owed to the government which we’re not collecting has 

risen substantially, substantially, since we’ve lost 27,000 employees. 

Thank you, Mr. Chairman. I yield back. 

Chairman LEWIS. Thank you very much. 

Mr. Crowley is recognized for his questions. 

Mr. CROWLEY. Thank you, Mr. Chairman, and thank you for 

this hearing today. 

I want to also thank both Ms. Stiff as well as Ms. Olson for being 

here today and for their testimony. 

Ms. Stiff, let me just, before I ask my question to both of you, 

let me just make a quick statement that pertains to Mr. Tiberi’s 

statement before about this rebate, and those unscrupulous individuals out there who may take advantage of those who may be eligible for this. 

I would just want to also suggest that those nationally known 

tax preparers that are out there, and I will not name any specific 

one, but this is a great opportunity, I think, for them to show some 

kindness, as well as build some good public relations, and particularly as it pertains to those individuals who do not have to file four 

taxes, but under these circumstances, need to in order to avail 

themselves of the rebate—I’m talking specifically of Social Security 

recipients as well as disabled veterans. 

It’s been brought to my attention that some of those preparers, 

if not all are charging at least $35 to file on behalf of those individuals. 

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For some of them, that is about 10 percent or more of the rebate 

that they will be receiving. 

I think, taking into consideration those individuals, the level of 

income is negligible for some of them, this is really something that 

they need to get every penny possible out of, so I would ask those, 

as an act of good will to those individuals, to take that into consideration and not charge for this simple filing. 

Let me, Ms. Stiff, then go to you first. 

My question pertains to a recommendation in the President’s fiscal year 2009 Blue Book regarding their recommendation to conform penalty standards between preparers and taxpayers. 

Does the IRS agree with this proposal to conform the penalty 

standards for tax preparers and for taxpayers, for taxpayers? 

Ms. STIFF. Yes, we do. 

The disparity that exists today presents unique challenges and 

problems both for the taxpayer and for the practitioner. 

Mr. CROWLEY. Thank you very much for your response. 

Ms. STIFF. Thank you. 

Mr. CROWLEY. Ms. Olson, for you, I understand that your annual report, which is too heavy to lift up and show to everyone here 

today, and I want to thank you for it, you do great work, you also 

have stated concerns with the current, quote, ′′more likely than 

not,’’ end quote, standard. 

So, do you also support the administration’s position on this 

issue, and if so, why? 

Ms. OLSON. Yes. First let me note my report does come in a CD 

ROM, which is lighter. 

[Laughter.] 

Ms. OLSON. We’ll be glad to get you one. 

Yes, we do support that those two standards, that the preparer 

and the taxpayer standard be made congruent. It brings about all 

sorts of screwiness, for lack of a better word, in the relationship. 

Mr. CROWLEY. Thank you very much. 

I don’t have much time, so I’m going to try to bring this to a concise point here on this particular question, as it pertains to the 

AMT patch and the discussion that took place prior to our passage 

of a 1-year fix. 

The IRS had noticed that Congress was attempting to fix this before we left, and before time ran out, ever so moving back the deadline period by which IRS needed to know what the intention of 

Congress was going to be so they can prepare for the change in 

your schedule and your ability to react to the AMT fix. 

Is there any way that the IRS, knowing that, having a good faith 

or good sense that the Congress is going to act to intercede on behalf of those individuals who are faced with AMT, knowing that we 

were going to somehow divert that, any way to prepare prior to our 

actually taking legislative action, so as to not be caught off-guard 

or offhand, and can we not have a way in which we can start that? 

If Congress fails to act, shame on us, but if Congress doesn’t fail 

to act and then it falls into your lap, who is the same on at that 

point? 

Is there any way in which we can work in a more cooperative 

way? 

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By the way, you have been incredible cooperative in creating an 

atmosphere between the Committee and the IRS. 

Is there any way we can broaden that out now to kind of have 

a fuller cooperation, not having that threat over our head by the 

White House, not having that threat that if we don’t act now we 

can’t get it done, knowing that we’re going to do something? 

Ms. STIFF. The answer has to be yes. I think there’s always an 

opportunity to work more closely together. 

I do need to thank you, because we actually were able to get 

some preplanning underway, because of the letter that you gave us 

that provided some specificity as to what to expect. 

I think the challenge is, and is going to continue to be, that the 

tax system is so large, there are so many systems, that I don’t 

know that the taxpayers, you or us, would want to incur the cost 

to allow that tax system to be programmed multiple, multiple ways 

for any eventuality, but I think there has to be a way to narrow 

down what the choices are going to look like, and get ahead of it 

a little bit. 

Mr. CROWLEY. I appreciate that. 

So, no—you don’t necessarily need legislation to pass in order to 

act? 

Ms. STIFF. I don’t want to say that, because we actually do need 

legislation to be able to fully act. 

Mr. CROWLEY. Understood. 

Ms. STIFF. Okay. 

Mr. CROWLEY. But to prepare, you don’t need, right? 

Well, thank you. Thank you for your 

Ms. OLSON. Sir, if I might 

Mr. CROWLEY. Yes, please. 

Ms. OLSON [continuing]. Add something, in my annual report, 

I recommend that one thing that Treasury and the IRS could do 

to move the ball rolling faster is to provide during the year, early 

in the year, a list to Congress, to the two tax writing Committees, 

of the expiring provisions, and then an estimate of the impact that 

the expiration would have, plus the drop-dead date, when do we 

need to have a real action by, so that folks who really care about 

these issues can use that information to move things along accordingly. 

Mr. CROWLEY. Thank you very much. 

Chairman LEWIS. Now, we turn to Ms. Tubbs Jones for her 

questions. 

Ms. TUBBS JONES. Thank you, Mr. Chairman, and Ms. Olson 

and Ms. Stiff. 

My question is directed to Ms. Stiff. 

I’m a former Cuyohoga County prosecutor, and we contracted 

with the Child Support Enforcement Agency to do work on behalf 

of child support. 

There’s been a recent ruling with regard to access to IRS information to county governments to lawyering, and in essence, the 

Department of Child and Family Services has been in conversation 

with the IRS about the sharing of this Federal tax information, and 

I would like to have my tax counsel follow up your office about our 

ability to access. 

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You know, you create what’s called, I think it’s a GDF process, 

to limit access of this information, so it doesn’t go out of those who 

are supposed to have it. 

As a result of that, there is some conversation as to whether or 

not prosecutors or attorneys that you can contract to access this information. 

It’s a big deal for 20 counties in the state of Ohio. Child support 

enforcement is a big deal. 

I just want to be able to have my tax counsel follow up with your 

folks and see if we can continue this conversation and work that 

out. 

Ms. STIFF. Will do. 

Ms. TUBBS JONES. Thank you very much, Mr. Chairman. I appreciate it. All the people in Ohio will be real happy. 

Chairman LEWIS. Thank you very much. 

The Committee hearing will recess for about 10 minutes, and we 

will return. 

Is that okay? 

Ms. STIFF. Yes, sir. 

Chairman LEWIS. Thank you very much. 

[Recess.] 

Chairman LEWIS. Thank you very much for being patient. Now, 

the hearing will resume. 

Ms. Olson, you noted that over 32,000 elderly have received an 

employment tax notice for workers caring for them in their home. 

Some have had their Social Security payment levied. Should this 

be happening? 

Ms. OLSON. No. 

Chairman LEWIS. Would a change in the statute resolve this unbelievable problem? 

Ms. OLSON. Yes. 

The problem is arising from the fact that the recipients of the 

home health care are considered employers under the common law 

rules that Commissioner Stiff talked about earlier, the 20-factor 

test, and what that means is, even if the state, for example, takes 

on the payment or the reporting obligations, the recipient of the 

care is still on the hook if something goes wrong. 

By making these workers the statutory employees of the entity 

who administers the funding, rather than the elderly person receiving the services, you basically make that entity responsible for all 

the reporting and paying and filing obligations, and if something 

goes wrong, we’re looking to the entity, whether it’s the state or an 

intermediate service organization or a local agency, we’re looking 

to them to make amends and make the corrections and take the 

collections, and the recipient of the care is protected from levies for 

these employment taxes. 

Chairman LEWIS. Thank you. 

Ms. OLSON. You’re welcome. 

Chairman LEWIS. Mr. Pomeroy, my friend, welcome back. You 

are now recognized for your questions. 

Mr. POMEROY. Thank you, Mr. Chairman, and Mr. Ranking 

Member. 

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As a former Ranking Member of this Subcommittee, I care deeply 

about the work, and appreciate being allowed to participate, even 

though I’m not on the Subcommittee this Congress. 

I well remember the leadership Rob Portman used to provide on 

this Subcommittee. 

He really would get into the weeds of how the IRS got this enormous responsibility, this charge, and whether it continued to have 

the resources that it needed. 

I’ve got so many questions, and not much time. I would just— 

one of the things we discussed during those years was the computer, this vast investment in the computer that—it was the computer project that was deeply frustrating. 

I mean, among other things, I think one of the takeaways I remember is, I guess to this contracting out business again, we were 

so dependent upon our consultants, we didn’t have internal staff 

capable of really driving and guiding the project and evaluating the 

quality of work that consultants were bringing us, really ultimately 

resulting in a cost of tens of millions, maybe hundreds of millions 

of dollars extra, and an awful lot of delay. 

How is that old computer project coming, and how is your internal capacity to deal with it? 

Ms. STIFF. I am very pleased to report to you that, over the last 

4 years, I think we’ve turned the corner on the project and on the 

management, even more importantly. 

I think earlier this week, or maybe later this week, but sometime 

this week, GAO is going to issue their first positive report on the 

modernization project. I’m with you. I’ll believe it when I’ve got it 

in my hands. 

But we have significantly improved our management and our 

governance, and as a result, we are, year in/year out,—÷this year 

being our most successful—producing new functionality, and delivering it on time, on schedule, and under cost. 

I mentioned earlier, and I don’t know if you were here, but our 

CADE system, the one that’s replacing the master file, this filing 

season, as we sit here today, is processing almost 25 percent of the 

individual returns filed, and for those returns, we’re able to settle 

those account balances in 24 hours, like you would experience with 

your bank or any other financial segment. 

So, we’re seeing—the list is long of the progress, but just an example, and I honestly feel very comfortable saying—— 

Mr. POMEROY [continuing]. That report, and I’m delighted by 

what you’ve said. 

To the extent, you know, when you get in this business, oversight 

business, no news is good news sometimes. We hadn’t heard much 

about this for a while. 

I’m very pleased that that’s the affirmative activity taking place 

underneath it. 

Nina, you mentioned something during your testimony that concerns me a lot. I’ve had some problems with this Free File alliance. 

To me, it has—we have given them an unbelievable, thoroughly 

endorsed, moneymaking opportunity, and at the same time, what 

was expected to be delivered by Free File has not really ever 

reached anywhere near the numbers that they’re talking about, 

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and the 14-percent growth this time off of a diminished base from 

2006 this isn’t anywhere near the expectation that we had. 

I’m very concerned by your report that they wouldn’t allow a 

very credible product prepared by a nonprofit in, which I expect 

compared very cost-competitively with other products available by 

other Free File members. Is that correct? 

Ms. OLSON. Well, yes, for the service, the things that it offers, 

it is very competitive, just from looking at it, plus it is free electronic filing and free cost, and so—— 

Mr. POMEROY. Ms. Stiff, I mean—sorry to interrupt, I see my 

time dwindling quickly -I think the service has responded to a 

number of the questions this Subcommittee on Oversight has 

raised over the years about Free File, and you’ve got some standards on products, and things that you didn’t used to have. That’s 

good. 

How about noncompetitive behavior of this private partnership 

that is our public-private partner? 

Obviously, noncompetitive behavior by Free File alliance is certainly repugnant to me, and I expect it would be to the service. Is 

that correct? 

Ms. STIFF. Yes, sir. What we’re doing in response to the concerns, which emerge each year, take a different form, and morph 

from this to that, is, we’ve—— 

Mr. POMEROY. By the way, I might just say, in business, if you 

got a partner, it’s always something. It’s just always something. 

You don’t have much of a partner. 

So I really think that Free File, in terms of having such little policing of its membership, where they’re always trying to look at 

some other low route way to make a buck, in exploitation of this 

relationship with the service, they’re certainly not getting the job 

done, in my opinion. 

I would like to think Free File is a best practice, its policing, uplifting effect, and it certainly has not been my view of their work 

so far. 

Ms. STIFF. Well, I think that they are serving the needs of millions of taxpayers each year, but I think more importantly, what 

we’re doing now, which will actually, I think, further this debate 

and decisionmaking on a forward-going basis, is that we are conducting an advanced e-file study, because as you know, you have 

an expectation that we’re going to get to 80 percent of all returns 

being e-filed at some point, and so we are bringing in internally, 

an independent third party to help us assess what are the best 

ways to advance our e-file goals. 

That’s going to include looking at direct file options. That’s going 

to include looking at Free File and what its providing. It’s going to 

include looking at 2D bar coding options. 

The list of what we’re going to cover in that study should get at 

all of the issues that are raised—— 

Mr. POMEROY. Frankly, will you be looking at a service developed product to be available free? 

Ms. STIFF. We’re going to be exploring that option, as well. 

Mr. POMEROY. As you do that work, I know—I’m glad you’re 

going to do that work, I look forward to seeing it. 

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Just to close back on this allegation of, or I won’t say allegation, 

because it happened in fact, the appearance of anti-competitive activity in Free File alliance to keep out a lower-cost product from 

the offerings allowed by alliance members, as the service gets its 

answers, I would very much like the report, and—— 

Ms. STIFF. We will follow up with you. 

We did make an intervention when that came to our attention, 

and I believe that partner is currently being listed. 

Mr. POMEROY. Is that correct? 

Ms. OLSON. Not on Free File. Not on Free File. 

It’s listed on the IRS’ site that lists partners, but it is not allowed 

on that site to tell that it is both free filing and free preparation, 

so the fullness of what it offers taxpayers is not being advertised 

on that site—— 

Mr. POMEROY. So, we have an entity that wants to offer free 

filing—— 

Ms. OLSON. It’s a nonprofit. 

Mr. POMEROY [continuing]. By a nonprofit, and the service has 

not made that information publicly available on the Web site. Why 

would that be? 

Ms. STIFF. I think it’s available on the Web site. 

Ms. OLSON. It’s not. It’s on the list. 

It’s on the list, but it is not allowed under the rules of that Web 

site to say that it is both free e-filing and free preparation software. 

It can only say one of those two things, like, ‘‘This is free e-filing,’’ and then taxpayers don’t know that they don’t have to pay to 

do the preparation, or it can say, ‘‘free preparation,’’ but they don’t 

know that it’s free e-filing. 

Those are the rules of that site. That’s the listing that it’s got up 

there. 

It was not allowed to be listed on the Free File alliance, become 

a member of the Free File alliance, which the IRS is actively publicizing as ‘‘Go here for free electronic filing and preparation.’’ 

Mr. POMEROY. I know I’m out of time, Mr. Chairman, but I 

would just say that, as this relationship matures, as products become available, broadly, cheaply, I think it does not behoove the 

IRS anymore to basically safeguard the profit opportunities for 

Free File partners. 

I saw the service playing that role, when suddenly they allowed, 

by service action, a maximum of something like 57,000 or whatever 

the amount is for a taxpayer using Free File. 

Before it was unlimited. It was the service that put a cap in, and 

basically to enhance the profit opportunity for Free File Members. 

Now, this, if there’s activity taking place among the Free File alliance, basically keeping out lower-cost alternatives in any way, 

and the service is countenancing this activity, I just think that’s so 

wrong, and I would hope that that’s corrected. 

I would also hope the information, as much information as possible about this lower-cost alternative would be available to the 

taxpayers. 

Thank you, Mr. Chairman, for allowing me to—— 

Chairman LEWIS. Thank you very much. 

Now we turn to Mr. Becerra for a question. Welcome, my friend. 

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Mr. BECERRA. Thank you, Mr. Chairman. 

Mr. Chairman, I hope we continue to do these types of hearings. 

I think it’s so important to have the administrator, to have the 

tax advocate, the commissioner and the tax advocate here to help 

us make sure that the American public understands what is being 

done in terms of taxes and how they can avail themselves of whatever services are available. 

No one wants to be hounded by the IRS, and most people, fortunately, in this country, do the right thing, and so I think it’s very 

important to these oversight hearings, and especially because of 

this rebate, that most Americans qualify for. 

I think Ms. Stiff is correct in trying to point out that folks need 

to get this information, and I thank you. 

I hope that the IRS is able to do as much as possible to explain 

to all Americans, including those Americans who weren’t planning 

to file a tax return this year, that they should consider it, because 

they may have a rebate coming, even if they weren’t planning to 

file for any type of income tax refund, or if they didn’t think they 

owed any taxes. 

I’d like to focus on a couple of things, and forgive me. I’m suffering from what I think half of the universe is suffering from—— 

Ms. STIFF. Me, too. 

Mr. BECERRA [continuing]. Yes, this cold. 

Tax preparers—and Ms. Olson, let me ask you, this, going directly to some of your testimony. 

In some of your testimony, you mentioned that there is a need 

for a legislative proposal to do, among other things, to protect the 

more than 60 percent of taxpayers who rely on paid tax preparers 

by imposing minimum standards of competence. 

At present, anyone who can Federal tax—I’m sorry. 

‘‘At present, anyone can prepare Federal tax return. There are no 

standards at all.’’ That’s a quote from your testimony. 

Should tax preparers register with the Treasury so that we know 

who is involved in the preparation of tax returns? 

Ms. OLSON. Absolutely. 

The tax return is the entry point to the tax system, and we have 

so many people going to preparers, and there are so many more 

programs, just because of software being available, who have no 

training in tax, who can just buy a package off the shelf, and prepare returns. 

Although the packages are wonderful, you know, they don’t replace knowledge of the Tax Code if you are preparing a return for 

a fee. 

Mr. BECERRA. So, give me some recommendations. What would 

you recommend we do to ensure that all preparers are competent? 

Ms. OLSON. Well, certainly many preparers, the attorneys, the 

CPAs, the enrolled agents, are already subject to licensing and testing, some kind of testing regime, and usually continuing education 

requirements. 

So, what we’re worried about are what we call the unenrolled 

preparers, and those folks need to be registered with the IRS. We 

need to know about them. 

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We need to have an entrance examination for them to just test 

their basic level of competency, that they understand the basic concepts of tax. 

I know that some folks have said that this might be costly, but 

we have an estimate from the group that runs the California preparer regulation system that they have, and they have estimated 

that they can do all of the testing, all of the tracking of registration, et cetera, for about $35 per preparer, which would be a fee 

we would pass on to those preparers, so it would be paid for by the 

preparers themselves. 

Mr. BECERRA. Do you think Treasury is capable of managing 

a system that requires some type of competence of these preparers? 

Ms. OLSON. I think that—I have thought the Treasury was, we 

were capable of doing that since I proposed it in 2002. 

Mr. BECERRA. Thank you. 

Now, Ms. Olson, I suspect that your workload has increased recently as a result of the downturn in the economy, more folks trying to figure out what they do, more modest-income folks who can’t 

afford to go to a professional tax preparer. 

How many people did you contact, or had contact with your office 

in, say, 2007? 

Ms. OLSON. We had about 248,000 cases, and about—the growing issues in our cases are in enforcement issues, because the IRS 

is ramping up enforcement, and then as the economy turns down, 

people have more economic, you know, economic pressures on them, 

and they’re not able to deal with paying their tax obligations. 

Mr. BECERRA. Are you expecting to have as many or perhaps 

more contacts for 2008? 

Ms. OLSON. We are expecting more contacts in 2008, and already seeing that. 

Mr. BECERRA. Ms. Stiff, is there value in the Tax Advocate’s 

Office from the perspective of the IRS? 

Ms. STIFF. Absolutely. 

Mr. BECERRA. Give me a sense. 

My understanding is that the administration’s budget proposal 

would decrease funding for the Taxpayer Advocate Services to a 

level that’s about $8 million below what they got last year. 

Is that something the IRS is supporting? 

Ms. STIFF. Let me give you some context with that number, because taken out of context, you get a different sense for it. 

From the year 2007 to the year 2009, the taxpayer advocate 

budget will experience a 9-percent increase. Okay? 

Mr. BECERRA. You’re not suggesting that they go the money 

and didn’t use it well? 

Ms. STIFF. No, no, no, sir. I’m just trying to put some perspective 

Mr. BECERRA. Okay. 

Ms. STIFF. They had a 9-percent increase in a 2-year period, 

while the rest of the IRS budget increased 7 percent. 

Mr. BECERRA. I understand. 

But now let me ask Ms. Olson, with that 9-percent increase, were 

you able to adequately handle all the contacts that were made to 

your office? 

Ms. OLSON. My—not really. 

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My employees are at the highest case per—highest case inventory per case advocate that we have ever been in the history of the 

Taxpayer Advocate Service. 

Mr. BECERRA. I would presume that chances are, Ms. Olson 

could probably use a 90-percent increase in her budget, and she’d 

still find that people are coming, simply because, as you and I 

know, it’s become very expensive to get good professional advice, 

and more and more, people are finding that they can’t afford it. 

You know, you buy the new washing machine that you need to 

clean your kids’ clothes, or you get a professional tax preparer, and 

sometimes I think washing clothes beats out the tax preparer. 

But I understand that you have constraints. You have to live 

with what the administration provides you to fund all the operations within IRS, including the taxpayer advocate. 

But wouldn’t it be pound foolish for us to diminish the resources 

that the taxpayer advocate has to make sure that people, first, voluntarily comply with their obligation to file a tax return, but two, 

to do it correctly, so that you don’t have to then use all your personnel later on to make corrections to someone who is making modest income, who just happened to make an innocent error? 

Ms. STIFF. Sir, I agree that the Taxpayer Advocate provides a 

valuable service, but as the Acting Commissioner, balancing all of 

the enforcement and service needs, I think it’s equally important 

that we provide equivalent levels of services across the board so 

that the cases don’t end up at the Taxpayer Advocate’s Office. 

So, it’s trying to maintain balance. 

Mr. BECERRA. Yeah. I know that most of us would hate to have 

to sit in your seat to try to respond to some of those questions, because you do have to balance all the obligations you have with the 

moneys that you’re given. 

I would just hope that, in the process of budgeting, you all, not 

so much you all, but Office of Management and Budget, the White 

House, would not be pennywise and end up being not just pound 

foolish, but foolish with all those taxpayers who are already burdened, but are still willing to voluntarily comply with their obligation to file a tax return. 

I think it would just be such a sin for us to send a message to 

Americans who have very modest income that we don’t care to have 

them comply with something that most of us don’t wish to have to 

do, and that is pay our taxes. 

I was shocked when I learned that the President’s budget called 

for an $8 million cut to the Taxpayer Advocate’s Office. 

Mr. Chairman, I know my time has expired, so I’ll just say one 

last thing and won’t ask a question. 

The taxpayer assistance centers that you have, same thing. 

To not ramp up those centers where, for the money that we pay 

as taxpayers to fund that program within IRS that gives assistance 

to, again, people who are voluntarily trying to comply with their 

tax requirements, to not have those offices open long enough so 

that people who work long hours can take part or participate in 

those programs that you make available, to get good advice so they 

don’t have to then pay someone else a pretty big fee to do something very simple, which someone in your office, if you had the resources and the staffing, could answer, I just—that’s what gives us 

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a bad name, both as government and as the IRS, when we seem 

to make it more difficult for people to do voluntarily what they 

know they must do. 

I just think that if you move toward doing these things, it has 

such a great return—the Taxpayer Advocate’s Office, the taxpayer 

assistance centers, the low-income tax centers—you know, we 

would get much greater response from the American people that 

we’re really trying to be helpful, not just take their money. 

I thank the Chairman and I thank the two witnesses for their 

time. 

Chairman LEWIS. Thank you very much. 

At this time, I would like to thank the IRS, the Acting Commissioner and the National Taxpayer Advocate, for their time, and 

your wonderful and helpful and meaningful testimony. 

The Subcommittee and all of the Members, all of us, appreciate 

your views. 

Is there any other business to come before the Subcommittee? 

[No response.] 

Chairman LEWIS. There being no further business, this hearing 

is now adjourned. 

[Whereupon, at 12:10 p.m., the hearing was adjourned.] 

[Questions for the record follow:] 

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Questions from Mr. Johnson 

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Questions from Mr. Cantor 

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1 Knight v. CIR, S.Ct. Docket No. 06–1286 (January 16, 2008). 

[Submissions for the Record follow:] 

Statement of Benson S. Goldstein 

The American Institute of Certified Public Accountants thanks the House Ways 

and Means Subcommittee on Oversight for the opportunity to submit this statement 

for the record of the public hearing on the 2008 tax return filing season, IRS operations, the Administration’s fiscal year 2009 budget proposals, and the National 

Taxpayer Advocate’s 2007 Annual Report to Congress, held on March 13, 2008. 

The AICPA is the national, professional organization of certified public accountants comprised of approximately 350,000 members. Our members advise clients on 

federal, state, and international tax 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 perspective that we offer our comments today. 

GENERAL COMMENTS ON THE FILING SEASON 

We are pleased to report that the 2008 filing season is generally progressing without any significant problems. The AICPA has received a few reports by CPAs about 

difficulties taxpayers have experienced as a result of enactment of the Alternative 

Minimum Tax ‘‘patch’’ in late 2007. These scattered reports of difficulties stem from 

the resultant delays in IRS’s release of certain forms, which caused processing 

delays (through February 11, 2008) for the returns of about 13.5 million taxpayers. 

Our members are receiving a moderate number of questions from clients regarding the economic stimulus program enacted in February 2008, a cash payment from 

the government to about 130 million households starting in May. While some taxpayers may be confused by the eligibility rules for the stimulus payments, we believe the IRS is generally doing a very commendable job in terms of publicity for 

the program and getting the necessary guidance out to the public. 

The AICPA appreciates that the Treasury and IRS promptly issued Notice 2008– 

32 in February 2008 following the January 16, 2008 U.S. Supreme Court decision 

in Knight v. CIR. 1 The notice, in providing interim guidance for 2007 tax returns, 

does not require trustees to determine the portion of a bundled fee that is subject 

to the 2-percent floor under Internal Revenue Code Section 67 for tax years prior 

to 2008. We note the certainty, clarity and helpfulness of the guidance for taxpayers 

and practitioners who are in the process of preparing 2007 tax returns. We also appreciate that the IRS and Treasury have opened a new three month comment period 

with respect to prop. reg. section 1.67–4, which was issued prior to the Supreme 

Court ruling. 

Our additional comments focus on a number of issues impacting on IRS operations and tax administration; specifically: (1) the Form 1065, Schedule K–1 due 

date; (2) IRS’s e-file strategy; (3) the tax gap and stakeholder outreach; (4) the National Taxpayer Advocate; (5) the section 6694 preparer penalty; (6) tax strategy 

patents; (7) federal regulation of tax return preparers; and (8) the section 7216 regulations. 

• FORM 1065, SCHEDULE K–1 DUE DATE 

One of the most significant filing season problems of recent years involves the receipt of ‘‘last minute’’ Form 1065, Schedules K–1, a problem that has perplexed taxpayers whose returns (Forms 1040, 1065, 1120 and 1120S) must include Schedule 

K–1 information. While the AICPA believes that this issue might be addressed ultimately and more completely through legislative changes, we believe a simple regulatory change would quickly assist a significant percentage of taxpayers presently 

burdened by the late receipt of Schedules K–1. Accordingly, we recommend changing 

temp. reg. section 1.6081–2T, the automatic extension of time to file certain returns 

by partnerships; a temporary regulation that expires on November 4, 2008. 

Under temp. reg. section 1.6081–2T, partnerships are generally allowed an automatic six month extension of time (from April 15 to October 15 for calendar year 

partnerships) to file Form 1065, U.S. Partnership Return of Income, or Form 8804, 

Annual Return for Partnership Withholding Tax, as long as the partnership submits 

the appropriate form for extension. This regulation has, unfortunately, contributed 

to the problem of a large number of calendar year partnerships completing and 

sending Schedules K–1 to taxpayers just prior to or after the due dates of the partners’ tax returns. Receiving Schedules K–1 on October 13 or 14 makes it very difficult for tax preparers and taxpayers to complete their returns by October 15, in 

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2See IRS Modernized e-File Form 1040 Status Report, dated January 2008, as provided by 

the IRS to the AICPA and posted to aicpa.org at URL: http://tax.aicpa.org/NR/rdonlyres/ 

8F52D6AA-A50D-466D-BD91-2C62C73FB8BD/0/1040_MeF_Overview_AICPA_012008.ppt 3See the National Taxpayer Advocate’s 2006 Annual Report to Congress, December 31, 2006, 

page 174. 

the case of an individual or other partnership tax return, and impossible for corporate returns (both S and C) which have an extended due date of September 15. 

We have had discussions with the Service regarding a regulation project to: (1) 

address the difficulties taxpayers face when receiving delayed Schedules K–1 and 

(2) move the extended due date for partnership returns from October 15 to September 15, thus providing a maximum extension of five months. 

• IRS’s e-file strategy 

The AICPA appreciates: (1) the benefits electronic filing offers to tax administration and taxpayers; and (2) the successes the IRS has had with its electronic tax 

filing (e-filing) program during recent filing seasons, successes due in large part to 

the Service’s vigorous efforts to gain the input and involvement of affected parties. 

The IRS closely collaborated with the AICPA during the 2006 and 2007 filing seasons on the Service’s rollout of the mandatory large corporate and exempt organizations e-file programs on the MeF platform; and also with respect to its rollout during the 2007 filing season of the large partnership e-file program on the MeF platform. With respect to these e-file programs, the AICPA played a proactive role in 

surfacing issues and solutions that ultimately contributed to the success of e-file. 

We plan to continuing working closely with the Service to meet its expectations for 

these programs for the 2008 filing season; and with respect to its future rollout of 

the Form 1040 MeF program.2

We support using the AICPA/IRS collaborative model for e-file for other customer 

outreach initiatives involving the Service, especially from the perspective of encouraging voluntary compliance. In general, we wholeheartedly support efforts by the 

Service to reach out to the AICPA and other stakeholders as much in advance as 

possible prior to the Service’s implementation date for a new program. By doing this 

the IRS will receive constructive feedback about the pending new program, input 

that will likely improve the program upon implementation; and such stakeholder 

outreach is likely to garner a higher degree of stakeholder ‘‘buy-in’’ or support for 

the program. 

• the Tax gap and stakeholder outreach 

The AICPA supports the suggestion by National Taxpayer Advocate Nina Olson 

that the IRS place a significant effort on understanding the tax gap and the noncompliance rates associated with small business taxpayers. According to IRS statistics, non-compliance by small business is the single largest component of the tax 

gap, representing about 44 percent of the gross federal tax gap of $345 billion.3

While we support the concept of increased enforcement to address the tax gap, 

we recognize (like the National Taxpayer Advocate) that the IRS should increase its 

focus on educating small businesses as opposed to solely relying on its enforcement 

apparatus. In Ms. Olson’s 2006 report to Congress, she suggests increasing the 

scope and reach to the small business community of the Small Business/Self-Employed Division’s Communication, Liaison, and Disclosure (CLD) function. We support an increase in resources for CLD, as well as enhancement of CLD’s educational 

component. 

CLD is doing a very commendable job in serving the small business and tax professional communities in terms of its stakeholder outreach efforts despite the reduction in staff and resources that took place a few years ago. We do believe a further 

commitment to programs like the Service’s Small Business Tax Workshops and its 

online resources such as the Small Business and Self-Employed Online Classroom, 

Small Business Resource Guide, and the Virtual Small Business Tax Forum are 

positive endeavors. In order to enhance further development of these types of products, it would be helpful for the SB/SE Division to study the market penetration and 

use of these programs by small firms. 

The AICPA does recognize that the Service heavily relies on irs.gov and the Internet to accomplish much of its ‘‘customer outreach’’ to small business. We appreciate 

the Service’s understanding that a substantial majority of small businesses rely on 

CPAs and other tax professionals to prepare their tax returns and provide professional advice. For this reason, the Service heavily utilizes the AICPA and other professional associations to assist the government in its outreach efforts to the business 

community on key tax administration issues. 

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4See ‘‘The National Taxpayer Advocate’s Fiscal Year 2007 Objectives to Congress,’’ July 19, 

2007; and the ‘‘National Taxpayer Advocate, 2007 Annual Report to Congress,’’ December 31, 

2007. 5See the ‘‘National Taxpayer Advocate, 2007 Annual Report to Congress,’’ December 31, 2007, 

Volume 1, pages 140–160 and 512–524. 

• NATIONAL TAXPAYER ADVOCATE 

From our perspective, the National Taxpayer Advocate is one of the best customer 

service oriented programs within the IRS. We find the two yearly reports issued by 

the National Taxpayer Advocate to be excellent compendiums of systemic problems 

and evolving trends within the tax administration and tax policy implementation 

arenas.4 We note that the Advocate’s 2007 Annual Report to Congress: (1) raises 

concerns about the potential conflicts of interest that could occur between preparers 

and their clients due to the higher standards of conduct put in place by last year’s 

modifications in IRC section 6694; and (2) recommends enactment of legislation to 

ban tax strategy patents.5 The section 6694 preparer penalty and tax strategy patent issues are described in more detail below. 

In addition to systemic advocacy, the Taxpayer Advocate’s office performs a vital 

function by providing taxpayers with an independent channel for resolving individual tax problems. The Advocate assists taxpayers by reviewing requests for assistance with respect to enforcement related cases involving ‘‘significant hardship,’’ 

and where appropriate, helps craft solutions to relieve such hardship. 

• Section 6694 Preparer Penalty 

The AICPA strongly supports H.R. 4318, legislation introduced by Representative 

Joseph Crowley, with Representative Jim Ramstad joining as an original cosponsor. 

H.R. 4318 is designed to reverse the negative impact of a tax provision enacted into 

law as part of the U.S. Troop, Readiness, Veterans’ Care, Katrina Recovery, and 

Iraq Accountability Appropriations Act of 2007 (‘‘the Act’’). This provision—passed 

last year without hearings or public comment—increased the tax return reporting 

standards applicable to tax return preparers under section 6694 for undisclosed 

items, from the ‘‘realistic possibility of success’’ standard to the ‘‘more likely than 

not’’ standard. As under prior law, if that reporting standard cannot be satisfied and 

the preparer wants protection from the possible imposition of an understatement 

penalty, a disclosure of the item on the return is necessary. 

The 2007 law raises the tax return reporting standard for preparers above the reporting standard for taxpayers (which is ‘‘substantial authority’’), creating the potential for conflicts of interest between preparers and their clients (as pointed out by 

the National Taxpayer Advocate above). It also creates the potential for the IRS 

being overwhelmed by excessive disclosures filed for routine items, thus defeating 

the purpose of the IRS disclosure system. 

Representative Crowley’s bill, H.R. 4318, would restore the role of CPAs as advocates for taxpayers by equalizing the tax return reporting standards for preparers 

and taxpayers at the substantial authority level. In introducing the legislation, Representative Crowley stated ‘‘The legislation ends the potential conflict between the 

tax preparer and the taxpayer, and it will reduce the paperwork backlog that prevents taxpayers from claiming deductions or credits.’’ Enactment of H.R. 4318 would 

restore a commonsense approach and perspective to section 6694. Treasury also supports a similar position, as noted in the Blue Book regarding the Administration’s 

fiscal year 2009 revenue proposals. 

• STRATEGY Patents 

To date, at least 65 patents for tax strategies have been granted and 107 patent 

applications for tax planning methods are pending. Patents for tax planning methods have already been granted in a variety of areas, including the use of financial 

products, charitable giving, estate and gift tax, pension plans, tax-deferred exchanges, and deferred compensation. One patent granted is for the process of computing and disclosing the federal income tax consequences involved in the conversion from a standard Individual Retirement Account (IRA) to a Roth IRA. We expect 

many more tax planning method patents to be issued, directly targeting average 

taxpayers in a host of areas, including: (1) income tax minimization; (2) alternative 

minimum tax (AMT) minimization; and (3) income tax itemized deduction maximization. 

The AICPA Position 

Patents for tax planning methods undermine the integrity, fairness, and administration of the tax system and are contrary to sound public policy. Consistent with 

this perspective, we believe patents granted for tax planning methods: 

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6See IRS Notice 2008–13 regarding ‘‘Guidance Under the Preparer Penalty Provisions of the 

Small Business and Work Opportunity Act of 2007.’’ 

• Limit the ability of taxpayers to fully utilize interpretations of tax law 

intended by Congress; 

• May cause some taxpayers to pay more tax than Congress intended and 

may cause other taxpayers to pay more tax than others similarly situated; 

• Complicate the provision of tax advice by professionals; 

• Hinder compliance by taxpayers; and 

• Mislead taxpayers into believing that a patented strategy is valid under 

the tax law. 

AICPA Legislative Recommendations 

AICPA supports S. 2369, as introduced in the Senate; and H.R. 1908, the Patent 

Reform Act of 2007, as passed by the House of Representatives, which (among other 

provisions) prohibits the granting of tax planning method patents. Both bills would 

generally exempt tax preparation software, with the intended effect of not impacting 

the development and sale of products like TurboTax and TaxCut. 

The AICPA also supports H.R. 2365, introduced by Representatives Rick Boucher, 

Bob Goodlatte, and Steve Chabot. The legislation still allows the patenting of tax 

strategy patents. However, it provides immunity from patent infringement liability 

for taxpayers and tax practitioners. H.R. 2365 exempts tax preparation software, 

just like the bills described in the preceding paragraph. 

• Federal Regulation of Tax Returns Preparers 

This section provides the AICPA’s comments on the federal regulation of tax return preparers. In drafting these comments, we recognize that Senator Jeff Bingaman introduced legislation last year (S. 1219, the Taxpayer Protection and Assistance Act of 2007) that specifically addresses some of these issues. When this section 

refers to the ‘‘preparer registration proposal,’’ we are referring to the general concept of the regulation of tax return preparers, and at other times, we will specifically refer to S. 1219. 

The AICPA Commitment to Professional Ethics 

The AICPA strongly supports the implementation of high professional standards 

for tax practitioners; and for this reason, we are sympathetic to the underlying reasons driving support for the federal regulation of tax return preparers. Our longstanding track record regarding high professional standards for CPAs, includes the 

AICPA Code of Professional Conduct and our enforceable Statements on Standards 

for Tax Services. These standards provide meaningful guidance to CPA members in 

performing their professional responsibilities. 

While the AICPA strongly supports initiatives designed to ensure high professional standards among tax professionals, we are not convinced that Congressional 

proposals calling for the regulation of unlicensed tax practitioners will accomplish 

the stated objectives advanced by the proponents of such proposals. We believe that 

there is a need to better understand the nature of the problem before coming to any 

particular conclusions as to the best solution. 

The AICPA also notes that the preparer registration legislation is being promoted 

at a time when the government is reviewing the current regulatory framework governing tax return preparer penalties, their interrelationship to taxpayer penalties, 

and the regulations governing practice before the IRS (i.e., Circular 230).6 Treasury’s call for a review of the regulatory regime governing preparer penalties is consistent with our concern that the preparer registration legislation warrants further 

evaluation. 

Addressing EITC and Refund Anticipation Loan Problems 

Legislation to regulate preparers has generally been proposed by members of Congress as a partial response to: (1) the high error rate associated with Earned Income 

Tax Credit (EITC) claims; and (2) consumer protection concerns associated with refund anticipation loans. 

We share the concerns regarding the high error rate associated with EITC claims 

and with the proliferation of high-interest, short-term refund anticipation loans 

(RALs). According to the Treasury Inspector General, an IRS study of 1999 tax returns suggests that—out of the $31 billion in EITC claims by taxpayers that year— 

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7Testimony of J. Russell George, Treasury Inspector General for Tax Administration, Hearing 

on IRS’s Fiscal 2006 Budget Request; Senate Committee on Appropriations, Subcommittee on 

Transportation, Treasury, the Judiciary, Housing, and Urban Development, and Related Agencies, April 7, 2005. 8The Internal Revenue Manual (IRM) requires IRS to refer all practitioners subject to section 

6694 penalties to OPR. 

between 27 and 32 percent of those claims were erroneous.7 With respect to the 

RALs, many commercial preparers aggressively encourage the use of RALs by low 

income taxpayers, often misleading these taxpayers about the true cost of such 

loans. These concerns have resulted in the introduction of bills such as S. 1219. 

Among other provisions, S. 1219 provides for the regulation of what the bill refers 

to as ‘‘federal tax return preparers’’ and ‘‘refund anticipation loan facilitators.’’ 

Before seriously considering legislation to regulate tax return preparers, the 

AICPA recommends Congress consider proposals that narrowly focus on solutions to 

address issues associated with the EITC program and the consumer protection 

issues surrounding refund anticipation loans. By creating solutions targeted to the 

specific problems associated with the EITC and RALs programs, we believe such 

proposals may result in more tangible increases in compliance than a preparer registration proposal might alone yield. 

The AICPA also believes the IRS currently has at its disposal tools that, if utilized 

and enforced, would achieve: (1) immediate reductions in fraudulent return preparation; and (2) long-run compliance improvements with respect to unregulated tax preparers. Any introduction of a new preparer regulation regime is premature and 

could potentially take years to see any possible rewards. 

Enforcement through Existing Regulatory Authority 

The AICPA believes the Service already has sufficient authority to regulate federal tax return preparers without the need for new legislation. First, the IRS has 

authority to regulate tax preparers through the penalty authority under current 

law. The Internal Revenue Code permits the Service to assess (among others) penalties for the understatement of a taxpayer’s liability (section 6694); the failure to 

furnish a copy or to sign the return (section 6695); the promotion of abusive tax 

shelters and gross valuation overstatements (section 6700); the aiding and abetting 

of the understatement of tax liability (section 6701); and actions to enjoin certain 

conduct by preparers or promoters (sections 7407 and 7408). 

The government also regulates practitioners through the IRS’s Office of Professional Responsibility (OPR). OPR enforces Circular 230 which governs the practice 

by certified public accountants (CPAs), attorneys, and enrolled agents (EA) before 

the Service. OPR has the authority to discipline these Circular 230 practitioners 

through disbarment and other sanctions. One of the largest sources of referrals to 

OPR is through information referrals from IRS compliance personnel.8

While unlicensed preparers are not subject to Circular 230, they are subject to a 

number of civil penalties, including the section 6694 understatement of taxpayer’s 

liability penalty. We believe the recent modifications to section 6694, including the 

marked increase in the dollar amount of the penalty from $250 to a level of $1,000 

or more—should provide the Service with significant authority to regulate ‘‘unethical’’ or incompetent unlicensed preparers. 

Public Awareness Campaign 

The AICPA strongly supports the Service’s annual news release of tips advising 

taxpayers how to choose a competent paid federal income tax return preparer. This 

publicity campaign receives wide coverage by U.S. newspapers and media outlets. 

It is an excellent foundation for any further efforts by the Service to educate the 

public about unethical and incompetent practices by preparers. The Service’s current media plan is crafted in a very positive way; it provides general tips on picking 

a competent preparer without putting itself in the difficult and likely un-winnable 

position of choosing sides between preparers who are not regulated by Circular 230, 

as well as the differing constituencies currently regulated under Circular 230 (i.e., 

CPAs, attorneys, and enrolled agents). 

Electronic Return Originator Application Process 

The AICPA recommends that Congress and the IRS review the current electronic 

return originator (ERO) application process. The ERO process significantly overlaps 

and may even duplicate any ‘‘limited’’ registration process to address unregulated 

tax return preparers. Under the current ERO application process, the IRS conducts 

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9The Treasury Inspector General for Tax Administration Report on ‘‘Better Screening and 

Monitoring of E-File Providers Is Needed to Minimize the Risk of Unscrupulous Providers Participating in the E-File Program,’’ Reference No. 2007–40–176, September 19, 2007. 

turn preparer’s firm. This background check includes: (1) an FBI criminal background review; (2) a credit history check; and (3) an IRS records check with respect 

to the preparer and the firm’s adherence to tax return and tax payment compliance 

requirements, including a review of any prior non-compliance under the IRS e-file 

program. 

In its September 2007 report on the ERO program, the Treasury Inspector General for Tax Administration (TIGTA) points out that certain inadequacies exist within the current IRS procedures for screening and monitoring EROs and that such inadequacies increase the risk to the public and to the Federal Government for potential losses due to unscrupulous e-file providers. The AICPA supports the implementation of new procedures with respect to EROs in order to mitigate any risks to the 

public and government; however, we believe the enactment of a wholly new tax return regulation regime (one that shares common administrative features to the current ERO program) will not likely reduce the risks associated with unscrupulous tax 

preparers. Instead, we believe it would be far more constructive (and resource efficient) to improve on and build onto the current ERO program, as opposed to implementing a largely duplicative regulatory-required administrative machine.9

Exception for CPAs, Attorney 

The AICPA continues to support language contained in S. 1219 that would require 

the IRS to, within one year of enactment, prescribe regulations that will regulate 

compensated return preparers not otherwise regulated under 31 USC 330 (the enabling legislation upon which Circular 230 is issued). Since they are already regulated by Circular 230, CPAs, attorneys, and EAs should be exempt from any new 

regulation regime imposed on currently unlicensed preparers. Previously proposed 

legislation has properly recognized that CPAs, attorneys, and EAs are already subject to regulation and professional standards imposed upon them by state boards of 

accountancy, state bars, court systems, and Circular 230, and we recommend that 

any proposal continue to include such exemption. 

• Section 7216 Regulations 

The AICPA Tax Division has formed a task force to review the impact of TD 9375, 

final regulations released by Treasury and the IRS in January 2008, involving the 

disclosure and use of tax return information by tax return preparers under Internal 

Revenue Code section 7216. According to Treasury and the IRS, the regulations are 

designed to ‘‘strengthen taxpayers’ ability to control their tax return by requiring 

that tax return preparers give specific information—to allow taxpayers to make 

knowing, informed, and voluntary decisions over the disclosure or use of their tax 

information by their preparer.’’ The new (final) regulations have been issued as a 

follow-up to proposed regulations the Service released about two years ago. 

In our public comments dated March 8, 2006, the AICPA raised three primary 

concerns about the scope of the proposed regulations. First, we raised a concern 

about the extent to which the regulations fashioned ‘‘an entirely new consent regime 

for any return preparation activities involving parties located outside the borders of 

the United States. Second, our 2006 comments suggested that a civil penalty is a 

more practical mechanism for regulating a practitioner’s everyday disclosure and 

use of taxpayer information, as opposed to reliance on a criminal statute like IRC 

section 7216. 

Our third concern, as expressed in our 2006 comments, involves tax preparation 

for U.S multinationals, non-U.S. multinationals, and U.S. Citizens (expatriates) located overseas. It is very typical for a tax professional located in the U.S. to consult 

with a tax professional located overseas in order to complete a business’ tax return 

or an expatriate’s Form 1040 tax return. A tax preparer should generally not be required to obtain consent from the taxpayer because the taxpayer anticipates that 

their tax information will be disclosed outside the United States. In this context, 

we stated we believe that adopting the current AICPA professional ethics rules regarding a member’s responsibilities when outsourcing services to third-party service 

providers are a far more preferable way of dealing with professional services offered 

by accountants and attorneys across borders. 

Some of the major tenets or provisions of the TD 9375 (the final regulations) are 

as follows: 

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• Within appropriate limits and safeguards, the regulations validate that 

the taxpayer continues to maintain the ability and the right to direct a 

preparer to disclose most tax return information as the taxpayer sees fit. • The regulations clarify that return preparers may disclose return information to the IRS for any purpose. • The disclosure of tax return information to a preparer located outside the 

U.S. is generally a permissible disclosure if the taxpayer consents to such 

disclosure. However, a preparer located inside U.S. is not permitted to obtain consent to disclose a taxpayer’s Social Security Number to a preparer 

located outside the U.S. Instead, the U.S. based preparer must redact or 

otherwise mask the taxpayer’s SSN before the return information can be 

disclosed to the overseas preparer. While we are still evaluating this provision, our initial assessment suggests that this provision will likely 

prove extremely problematic to the many firms and practitioners who 

have well established expatriate practices. As it currently stands, this 

provision has the potential of injecting additional cost, complexity and increased security risks that actually run contrary to what we expect was 

the public policy motivation behind the original ‘‘redaction’’ proposal. • With respect to large corporations and other ‘‘large taxpayers,’’ tax return 

preparers are permitted to obtain the taxpayer’s consent for the disclosure or use of return information through the use of an engagement 

letter. • The Service has released Rev. Proc. 2008–12, which generally complements TD 9375 by providing guidance regarding the content of certain 

consents to disclose and use tax return information. 

Anticipating that the regulations could dramatically impact the office operations 

and procedures of tax return preparers, Treasury and IRS have established a January 1, 2009 effective date for the regulations, providing preparers one year to make 

any necessary changes in their professional practices. The AICPA is currently reviewing the final regulations to assess the impact on the tax return preparation 

practices of CPAs, and expects to meet with Treasury and IRS to obtain clarification 

of the scope of some of the provisions of the regulations. 

The section 7216 regulations will also cause the AICPA to assess the impact of 

these tax regulations on the AICPA’s current professional ethics rules, particularly 

with respect to the outsourcing of tax return information to a location outside the 

U.S. The current AICPA rules, including Rules 102, 201, 202, and 301 of the Code 

of Professional Conduct, generally provide that prior to sharing confidential client 

information (such as a tax return) with a third-party 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. In 

contrast to the AICPA professional ethics rules, Rev. Proc. 2008–12 provides for a 

specific written consent (which must be signed by the client) before tax return information can be transmitted to the third-party service provider. 

Treasury and the IRS have also released a notice of proposed rulemaking (REG– 

136596–07) in January 2008, requesting comments on whether a tax return preparer should effectively be prohibited from obtaining consent for the disclosure or 

use of tax return information in the solicitation of refund anticipation loans (RALs) 

for taxpayers. The AICPA is currently reviewing this proposed rule, particularly in 

light of the perceived usurious nature of RALs, and the potential negative impacts 

that RALs may have on promoting tax compliance. 

The AICPA will keep the Subcommittee on Oversight informed about the impact 

of the recently released (final) section 7216 regulations on tax preparation. 

Thank you for the opportunity to share these views with you. 

f 

Statement of Colleen M. Kelley 

Chairman Lewis, Ranking Member Ramstad, and distinguished members of the 

Subcommittee, I would like to thank you for allowing me to provide comments on 

the Administration’s FY ’09 budget request for the Internal Revenue Service (IRS). 

As President of the National Treasury Employees Union (NTEU), I have the honor 

of representing over 150,000 federal workers in 31 agencies, including the men and 

women at the IRS. 

IRS FY ’09 Budget Request 

Mr. Chairman, the IRS and its employees represent the face of U.S. government 

to more American citizens than any other government agency. The IRS is responsible for helping all of America’s taxpayers understand and meet their tax responjbell on PROD1PC69 with HEARING

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sibilities and collects 96 percent of the revenues that fund the Federal Government. 

Without an adequate budget, the IRS cannot expect to continue providing taxpayers 

with top quality service and will be hampered in its effort to enhance taxpayer compliance and close the tax gap. 

And while acknowledging that IRS employees continue to provide world class customer service and are as efficient as ever in collecting taxes and enforcing tax law, 

the Administration continues to put forth insufficient and unrealistic budget requests that fail to allow the service to meet its customer service and enforcement 

challenges. 

Insufficient funding from Congress is not the problem. Over the past seven years, 

Congress has been supportive of IRS’s efforts to improve service to taxpayers and 

increase enforcement staff and IRS has succeeded at the former. However, despite 

budgets that were almost fully funded, IRS enforcement staff is still down far below 

1995 levels. 

The decline in IRS personnel, particularly enforcement staff can be attributed to 

unrealistic budget requests which since 2003 have contemplated internally generated savings or ‘‘efficiency savings’’ to help fund proposed increased staffing for 

enforcement. For FY ’09, the budget request identifies ‘‘efficiency savings’’ of more 

than $94 million at the cost of almost 976 FTEs. If, as sometimes has been the case 

in previous years, IRS fails to realize all expected savings then the funds available 

for new enforcement personnel spending would be further reduced. 

And although it’s widely recognized that additional funding for enforcement provides a great return on the investment, the IRS has repeatedly told Congress that 

the IRS does not need any additional funding above the President’ budget request. 

Employee productivity is not the issue. Despite the significant decline in enforcement staff over the past ten years, enforcement revenue has increased significantly 

reaching $59.2 billion in 2007, up from $48.7 billion in 2006 and an increase of $46 

billion since 2000. The $59.2 billion in collections in 2007 represents a 5.6 to 1 return on investment for all IRS activities. 

Yet, between 1995 and 2007, the total number of employees has shrunk from 

114,064 to 86,638. Even more alarming is that during that period, revenue officers 

and revenue agents—two groups critical to reducing the tax gap—have shrunk by 

33 and 20 percent respectively. Revenue officers went from 8,139 to 5,468 and revenue agents fell from 16,078 to 13,026. These drastic cuts have come at a time when 

the IRS workload has increased dramatically. According to IRS’s own annual reports 

and data, taxpayers filed 114.6 million returns in 1995. After a steady annual climb, 

eleven years later, the Service saw 134.4 million returns filed. In addition, between 

1997 and 2007, the number of individual tax returns with $100,000 in reported income, which are generally more complex returns, increased by 103 percent. 

Unfortunately, instead of recognizing that the dramatic cuts to the IRS workforce 

are straining the ability of IRS employees to handle the increasing workload, the 

IRS has continued to reduce its workforce. Further exacerbating the dire staffing 

situation at the Service is the aging of the IRS workforce. Approximately 4,000 of 

its employees are retiring annually presenting the Service with the difficult challenge of replacing a large portion of its workforce each year and the institutional 

knowledge they take with them. These retirements of some of the Services’ most experienced personnel will only further stress the current IRS workforce already 

straining under a rising workload. 

Amazingly, IRS efforts to reduce the overall workforce have targeted some of the 

Service’s most productive employees. These include the recent re-organization of the 

Estate and Gift Tax Program which sought the elimination of 157 of the agency’s 

345 estate and gift tax attorneys—almost half of the agency’s estate tax lawyers— 

who audit some of the wealthiest Americans. The Service pursued this drastic 

course of action despite internal data showing that estate and gift attorneys are 

among the most productive enforcement personnel at the IRS, collecting $2,200 in 

taxes for each hour of work. It is difficult to understand why the IRS sought the 

elimination of key workforce positions in an area that could produce significant revenue to the general treasury. 

In addition, the Service continues to move forward with its plan to close five of 

its ten paper tax return submission facilities by 2011. The IRS originally sought the 

closings of the five paper return submission centers due to the rise in the use of 

electronic filing (e-filing) and in order to comply with the IRS Restructuring and Reform Act of 1998 (RRA 98) which established a goal for the IRS to have 80 percent 

of Federal tax and information returns filed electronically by 2007. But the IRS recently reported that in 2007 just 57 percent of Federal tax returns were filed electronically and has previously acknowledged that it is getting harder to convert additional taxpayers to e-filing as those might convert most readily have already done 

so. 

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The continued slow migration of taxpayers to e-filing recently caused the IRS 

Oversight Board to call on Congress to extend the 80 percent deadline to 2012 in 

their recent report to Congress on e-filing. 

In addition, while the IRS has stated that it will receive millions of dollars in cost 

savings as a result of the paper submission consolidation effort, an August 2007 report by the Treasury Inspector General for Tax Administration (TIGTA) found that 

the agency’s business decision to consolidate sites did not even include a cost-benefit 

analysis (TIGTA Report Number: 2007–40–165). Furthermore, the report found that 

the IRS had not adequately updated or monitored financial information on the personnel costs of consolidations and had included savings not attributable to site consolidation in some of its analyses. What is most disturbing is that while the IRS 

acknowledged some of the assumptions used to determine the consolidation plan 

may have changed, they refused to complete a cost-benefit analysis to determine if 

the existing plan is optimal or if alternatives need to be considered. 

Mr. Chairman, while overall use of e-filing may be on the rise, it is clear that the 

number of taxpayers opting to use this type of return is not increasing as rapidly 

as the IRS had originally projected. Combined with the fact that the IRS consolidation strategy rests on an incomplete business plan which did not include any type 

of cost-benefit analysis, NTEU believes that the IRS should immediately postpone 

further site consolidations until a comprehensive cost-benefit analysis can be completed to ensure that the existing plan is optimal in terms of cost savings and benefits. 

It is clear that drastic reductions in some of the agency’s most productive tax law 

enforcement employees directly contradict the Service’s stated enforcement priority 

to discourage and deter non-compliance. In addition, we believe these staffing cuts 

have greatly undermined agency efforts to close the tax gap which the IRS recently 

estimated at $345 billion. As Nina Olson, the National Taxpayer Advocate noted, 

this amounts to a per-taxpayer ‘‘surtax’’ of some $2,000 per year to subsidize noncompliance. And while the agency has made small inroads and the overall compliance rate through the voluntary compliance system remains high, much more can 

and should be done. NTEU believes that in order to close the tax gap and handle 

a rising workload, the IRS needs additional employees on the frontlines of tax compliance and customer service. In addition, we believe Congress should establish a 

dedicated funding stream to provide adequate resources for those employees. 

NTEU Staffing Proposal 

In order to address the staffing shortage at the IRS, NTEU believes the workforce 

should be gradually increased to its pre-1996 levels. Specifically, we support a 3 percent annual net increase in staffing (roughly 2,600 positions per year) over a fiveyear period to gradually rebuild the depleted IRS workforce to its pre-1996 levels 

from its current level of 86,638. Because it takes time and careful management to 

hire, train, and deploy qualified professional staff, consistent but modest annual increases are necessary. A similar idea was proposed by former IRS Commissioner 

Charles Rossotti in a 2002 report to the IRS Oversight Board. In the report, Rossotti 

quantified the workload gap in non-compliance, that is, the number of cases that 

should have been, but could not be acted upon because of resource limitations. 

Rossotti pointed out that in the area of known tax debts, assigning additional employees to collection work could bring in roughly $30 for every $1 spent. The 

Rossotti report recognized the importance of increased IRS staffing noting that due 

to the continued growth in IRS’ workload (averaging about 1.5 to 2.0 percent per 

year) and the large accumulated increase in work that should be done but could not 

be, even aggressive productivity growth could not possibly close the compliance gap. 

Rossotti also recognized that for this approach to work, the budget must provide for 

a net increase in staffing on a sustained yearly basis and not take a ‘‘one time approach.’’ 

Adding staff to handle an increasing workload at the IRS is not a new concept. 

In its 2001 budget request, IRS asked for funding for the Staffing Tax Administration for Balance and Equity program (STABLE), an initiative aimed at restoring 

IRS staffing to mid-1990s levels and strengthening the Service’s tax compliance and 

customer service functions. The STABLE initiative envisioned hiring nearly 4,000 

new employees to help increase compliance and improve customer service. The proposal sought to boost staff in Field Offices, where IRS employees provide direct, inperson service to taxpayers, and Service Center/Call Sites, where service is typically 

provided via telephone and correspondence. Hiring requirements for the Field Offices was to be determined based on projected workload in the office’s geographic 

area, and existing staff capabilities. Conversely, Service Center/Call Site workload 

would be planned on a nationwide basis due to the nature of the work, and staffing 

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allocations based upon physical space and local labor market conditions around the 

center in question. 

Although such a staffing initiative would require a substantial financial commitment, the potential for increasing revenues, enhancing compliance and shrinking 

the tax gap makes it very sound budget policy. One option for funding a new staffing initiative would be to allow the IRS to hire personnel off-budget, or outside of 

the ordinary budget process. This is not unprecedented. In fact, Congress took exactly the same approach to funding in 1994 when Congress provided funding for the 

Administration’s IRS Tax Compliance Initiative which sought the addition of 5,000 

compliance positions for the IRS. The initiative was expected to generate in excess 

of $9 billion in new revenue over five years while spending only about $2 billion 

during the same period. Because of the initiative’s potential to dramatically increase 

federal revenue, spending for the positions was not considered in calculating appropriations that must come within annual caps. 

A second option for providing funding to hire additional IRS personnel outside the 

ordinary budget process could be to allow IRS to retain a small portion of the revenue it collects. The statute that gives the IRS the authority to use private collection companies to collect taxes allows 25 percent of collected revenue to be returned 

to the companies as payment, thereby circumventing the appropriations process altogether. Clearly, there is nothing magical about revenues collected by private collection companies. If those revenues can be dedicated directly to contract payments, 

there is no reason some small portion of other revenues collected by the IRS could 

not be dedicated to funding additional staff positions to strengthen enforcement. 

While NTEU agrees with IRS’ stated goal of enhancing tax compliance and enforcement, we don’t agree with the approach of sacrificing taxpayer service in order 

to pay for additional compliance efforts. That is why we were disappointed to see 

that the President’s proposed budget calls for a $31 million cut in funding for Taxpayer Assistance Center (TACs) at a cost of 262 FTEs. NTEU believes providing 

quality services to taxpayers is an important part of any overall strategy to improve 

compliance and that reducing the number of employees dedicated to assisting taxpayers meet their obligations will only hurt those efforts. It is clear that IRS employees are continuing to provide quality customer service to American taxpayers. 

2007 year end data from the IRS shows that IRS’ customer assistance centers met 

the 82 percent level of service goal, with an accuracy rate of 91 percent for tax law 

questions. And while these numbers show that employees providing taxpayer services are helping taxpayers understand and meet their tax responsibilities, more can 

and should be done. 

Mr. Chairman, in order to continue to make improvements in taxpayer services 

while handling a growing workload and increasing collections, it is imperative to reverse the severe cuts in IRS staffing levels and begin providing adequate resources 

to meet these challenges. With the future workload only expected to continue to rise, 

the IRS will be under a great deal of pressure to improve customer service standards while simultaneously enforcing the nation’s tax laws. NTEU strongly believes 

that providing additional staffing resources would permit IRS to meet the rising 

workload level, stabilize and strengthen tax compliance and customer service programs and allow the Service to address the tax gap in a serious and meaningful 

way. 

Private Tax Collection 

Mr. Chairman, as stated previously, if provided the necessary resources, IRS employees have the expertise and knowledge to ensure taxpayers are complying with 

their tax obligations. That is why NTEU continues to strongly oppose the Administration’s private tax collection program. NTEU believes this misguided proposal is 

a waste of taxpayer’s dollars, invites overly aggressive collection techniques, jeopardizes the financial privacy of American taxpayers and may ultimately serve to undermine efforts to close the tax gap. 

NTEU strongly believes the collection of taxes is an inherently governmental function that should be restricted to properly trained and proficient IRS personnel. 

When supported with the tools and resources they need to do their jobs, there is 

no one who is more reliable and who can do the work of the IRS better than IRS 

employees. 

As you know, in September 2006, the IRS began turning over delinquent taxpayer 

accounts to private collection agencies (PCAs) who are permitted to keep up to 24 

percent of the money they collect. NTEU strongly believes the collection of taxes is 

an inherently governmental function that should be restricted to properly trained 

and proficient IRS personnel. 

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NTEU believes this misguided proposal is a waste of taxpayer’s dollars, invites 

overly aggressive collection techniques, jeopardizes the financial privacy of American 

taxpayers and may ultimately serve to undermine efforts to close the tax gap. 

While supporters of the program and IRS officials claim that the use of private 

collectors is a sensible and cost efficient way to help collect delinquent taxes, recent 

data from the IRS makes clear that the program is not working. According to the 

IRS, in FY ’07, the PCAs brought in just $31 million in gross revenue, far below 

their original projections of up to $65 million. After deducting commission payments 

to the PCAs, the true net revenue from PCA (non-IRS) collection activity was just 

$20 million. Therefore, after spending $71 million in start up and ongoing maintenance costs through the end of FY ’07, the IRS private tax collection program lost 

$50 million. 

According to the National Taxpayer Advocate’s 2007 Annual Report to Congress, 

the dismal performance of the private collectors resulted in the IRS revising its 

original ten-year projection for the program. The report notes that as recently as 

last May, the IRS projected the program would bring in between $1.5 and $2.2 billion in gross revenue (before commissions) over the next ten years. To meet this projection the IRS would need to average $185 million per year. The PCA initiative 

only collected $31 million in gross revenue for FY 2007 and is projected to collect 

only $23 million to $30 million for FY 2008. 

NTEU also believes that sky high commission payments to the private contractors 

for work on the easiest to collect cases is unjustified and unnecessary. Under current contracts, private collection firms are eligible to retain 21% to 24% of what they 

collect. The legislation authorizing the program actually allows PCAs to retain up 

to 25% of amounts collected. These commission rates were never put up for competition. Before the initial bid solicitations went out, the IRS set commission rates at 

21 to 24 percent of the revenue collected by contractors, denying bidders an opportunity to make offers on terms that would have resulted in the IRS getting a greater 

share of the collected revenue. Consequently, one of the companies that lost its bid 

for a contract filed a protest with GAO and noted in its bid protest that ‘‘offerors 

were given no credit for proposing lower fees than the ’target’ percentages recommended by the IRS.’’ 

The problem of excessive commission rates was recently addressed by Congress 

in legislation overhauling the Department of Education’s student loan program, 

which the IRS has consistently held up as a model for the IRS private collection 

program. Amid charges that student aid lenders have engaged in abusive and potentially illegal collection tactics including charging excessively high collection fees, coercing consumers into payment plans they could not afford and misrepresenting 

themselves as Department of Education employees, the House and Senate approved 

H.R. 2669, the ‘‘Higher Education Access Act of 2007,’’ which lowers from 23 percent 

to 16 percent the amount of recovered money that private guaranty agencies contracted by the government can retain on defaulted loans. 

Mr. Chairman, in addition to being fiscally unsound, the idea of allowing PCAs 

to collect tax debt on a commission basis also flies in the face of the tenets of the 

IRS Restructuring and Reform Act of 1998 (RRA 98) which specifically prevents employees or supervisors at the IRS from being evaluated on the amount of collections 

they bring in. But now, the IRS has agreed to pay PCAs out of their tax collection 

proceeds, which will clearly encourage overly aggressive tax collection techniques, 

the exact dynamic the 1998 law sought to avoid. 

The fear that allowing PCAs to collect tax debt on a commission basis would lead 

to contractor abuse was realized when the IRS recently confirmed that that the 

agency had received more than five dozen taxpayer complaints against the PCAs, 

including violations of the taxpayer privacy laws under Code section 6103. At least 

one of those complaints was confirmed by an IRS Complaint Panel to be a serious 

violation of law. In addition, penalties totaling $10,000 have been imposed by the 

IRS on the PCAs for taxpayer violations. In one instance, private collectors made 

150 calls to the elderly parents of a taxpayer after the collection agency was notified 

he was no longer at that address. And one of the three private contractors was 

dropped by the IRS for dubious practices despite the Service’s previous assurance 

that its oversight would prevent abuse. 

Mr. Chairman, NTEU is not alone in our opposition to the private tax collection 

program. Opposition to the IRS tax debt collection program has also been voiced by 

a growing number of major public interest groups, tax experts, two former IRS Commissioners as well as the National Taxpayer Advocacy Panel, whose members are 

appointed by the Internal Revenue Service (IRS) and the Treasury Department. In 

addition, the National Taxpayer Advocate, an independent official within the IRS 

previously identified the IRS private tax collection initiative as one of the most serious problems facing taxpayers and recently renewed her prior call for Congress to 

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immediately repeal the IRS’ authority to outsource tax collection work to private 

debt collectors. 

Opposition to the program has also been growing within Congress. Since granting 

IRS the authority to use PCAs in the American Jobs Creation Act of 2004, the 

House of Representatives, with bi-partisan support, has twice passed language prohibiting the IRS from moving forward with its private collection initiative. In addition, last session, the House overwhelmingly approved two separate tax bills (H.R. 

3056, the ‘‘Tax Collection Responsibility Act of 2007’’ & H.R. 3996, the ‘‘Temporary 

Tax Relief Act of 2007’’) that contain language that would repeal IRS’ authority to 

use private debt collectors to pursue tax debts. 

In the Senate, stand alone legislation (S. 335) introduced by Senator Byron Dorgan (D–ND) that would force the IRS to immediately and permanently suspend its 

plan to outsource part of its tax debt collection responsibilities to PCAs and prohibit 

the use of any IRS funds for that purpose has 24 co-sponsors. 

Mr. Chairman, instead of rushing to privatize tax collection functions which jeopardizes taxpayer information, reduces potential revenue for the Federal Government 

and undermines efforts to close the tax gap, NTEU believes the IRS should increase 

compliance staffing levels at the agency to ensure that the collection of taxes is restricted to properly trained and proficient IRS personnel. 

While proponents of the program have argued that the IRS does not currently 

have the infrastructure or technological capabilities to work the type of cases being 

turned over to the private companies, the facts say otherwise. The IRS already has 

a significant collection infrastructure with thousands of trained employees, including fourteen Automated Collection System (ACS) sites which allow the IRS to contact taxpayers by telephone and collect delinquent taxes. 

The ACS function is a critical Collection operation, collecting nearly $1.49 million 

per employee per year. The IRS itself has analogized the use of private collectors 

to the ACS, where IRS collection representatives interact with taxpayers on the telephone. But unlike the private collectors, ACS personnel are able to analyze financial 

statement information, research assets, enter into installment agreements, make 

currently not collectible determinations, and can take lien and/or levy enforcement 

actions. ACS employees also receive training that is far more comprehensive and 

rigorous than that of the private collectors. In addition, these employees undergo 

mandatory annual training on topics such as confidentiality and privacy of taxpayer 

information, ethics awareness, taxpayer rights and computer security. 

Unfortunately, inadequate staffing at ACS sites has prevented the IRS from using 

its current systems to proactively contact taxpayers by telephone to resolve delinquent accounts. The need for the IRS to expand ACS’ use of outbound calls has been 

recognized by IRS management and at least two recent internal IRS study groups 

have recommended making more outbound calls as a way to make the ACS operation more effective and efficient. 

The IRS requested $7.35 million to run the private collection program in FY ’08. 

We believe this $7.35 million could fund roughly 98 additional ACS employees that 

could return more than $146 million to the Treasury annually. By comparison, the 

IRS is now projecting the PCAs to bring in between just $23 million to $30 million 

in gross revenue in FY ’08, far less than its original estimate of $88 million. 

NTEU believes that increasing the number of ACS personnel would allow the IRS 

to maximize its ability to proactively resolve delinquent accounts by contacting taxpayers directly. This would also help ensure that the high level of customer service 

to those taxpayers who call the ACS seeking account resolution is preserved. The 

IRS has acknowledged that ACS employees are already performing admirably noting that in 2006, ACS customer service and quality ranged between 89.5 to 99.5 percent (pg. 54—IRS response to Olson ’06 Report to Congress). These exceptional ratings are all the more impressive when you consider ACS employees generally work 

on much more complex and often contentious cases than those being worked by the 

private collectors and that the total number of cases worked by ACS employees 

dwarfs those worked by the private collectors. 

Mr. Chairman, NTEU understands and commends efforts to ensure that all taxpayers pay their fair share of taxes. Without a doubt, rank and file IRS employees 

are committed to achieving this goal in the most cost-effective manner while providing a high level of customer service to American taxpayers. But the facts make 

clear that the use of private tax collection companies is not in the best interest of 

American taxpayers, could potentially undermine future efforts to close the tax gap, 

and should be terminated immediately. 

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Conclusion 

It is indisputable that the IRS workforce is getting mixed signals regarding its 

value to the mission of the Service and the level of workforce investment the Service 

is willing to make. Without a doubt, the frontline employees are committed to working with management to increase efficiency and customer satisfaction. 

But NTEU believes that until the Administration begins proposing realistic budget requests for the Service, reverses drastic staffing cuts that have targeted some 

of the IRS’ most productive employees and ceases its’ reliance on outside contractors 

to handle inherently governmental activities such as the collection of taxes, the 

agency’s ability to fulfill its tax enforcement and customer service missions will be 

severely challenged. 

f 

Statement of Gerald E. Scorse 

Honorable Chairman Lewis and other members of the Subcommittee: 

In the United States in 2008, the federal income tax on the wages of average 

Americans is higher than the tax on long-term capital gains. 

It seems to me inequitable on its face to tax earned income (wages) at a higher 

rate than unearned income (capital gains). In addition, the standard rationale for 

this preferential tax treatment is demonstrably false; propaganda is its only reason 

for being. 

The following article addresses this tax inequity. The article will also remind the 

Subcommittee of President Ronald Reagan’s Tax Reform Act of 1986, and how it addressed the very same issue. 

I think you’ll be interested. 

Tax Policy Loves Investors, Squeezes Wage Earners 

Over the last ten years, nobody has gotten more love from Washington than investors. It’s time to stop and ask if the love is misplaced. 

Investor-love settled in on the Potomac in 1997, when President Clinton cut the 

tax on long-term capital gains from 28% to 20%. In 2003, President Bush kept the 

love coming from the GOP side. He took another 5% off the capital gains rate and 

slashed the levy on corporate dividends as well. 

All this love has worked splendidly for the loved. The tax on long-term gains and 

qualified dividends has been driven down to 15%. That’s a 70-year low, and it’s less 

than the rate on the wages of average Americans. As the multi-billionaire Warren 

Buffett abashedly confessed, the secretaries in his office now pay taxes at a higher 

rate than he does. 

Buffett was quickly called out for coming up short on investor-love. Maria 

Bartiromo, an anchor on the business channel CNBC, labeled his remark ‘‘misleading’’. 

Misleading? Hardly, compared to the claim that buyers of stocks drive the U.S. 

economy by growing jobs and new businesses. If so, investor-love might be deserved. 

Let’s look in on the market and analyze what takes place. 

Billions of shares change hands daily on the major exchanges. On any given day, 

only a minute fraction of those shares grows anything. Days can pass without a 

bona fide investment; the sounds you hear are aftermarket noise and the closing 

bell. 

In short, ‘‘investors’’ do not grow jobs (except in the financial sector). The seed 

money that nourishes start-ups and expansions comes from a tiny subset of real investors; the rest of us merely place our bets at the tables down on Wall Street. 

What’s the problem with investor-love? First, Warren Buffett has it right: it’s 

wrong for income from work to be taxed at a higher rate than income from wealth. 

Second, investor-love has no reason for being; it’s a tax policy shaped by propaganda. 

Lawmakers might better follow the policy shaped by Ronald Reagan. 

Reagan’s 1981 tax cuts tilted toward the wealthy and made him a supply-side 

icon. But Reagan could also be fair, and fairness would permeate his last fiscal legacy. In the landmark Tax Reform Act of 1986, nearly three years in the drafting, 

Reagan again cut marginal rates but raised taxes sharply on investors. 

The reform ended preferential tax treatment of capital gains. The tax rate on 

long-term gains leapt from 20% to 28%, nearly double the current levy. Higher-income taxpayers could pay as much as 31% on their gains. 

Reagan hailed the bill as ‘‘the dream of America’s fair-share tax plan.’’ He also 

called it ‘‘the best job creation program ever to come out of the Congress’’; hyperbole, 

but evidence that he expected no growth falloff from higher capital gains taxes. The 

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new 28% rate held until ’97, when a GOP-controlled Congress and a Democratic 

president fell under the spell of investor-love. 

Republican presidential candidate John McCain stays miles away from the fact 

that Reagan equalized taxes on income from wages and income from wealth. But 

Barack Obama (and John Edwards, before dropping out) have pointed to it with relish. 

In their bones they know what’s fair, just like The Gipper did. 

f 

Statement of IRS Oversight Board 

The IRS Oversight Board thanks Chairman Lewis and Ranking Member Ramstad 

for the opportunity to submit its views on the Internal Revenue Service’s operations 

and its FY2009 budget. Created as part of the IRS Restructuring and Reform Act 

of 1998 (RRA 98), the Oversight Board’s responsibilities include overseeing the IRS 

in its administration, management, conduct, direction and supervision of the execution and application of the internal revenue laws. The Board is also responsible for 

ensuring that the IRS’ organization and operations allow the agency to carry out 

its mission. To this end, the Board was given specific responsibilities for reviewing 

and approving annual budgets and strategic plans. 

Given the mission of the Board to provide governance over the IRS, it is most appropriate for the Board to focus its comments on the progress that IRS operations 

have made since the passage of RRA 98, the strategic challenges which the IRS still 

faces, and its recommendations for the IRS’ FY2009 budget. 

IRS Operations and Challenges 

It is now almost a decade since the enactment of the IRS Restructuring and Reform Act of 1998 and the IRS Oversight Board is pleased to report that the IRS 

has made steady progress in meeting the letter and spirit of that landmark legislation. 

Over the past nine years, the IRS has reorganized and modernized itself to think 

strategically and operate with a customer-centric focus. It is becoming a performance-driven, results-oriented organization that provides taxpayers with quality service through a variety of channels, including Internet, telephone, and in-person. 

It is doing a better and more efficient job of enforcing the tax laws and collecting 

the taxes owed the Federal Government. The IRS has improved its ability to interact with taxpayers electronically and is now delivering benefits to all types of taxpayers. For example, the IRS can now accept electronically many types of returns 

including all the major tax forms and offers more Internet-based self-serve options 

than ever before. 

The Oversight Board praises the IRS for this improvement. The IRS has demonstrated to its skeptics that it can change for the better. However, it still faces 

many challenges and must not become complacent. The existence of an annual $290 

billion net tax gap, the difference between what is legally owed and what is actually 

paid, is a stark reminder that improvements in tax administration are still needed. 

The IRS should not settle for good performance—it must set its sights on great 

performance. In the Board’s view, taking that important step will require increased 

management focus and potential ‘‘breakout’’ performances in four key areas: (1) customer service, (2) enforcement, (3) human capital, and (4) information technology. 

To take customer service to the next level, the IRS must do more than respond 

to taxpayer inquires. It must understand taxpayers’ needs better through new research and implement education and outreach services tailored to the needs of specific groups of taxpayers. Great service requires that the IRS proactively provide 

taxpayers with information that helps them easily understand their tax obligations, 

provides more self-service applications, simplifies information sharing, and facilitates electronic filing. On a limited basis, the IRS has demonstrated that it can form 

community partnerships that perform effective outreach to taxpayers, such as the 

Volunteers in Tax Assistance (VITA) program. Such programs should be expanded. 

Through modern electronic tax administration (ETA) services, the IRS can provide 

more opportunities for taxpayers and tax professionals to interact quickly, efficiently 

and accurately with the IRS. Great service will entail a broader use of secure electronic interactions over the Internet between taxpayers, practitioners and the IRS, 

such as account management and issue resolution, than is offered today. These capabilities are much along the lines of what large financial institutions already offer 

their customers. 

The IRS must apply the results of its research program to increase the effectiveness and efficiency of its enforcement activity. In selecting taxpayers for audits, the 

IRS should have a high degree of confidence that an audit is necessary. High nochange rates for audits place unnecessary burdens on taxpayers and waste IRS rejbell on PROD1PC69 with HEARING

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sources. The Oversight Board expects that the IRS will use the results of the National Research Program (NRP) to focus its audit programs where they will be the 

most effective. Collection cases must also be worked as effectively as possible, with 

cases assigned to different treatment streams based on the optimum assignment of 

resources for the expected return and impact on compliance. 

Today, enforcement is a major part of the IRS’ mission but does not dwarf customer service as it did in the early—to mid-1990s. In this regard, the IRS is to be 

commended for doing a better job enforcing the Tax Code in a manner consistent 

with RRA 98’s safeguards. As customer service improved, more resources were appropriately shifted to support enforcement activities. Key performance measures for 

enforcement, such as audits of individuals with higher incomes are up and enforcement revenues have increased, while taxpayer service measures such as level of 

service have remained stable. 

Through its annual taxpayer attitude survey, the Board has also found that 94 

percent of taxpayers believe it is every American’s civic duty to pay their fair share 

of taxes. Around 86 percent cite personal integrity as a principal factor influencing 

whether they report and pay their taxes honestly, while only 54 percent of taxpayers indicate they are influenced by fear of an audit. 

The Board encourages the IRS to find ways to leverage this strong support for 

voluntary tax compliance and personal integrity and reinforce the message that tax 

compliance is a ‘‘social norm,’’ much like obeying laws against shoplifting or drunk 

driving. The Board is particularly concerned that this message be reinforced with 

America’s young people. Previous surveys have shown they are more willing to accept cheating ‘‘a little here or there’’ on their taxes. 

Another area that must be addressed for the IRS to achieve great performance 

is workforce development. Employees are the IRS’ greatest asset but the aging of 

the workforce represents an enormous challenge; approximately 4,000 of its employees are retiring annually. Many of them possess unique skills and institutional 

knowledge that are not captured when they leave, and the IRS has found it difficult 

to recruit a sufficient number of skilled employees to replace them. 

The IRS must devote more attention to the total career development of its workforce, from hiring to retiring. It should emphasize career development throughout 

the entire ‘‘work life’’ of employees. It should recruit more like the private sector 

and employ proven ‘‘best practices’’ to improve employee recruitment, retention, 

training, and succession planning. Employees should have clearly defined career development opportunities throughout their employment. 

More progress must also be made in the IRS’ efforts to modernize its information 

technology (IT). The IRS has made slow but steady progress in replacing its antiquated IT systems. The most noticeable improvements to taxpayers include electronic filing of tax returns and Internet self-service tools such as ‘‘Where’s my Refund?’’, ‘‘Do ́nde esta ́ mi reembolso?’’, and Practitioner e-Services. Infrastructure 

improvements have also allowed the IRS to improve toll-free telephone level of service through more effective call routing. However, IRS performance is still hampered 

by archaic IT systems used for central record-keeping that update taxpayer account 

information on a weekly instead of a daily basis. 

The IRS will not be able to achieve great performance until it can update its central records on a daily basis, much like any other modern financial institution. Such 

a capability is needed to modernize both its customer service and enforcement functions. Daily updating of records will provide current information to taxpayers, tax 

professionals, and IRS employees, improve IRS efficiency, and reduce taxpayer burden. 

It is critical that the IRS make real progress each year to reach its three strategic 

goals. However, it is also vitally important that specific quantitative measures for 

these long-term goals be set to follow the IRS’ performance in key areas. In March 

2007, the Oversight Board approved five long-term measures with target values and 

requested the IRS to identify an additional set of measures for employee engagement and customer satisfaction, along with a measure to assess progress in modernizing its technology systems. The Board is pleased to see the IRS make progress in 

measuring the achievement of its strategic goals. 

FY2009 IRS Budget Recommendations 

One of the IRS Oversight Board’s most important statutory responsibilities is to 

ensure that the IRS’ budget request supports the agency’s annual and long-term 

strategic plans. A budget request is more than a mechanism for appropriating funding; it’s also a plan and a commitment. Not only does a proposed budget request 

funding, it also describes the activities the IRS will perform, how those activities 

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pected results. A performance budget is more than money, it’s a performance management tool, and properly used, enhances the ability of the IRS to meet its shortterm performance targets and the agency’s three strategic plan goals: (1) improve 

customer service; (2) enhance enforcement of the tax law; and (3) modernize the IRS 

through its people, processes and technology. 

Achieving these three strategic goals will enable the IRS to address the most serious problem facing tax administration today—reducing the tax gap, the difference 

between what taxpayers should be paying and what they actually pay in a timely 

manner. The size of the tax gap is significant, with the IRS’ most recent estimates 

placing it at approximately $290 billion (net) annually, based on 2001 tax returns. 

The imperative for closing the tax gap has never been greater. An annual net tax 

gap of $290 billion averages to about $2,200 per individual tax return, an enormous 

burden for the average taxpayer, and one that should not be tolerated by honest 

taxpayers. It is far too large to be dismissed lightly—it imposes a large burden on 

all taxpayers and undermines respect for tax administration. 

The IRS Oversight Board recommends an IRS FY2009 budget of $11.737 billion, 

an increase of $845 million over the enacted FY2008 amount of $10.892 billion, as 

summarized in Table 1. 

Table 1: IRS Oversight Board’s Recommended FY2009 IRS Budget 

(all dollars in millions) 

FY2008 Enacted Appropriation $10,892.38 

Base Adjustments $262.62 

Savings/Reinvestments ($61.65) 

FY2008 Base Budget $11,093.35 

Initiatives 

Enforcement 

Reduce the Tax Gap for Small Business/Self-Employed $120.7 

Increase Reporting Compliance of Domestic Taxpayers with Offshore Activity $16.4 

Reduce the Tax Gap for Large Businesses $52.0 

Expand Federal Payment Levy Program $17.3 

Reduce Tax Fraud $72.2 

Enhance Financial Investigations of Narcotics Trafficking Organizations $24.0 

Enhance BSA Compliance Program $3.4 

Address Complexity through Up-Front Guidance, Education, and Correction Opportunities $8.9 

Expand Examination of Tax Exempt Organizations $28.6 

Increase Tax Court Litigation $5.8 

Implement New Procedural Tax Court Requirements $3.4 

Improve Tax Gap Estimates, Measurement, and Detection of Non-Compliance $11.1 

Increase Monitoring of Preparers $2.5 

Total Enforcement $366.3 

Taxpayer Services Dollars (M) 

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Maintain Processing of Critical Pension Plan Returns $6.3 

Research Taxpayer Burden, Complexity, and Compliance $10.0 

Expand Volunteer Income Tax Assistance and Low Income Tax Clinics $10.0 

Total Service $26.3 

Infrastructure/IT Dollars (M) 

Enhance IT Security $16.7 

Enhance Contingency Planning and Disaster Recovery $8.7 

Implement Security Auditing $6.8 

Redesign Form 990 for Tax Exempt Organizations $23.5 

Preserve Quality IT Workforce in Applications Development $36.8 

Build Alternate Power Supply for the Computing Centers $11.0 

Infrastructure/IT Initiatives Subtotal $103.5 

Business Systems Modernization (BSM) $142.4 

HITCA $5.50 

Total Initiatives $644.00 

FY2009 Budget Request $11,737.35 

FY2009 Request Increase over FY2008 Base $844.97 

FY2009 President’s Request for IRS $11,361.51 

Increase Over President’s Budget Request $375.8 

The recommended budget takes a long-term view of IRS needs. Despite the severity of the tax gap, the Board believes such a view is both warranted and needed. 

In submitting its FY2009 budget recommendations to the Treasury Department in 

June 2007, the Board identified increased funding for Business Systems Modernization (BSM), security, infrastructure, and research as high priorities. These initiatives offer the best opportunity to reduce the tax gap in the long term. 

By following this approach, the Board’s recommended budget maintains balance 

at its core: enforcement, taxpayer service, business systems modernization, and employee development must be adequately funded for the IRS to succeed in all parts 

of its mission and to ensure the long—term health of our tax administration system. 

The Board’s recommended IRS budget compares to the President’s request of 

$11.361 billion, an increase of $469 million over the FY2008 enacted appropriation. 

Although the two budgets are within 3.3 percent, they take different approaches to 

funding priority program initiatives at the margin. The Board recommends a total 

of $644 million in program initiatives, spread among four areas: enforcement, taxpayer service, infrastructure and IT, and BSM. The President’s budget requests a 

nearly identical amount of funding for enforcement initiatives as the Board, but cuts 

taxpayer service and BSM funds, and includes no program initiatives for infrastructure and IT. Figure 2 shows the differences in graphic form. 

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Although both budgets have as a core objective the reduction of the tax gap, the 

Board recommends funding initiatives across the full range of IRS functions and 

taxpayer segments. In contrast, the President’s budget has as its central focus a 

short-term effort to build up IRS revenue-producing enforcement staffing at a time 

when the IRS is hard-pressed to replace the high number of experienced employees 

who are retiring. Increased staffing is important, but the Oversight Board believes 

the IRS cannot ‘‘audit its way out of the tax gap,’’ and should avoid the temptation 

to close the tax gap with large staffing increases in revenue-producing functions 

that cannot be absorbed effectively. The Board believes its recommended budget 

avoids this problem by focusing on ways to make the IRS more efficient in the long 

term, and putting more resources into technology, infrastructure, and service as well 

as enforcement. 

Because reducing the tax gap is of critical importance, the Board has identified 

a subset of its recommended initiatives as having the highest priority. These initiatives are generally infrastructure and research intensive and will have the greatest 

effect on reducing the tax gap in the long term, and are identified in Table 2. 

Table 2. IRS Oversight Board Highest Priority Initiatives 

Technology/Infrastructure Dollars 

(in millions) 

Fund Business Systems Modernization in Line with Current 

Strategy $141.0 

Enhance IT Security $16.7 

Enhance Contingency Planning and Disaster Recovery $8.7 

Implement Security Auditing $6.8 

Preserve quality IT workforce in applications development $36.8 

Build alternate power supply for computing center $11.0 

Technology/Infrastructure Subtotal $221.2 

Enforcement 

Improve tax gap estimates, measurement, and detection of 

non-compliance $11.1 

Taxpayer Service 

Research Taxpayer Burden, Complexity, and Compliance $10.0 

Total Highest Priority Initiatives $242.3 

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None of these initiatives, except the enforcement initiative for improving tax gap 

estimates, are funded in the President’s budget. Moreover, as shown in Figure 2, 

the BSM program and taxpayer service programs undergo reductions of $45 million 

and $47 million, respectively. The Board recommends that the appropriated IRS 

FY2009 budget closely follow the priorities and balance reflected in this statement. 

The following sections discuss the Board’s budget recommendations in the context 

of each of the IRS’ strategic goals. 

Strategic Goal 1—Improve Taxpayer Service 

IRS customer service has made consistent gains since FY2002. For example, TollFree Tax Law Accuracy and Accounts Accuracy are at 91 percent and 93 percent 

respectively in FY2007, as compared to 84.4 percent and 90 percent five years ago. 

Of particular note, overall customer satisfaction with IRS Toll-Free Service has held 

steady at 94 percent for four consecutive years. Such stability is most welcome and 

a good indicator that best practices have taken root. 

As a result, a more pressing challenge is to deliver more extensive electronic selfassistance tools and to perform research that identifies innovative ways to expand 

taxpayer education and outreach to all taxpayer segments, especially those who are 

now under served. 

To a large degree, many of the IRS’ customer service activities are designed to 

respond to taxpayer inquiries. Examples include toll-free telephone service and Taxpayer Assistance Centers. Overall, the IRS has done a good job fielding and answering questions, whether via toll-free telephone, the Internet, or in person at Taxpayer 

Assistance Centers. 

The IRS expends considerably fewer resources on education and outreach services. 

A broader approach to customer service would entail giving taxpayers access to selfservice applications so they could ‘‘pull’’ specific information on accounts or tax law, 

and ‘‘pushing’’ answers, information and updates to taxpayers, practitioners and 

other affected parties as the need for such information became apparent. Lastly, the 

IRS must seize opportunities to provide innovative outreach, education and community partnerships. For example, given limited resources and elimination of programs 

such as TeleFile, the IRS must also work to broaden and strengthen partnerships, 

such as Volunteers in Tax Assistance (VITA). 

To take customer service to the next level, the IRS must better understand the 

taxpayers they serve. The IRS must conduct more insightful research, and based on 

this analysis, develop services better tailored to the specific needs of particular taxpayer segments. By better understanding taxpayers, the IRS can focus both its service and enforcement efforts to increase compliance through targeted pre-filing, filing, 

and post-filing efforts. The IRS must find out what kind of information and assistance taxpayers need and the most effective ways of delivering that information to 

them. 

In the last two years, the IRS has put considerable effort into developing the Taxpayer Assistance Blueprint (TAB), which establishes a five-year plan for delivering 

service to taxpayers. This vision entails a much broader use of electronic interactions between taxpayers, practitioners and the IRS, such as account management 

and the ability to resolve taxpayer issues securely over the Internet. The TAB describes an IRS that is an ‘‘interactive and fully integrated, online tax administration 

Agency’’ with the capability ‘‘for any exchange or transaction that occurs face-toface, over the phone, or in writing to be completed electronically.’’ These types of 

services are much along the lines of what customers of large financial institutions 

already experience today but are still for the most part unavailable to taxpayers. 

The vision of great customer service is clear, but to go from good to great the IRS 

must execute the five-year strategic plan articulated in the TAB to improve service 

beyond what is familiar and available today. 

The Oversight Board disagrees with the President’s program reductions for taxpayer service and recommends that the following three initiatives be funded for a 

total of $26.3 million: 

• Maintain Processing of Critical Pension Plan Returns ($6.3 million) 

• Research Taxpayer Burden, Complexity, and Compliance ($10 million) 

• Expand Volunteer Income Tax Assistance and Low Income Tax Clinics 

($10 million) 

The first initiative supports customer service by providing funds to maintain processing of essential pension plan return information while transitioning to a new 

mandated electronic filing system ‘‘EFAST2’’ in 2010. It also enables processing of 

residual returns that are IRS-only forms and not part of the mandated EFAST2 system (Form 5500EZ and Schedule SSA filings). 

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The second initiative provides funding to enhance understanding of the interaction between taxpayer burden, complexity of the tax law and process, and taxpayer compliance. This research will help improve understanding of these inter-relationships, in keeping with strategies put forth in the Taxpayer Assistance Blueprint 

(TAB) and the Department of the Treasury report, A Comprehensive Strategy for Reducing the Tax Gap. 

The third initiative provides funding to enhance two programs to improve service 

delivery to two taxpayer segments with specifically identified needs: the growing 

number of elderly and the ethnically diverse. These taxpayer segments face unique 

challenges in meeting their tax obligations because of limited access to or inability 

to use all of the channels offered for service delivery. Additional resources will enhance the IRS’s volunteer return preparation and other services provided by the 

Volunteer Income Tax Assistance (VITA) and the Low Income Tax Clinic programs 

with emphasis on both targeted taxpayer segments. Such services help created a 

more fair and just tax system. 

Strategic Goal 2—Enhance Enforcement of the Tax Law 

Increases in IRS enforcement activity intended to produce gains in direct revenue 

collection must be balanced with a broad view of the tax gap. The Board recognizes 

that increased enforcement activity over the past five years has produced noticeable 

results—enforcement revenue has increased from $34.1 billion in FY2002 to $59.2 

billion in FY2007, a gain of nearly 74 percent. The IRS estimates that it can 

produce more than a four-to-one return on every dollar invested in additional enforcement resources, a fact that the Board believes warrants the appropriation of 

additional enforcement funding. 

However, while the Board applauds the increases in enforcement activity and revenue, it also recognizes that the IRS cannot ‘‘audit its way out’’ of the tax gap. There 

is wide belief, as evidenced by the Board’s recommendations for reducing the tax 

gap and the aforementioned Treasury Department’s tax gap strategy, A Comprehensive Strategy for Reducing the Tax Gap, that an integrated set of comprehensive actions is needed. Even a large infusion of resources for more enforcement personnel— 

something highly unlikely—would not eliminate the tax gap. There are many reasons for taxpayer non-compliance. Only a balanced program that promotes voluntary 

compliance across a broad continuum of taxpayers, from education and service for 

those who want to comply, to enforcement and even criminal prosecutions for those 

who refuse to comply, can be effective. 

Table 3 below compares the Board’s and President’s enforcement initiatives. Although very close in dollars, the President’s initiatives place more emphasis on enforcement resources that can be shown to produce revenue in the short term. The 

Board takes a broader view of enforcement, and recommends program increases in 

such areas as expanded collection of proper taxes from recipients of federal payments, investigation of tax-related criminal activity, Bank Secrecy Act compliance, 

tax exempt organization examination, more published guidance for Tax Exempt taxpayers, additional litigation staff, and tax preparer monitoring. 

Table 3. Comparison of Enforcement Initiatives for Board’s and President’s 

Budgets 

Oversight Board’s Budget 

Enforcement Initiatives 

Dollars 

(M) 

President’s Budget 

Enforcement Initiatives 

Dollars 

(M) 

Reduce the Tax Gap for Small Business/Self-Employed $120.7 Reduce the Tax Gap for Small Business/Self-Employed $168.50 

Increase Reporting Compliance of 

Domestic Taxpayers with Offshore 

Activity 

$16.4 Improve Reporting Compliance of 

U.S. Taxpayers with Offshore Activity 

$13.70 

Reduce the Tax Gap for Large Businesses $52.0 Reduce the Tax Gap for Large Business $69.49 

Expand Federal Payment Levy Program $17.3 

Reduce Tax Fraud $72.2 

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Oversight Board’s Budget 

Enforcement Initiatives 

Dollars 

(M) 

President’s Budget 

Enforcement Initiatives 

Dollars 

(M) 

Enhance Financial Investigations of 

Narcotics Trafficking Organizations 

$24.0 

Enhance BSA Compliance Program $3.4 

Address Complexity through UpFront Guidance, Education, and 

Correction Opportunities 

$8.9 

Expand Examination of Tax Exempt 

Organizations 

$28.6 

Increase Tax Court Litigation $5.8 

Implement New Procedural Tax 

Court Requirements 

$3.4 

Improve Tax Gap Estimates, Measurement, and Detection of NonCompliance $11.1 Improve Tax Gap Estimates, Measurement, and Detection of NonCompliance $51.06 

Increase Monitoring of Preparers $2.5 

Expand Document Matching $35.06 

Implement Legislative Proposals to 

Improve Compliance 

$23.05 

Total Enforcement $366.3 $360.85 

Additional enforcement resources produce a positive return on investment and result in short-term benefits, so the benefits of increased enforcement are apparent. 

However, increases in enforcement resources must also be balanced with more systemic long-range actions that improve voluntary compliance, and priorities must be 

considered as budget resources are limited. The Oversight Board considers technology modernization and research a higher priority than additional enforcement resources, in recognition of the long-term impact that technology modernization and 

research have on the IRS’ ability to work more efficiently to reduce the tax gap and 

to be better able to focus both its service and enforcement resources optimally. 

Another factor that must be considered is the degree to which additional staffing 

can be absorbed into various IRS organizational units. Figure 3 depicts the distribution of new hires in major IRS organizations that are required by the President’s 

and Board’s budget. The Board believes its budget strikes a more balanced posture 

across all IRS organizational units and expands enforcement resources for a range 

of activities that are important elements of IRS enforcement, although they do not 

generate revenue directly, such as examination of tax exempt organization reporting, regulation of pension plans, and criminal investigation of tax fraud and abusive 

tax shelters. These activities are all part of a balanced, enforcement program that 

has as a goal the promotion of voluntary compliance among all taxpayer segments. 

To better understand the organizational implications of the Small Business/SelfEmployed (SB/SE) and Large and Mid-Sized Business (LMSB) divisions’ hiring requirements inherent in both budgets, the Board examined hiring requirements during FY2009 for the SB/SE and LMSB divisions. Table 4 shows the number of Mission Critical Occupation (MCO) employees projected to be on-rolls as of September 

30, 2008, as well as the hiring requirements contained in both budgets. The Board 

has used a rule of thumb that 15 percent new hires is a reasonable limit on the 

amount of new employees that can be effectively accommodated into an organization 

in a year. It had concerns with the hiring implications of its own budget on SB/SE, 

but thought this risk could be mitigated. The President’s budget would increase the 

percentage of new hires in SB/SE to over 23 percent of its employees in FY2009, 

and over 16 percent for LMSB. 

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Table 4. SB/SE and LMSB Hiring Requirements in the Board’s and President’s FY2009 Budgets 

Operating Unit 

Mission Critical 

Occupations 

Projected on 

rolls as of 

9/30/2008 

Projected 

Attrition 

Hires in 

FY2009 

Projected 

New 

Hires in 

FY2009 to 

Meet 

Budget 

Request 

Total 

Attrition 

Hires and 

New Hires 

Percent of 

Hires to 

total MCO 

population 

Oversight Board Budget 

SB/SE 19,394 2,612 1,177 3,789 19.5% 

LMSB 5,126 403 273 676 13.2% 

President’s Budget 

SB/SE 19,394 2,612 1,918 4530 23.4% 

LMSB 5,126 403 433 836 16.3% 

As in FY2006 through FY2008, the Administration proposes to include its requested enforcement increases as a Budget Enforcement Act program integrity cap 

adjustment. The Oversight Board’s recommended enforcement initiatives would also 

qualify for such treatment, should Congress decide to make such an adjustment. 

Strategic Goal 3—Modernize the IRS Through its People, Processes and 

Technology 

The most effective strategy for reducing the tax gap in the long term is to provide 

the IRS with modern technology that enables it to operate at a high performance 

level. The Board has no doubts that a high performing organization with high service, quality, and satisfaction levels also minimizes taxpayer burden. Under such conditions, service and enforcement activities are prompt, efficient, and correct. 

The Board has identified program initiatives for IT and infrastructure activities 

that are funded under the BSM and Operations Support accounts. These initiatives 

will further modernize the IRS core IT systems used for tax administration, upgrade 

its infrastructure, and improve its security posture. 

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Business Systems Modernization Program Initiative 

Tax administration is a knowledge-intensive activity and the IRS depends heavily 

on information technology (IT) to leverage the knowledge and perform its mission. 

The IRS has made slow but steady progress in replacing its antiquated IT systems. 

The most noticeable improvements to taxpayers have been increased use of electronic products and services to interact with the IRS. However, the IRS’ performance is still hampered by archaic IT systems used for central record-keeping that 

update taxpayer account information on a weekly instead of a daily basis. 

The Oversight Board has long advocated that the BSM program be funded at a 

higher level so progress could be made more quickly. Admittedly the program experienced a series of cost and schedule overruns during its first several years, and the 

result has been to slow down the funding stream to levels that dictate only modest 

progress can be made in modernizing the core IRS master files and account management systems. Because of its long-term effect on reducing the tax gap, the Board 

considers increasing BSM funding so that the pace of IT modernization can be increased as having the highest priority. 

Figure 4 compares the BSM budget recommended by the Oversight Board, the 

amount requested by the President, and the BSM funding appropriated by Congress 

for fiscal years 2003 to 2008. BSM funding needs to be restored to the levels realized 

in FY2003 and FY2004 to make progress faster. Had the Board’s funding recommendations been followed, the IRS would be closer to the day when it could update its central records on a daily basis. 

Note: FY2008 and FY2009 amounts contain $45.2 and $56.9 million of labor costs 

not contained in prior years. 

Table 5. Application of FY2009 BSM Funding to Projects in the IRS Oversight Board and President’s Budgets 

Dollars (M) 

Oversight Board President 

Project Activities FY2008 FY2009 Increase 

over FY2008 FY2009 Increase over FY2008 

Customer Account Data Engine $58.5 $80.0 $21.5 $58.8 $0.3 

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Dollars (M) 

Oversight Board President 

Project Activities FY2008 FY2009 Increase 

over FY2008 FY2009 Increase over FY2008 

Accounts Management Services $29.0 $47.4 $18.4 $26.2 ($2.8) 

Modernized e-File $55.8 $25.0 ($30.8) 

Common Services Project $0.0 $16.0 $16.0 $0.0 $0.0 

Integrated Financial System $0.0 $73.0 $73.0 $0.0 $0.0 

Core Infrastructure; Architecture Integration & Management; and Management Reserve $78.6 $98.1 $19.5 $69.3 ($9.3) 

Subtotal Capital Investments $221.8 $350.6 $128.8 $179.3 ($42.6) 

BSM Labor $45.2 $56.7 $11.5 $43.4 ($1.8) 

BSM Program Total $267.1 407.3 $140.2 $222.7 ($44.4) 

Note: BSM program excludes $1.2 M of corporate costs in Operations Support. 

The Board believes that when implemented, modernized IT systems will literally 

save taxpayers billions of dollars in burden reduction and make the IRS much more 

efficient. For example, replacement of the Individual Master File by the Customer 

Account Data Engine (CADE) will allow the IRS to update the tax accounts for individuals on a daily basis, instead of its current weekly update process. The Oversight 

Board expects that a rapid refund from the IRS of three to five days will reduce 

the number of Refund Anticipation Loans (RALs). The National Consumer Law Center and Consumer Federation of American estimate that approximately 12 million 

American taxpayers spent an unnecessary $1.6 billion on RALs in 2004 (the latest 

year for which data is available) to obtain their refund monies faster by two weeks. 

Moreover, daily updating of account records will give IRS employees and taxpayers 

access to the most current taxpayer account data, eliminating the problems associated with having various data bases with less than current status. The Oversight 

Board expects that daily posting of account information will improve the IRS’ analysis capability and greatly reduce the burdens associated with the account resolution process. 

The Modernized e-File system not only makes it easier for taxpayers to file tax 

returns with the IRS, it reduces the human resources needed to receive and process 

tax returns and eliminates the error-prone transcription process. For corporate filers, it helps the LMSB division improve currency and cycle time in working large 

corporate tax cases. When implemented for individual tax returns, it will make the 

electronic filing process even simpler than it is today with the current legacy electronic filing system. 

The Integrated Financial System (IFS) will provide necessary improvements to 

the system the IRS uses to manage its financial resources, clearly a must for any 

agency, especially one that is responsible for managing taxpayers’ accounts as well 

as its own appropriated resources. The IFS upgrade is needed to ensure that the 

IRS remains in compliance with federal accounting and other financial management 

requirements. The additional funding for the IFS initiative will enable the IRS to 

add procurement and asset management modules to the existing IFS application 

and integrate related business processes with core accounting and financial management operations. The funding will also provide for the subsequent transfer of IFS 

to a Shared Service Center and thereby maintain its longer term viability. 

The Board believes that funding for the BSM program should be accelerated, not 

slowed down. Failure to fund the IRS BSM program at higher levels, in the view 

of the Board, is a case of being penny-wise and pound foolish. 

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Information Technology/Infrastructure Program Initiatives 

The IRS must be held to the highest standards for security and data integrity 

while increasing its engagement in the electronic world in which most taxpayers already live. Meeting this dual challenge of high security and a high degree of electronic interaction with taxpayers demands that the IRS have a modern information 

systems and infrastructure. 

The Board recommends six program initiatives for a total of $103 million that will 

improve the IRS’ operations by allowing it to make critical improvements to its technology and personnel infrastructure. By comparison, the President’s budget contains 

no initiatives for IRS infrastructure. 

Three of the initiatives, totaling $32.2 million, enhance the IRS’ security posture 

as the way the IRS does business continues to evolve and security threats seem to 

increase on a daily basis. Data security has taken on an expanded meaning in a 

post 9/11 world. Terrorists from around the globe are actively working to exploit 

weaknesses in government IT security systems with the intent of producing both 

great physical and economic harm. Disrupting IRS returns processing and stealing 

sensitive information could wreak havoc on the economy and financial markets. The 

IRS cannot be complacent with respect to security, and the Board recommends the 

following security initiatives: 

• Enhance IT Security ($16.7 million) 

• Enhance Contingency Planning and Disaster Recovery ($8.7 million) 

• Implement Security Auditing ($6.8 million) 

The first initiative enables the IRS to further implement key IT security and privacy safeguards to assure the integrity of sensitive taxpayer and employee data and 

supporting infrastructure processes. Protecting taxpayer data is paramount. The 

second initiative is to enhance the IRS enterprise-wide contingency planning and 

disaster recovery capabilities to support critical business systems. Any unavailability of critical IRS business systems poses an unacceptably high risk to the nation’s security. The third initiative, Security Auditing, will allow the IRS to more 

effectively monitor key networks and systems to identify any unauthorized activities. 

The remaining three initiatives, for a total of $71.3 million, allow the IRS to improve other elements of its infrastructure. They are: 

• Redesign Form 990 for Tax Exempt Organizations ($23.5 million) 

• Preserve Quality IT Workforce in Applications Development ($36.8 million) 

• Build Alternate Power Supply for the Computing Centers ($11.0 million) 

The first initiative, the only one that is not considered high priority, is recommended because it brings new efficiencies to tax filing for a segment of taxpayers 

who are frequently ignored because their tax returns do not produce revenue—tax 

exempt organizations. The Form 990 tax return is difficult to complete for tax exempt organizations to complete and for reviewers to comprehend. Worse, it fails to 

provide the IRS with sufficient information to detect and analyze compliance trends 

in the sector and target enforcement actions as needed. 

The second initiative will give the IRS better tools to retain its IT workforce by 

mitigating intellectual and experiential loss through a series of supporting strategies such as workforce re-tooling, succession planning, and retention. The third initiative provides alternate power supply for three of the IRS’s computing centers. 

Currently there is but a single power supply facility at each of the computing centers. An alternate power supply capability at each of the three computing centers 

would ensure the continuous operation of, and continuous access to, tax processing 

systems at the computing centers during unplanned emergencies and planned power 

supply tests, and avoid the revenue loss and overtime expense associated with the 

current process that requires total shut down periods. 

Investing in IRS is a Good Business Decision Supported by the Public 

In spite of recommendations made by the IRS Oversight Board, the IRS has not 

been funded at the most effective levels to achieve its strategic objectives. Figure 

5 illustrates funding recommendations made by the Board since its inception, the 

President’s budget request during this same time frame, and the funding appropriated by Congress. One of the principal reasons for this so-called ‘‘resource gap’’ 

is the budget process which treats the IRS the same as it does all other discretionary spending requests. It does not credit the IRS with bringing in 95 percent 

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1 IRS Oversight Board reports, FY2006 IRS Budget Recommendations/Special Report, FY2007 

IRS Budget Recommendations/Special Report, and FY2008 IRS Budget Recommendations/Special Report. 2 NTA, 2006 Report to Congress, Section 2, p. 445, and Statement of Colleen M. Kelley, President, National Treasury Employees Union, Testimony Before the House Committee on Ways 

and Means, May 23, 2007. 

of all the revenue to fund the Federal Government, nor does it recognize the previously discussed four-to-one return on every dollar invested in tax enforcement. 

The Oversight Board has urged previously Congress to view funding of the IRS 

as an investment.1 Other members of the tax administration community, such as 

the National Taxpayer Advocate and the National Treasury Employees Union, have 

made similar recommendations.2

There are a number of approaches that Congress could take to achieve this result, 

such as funding the IRS outside of budget caps, and the Board believes that the 

implementation of such a change is best left for Congress to decide. The Board 

would be remiss, however, if it didn’t point out providing additional funds to the 

IRS has been consistently supported by nearly two out of three members of the public. In its annual Taxpayer Attitude Survey, the Board has asked taxpayers whether 

they support additional funding for the IRS. The results for 2005 through 2007 are 

shown in Table 6. 

Table 6. Results of Taxpayer Attitude Survey on IRS Funding 

Survey Question 11 

Percent Percent 

Completely Agree Mostly Agree 

2007 2006 2005 2007 2006 2005 

The IRS should receive extra funding to enforce 

tax laws and ensure taxpayers pay what they 

owe 24 24 20 40 39 43 

The IRS should receive extra funding so it can assist more taxpayers over the phone and in person 21 24 22 42 42 44 

The Board believes such strong support indicates the public understands the need 

for effective tax administration and realizes that, ultimately, it pays for itself. 

Conclusion 

Approving a budget is not just about money; it’s also about choices. The Board 

believes its budget recommendations, if implemented, will put the IRS on an effective long-term path to achieving the IRS strategic goals, improving voluntary compliance, and reducing the tax gap. 

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Although the Board’s recommended budget is $375 million more than the President’s request, there are some important decisions that must be made with respect 

to priorities and balance. The Congress must not only decide the amounts to be appropriated, but must also choose whether it wants to pursue short-term growth in 

enforcement activity over a more balanced path that stresses the benefits of longterm investments in technology, infrastructure, service, and research. 

Æ 

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