U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Printing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

80–396—PDF 2012

S. HRG. 112–759 

TAX FILING SEASON: IMPROVING THE 

TAXPAYER EXPERIENCE 

HEARING 

BEFORE THE

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

ONE HUNDRED TWELFTH CONGRESS 

SECOND SESSION 

APRIL 26, 2012 

( 

Printed for the use of the Committee on Finance 

COMMITTEE ON FINANCE 

MAX BAUCUS, Montana, Chairman 

JOHN D. ROCKEFELLER IV, West Virginia 

KENT CONRAD, North Dakota 

JEFF BINGAMAN, New Mexico 

JOHN F. KERRY, Massachusetts 

RON WYDEN, Oregon 

CHARLES E. SCHUMER, New York 

DEBBIE STABENOW, Michigan 

MARIA CANTWELL, Washington 

BILL NELSON, Florida 

ROBERT MENENDEZ, New Jersey 

THOMAS R. CARPER, Delaware 

BENJAMIN L. CARDIN, Maryland 

ORRIN G. HATCH, Utah 

CHUCK GRASSLEY, Iowa 

OLYMPIA J. SNOWE, Maine 

JON KYL, Arizona 

MIKE CRAPO, Idaho 

PAT ROBERTS, Kansas 

MICHAEL B. ENZI, Wyoming 

JOHN CORNYN, Texas 

TOM COBURN, Oklahoma 

JOHN THUNE, South Dakota 

RICHARD BURR, North Carolina 

RUSSELL SULLIVAN, Staff Director 

CHRIS CAMPBELL, Republican Staff Director 

(II) 

C O N T E N T S 

OPENING STATEMENTS 

Page 

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee 

on Finance ............................................................................................................ 1 

Hatch, Hon. Orrin G., a U.S. Senator from Utah ................................................. 10 

WITNESSES 

White, James, Director, Tax Issues, Government Accountability Office, Washington, DC ............................................................................................................. 3 

Lewis, Troy, Lewis and Associates, CPAs, LLC, Draper, UT .............................. 4 

Tucker, Beth, Deputy Commissioner, Operations Support, Internal Revenue 

Service, Washington, DC ..................................................................................... 6 

Thompson, Teresa, Local Taxpayer Advocate for Montana, Taxpayer Advocate 

Service, Helena, MT ............................................................................................. 8 

ALPHABETICAL LISTING AND APPENDIX MATERIAL 

Baucus, Hon. Max: 

Opening statement ........................................................................................... 1 

Prepared statement .......................................................................................... 23 

Hatch, Hon. Orrin G.: 

Opening statement ........................................................................................... 10 

Prepared statement .......................................................................................... 25 

Lewis, Troy: 

Testimony .......................................................................................................... 4 

Prepared statement .......................................................................................... 27 

Thompson, Teresa: 

Testimony .......................................................................................................... 8 

Prepared statement .......................................................................................... 39 

Responses to questions from committee members ......................................... 50 

Tucker, Beth: 

Testimony .......................................................................................................... 6 

Prepared statement .......................................................................................... 51 

Responses to questions from committee members ......................................... 60 

White, James: 

Testimony .......................................................................................................... 3 

Prepared statement .......................................................................................... 63 

Responses to questions from committee members ......................................... 81 

COMMUNICATIONS

H&R Block ................................................................................................................ 85 

Kogod Tax Center .................................................................................................... 87 

National Community Tax Coalition ....................................................................... 98 

National Treasury Employees Union (NTEU) ...................................................... 100 

Texas Society of Certified Public Accountants ...................................................... 106 

(III) 

(1) 

TAX FILING SEASON: IMPROVING THE 

TAXPAYER EXPERIENCE 

THURSDAY, APRIL 26, 2012 

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC. 

The hearing was convened, pursuant to notice, at 10:09 a.m., in 

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus 

(chairman of the committee) presiding. 

Present: Senators Wyden, Cardin, and Hatch. 

Also present: Democratic Staff: Russ Sullivan, Staff Director; 

Neil Pinney, Detailee; Amanda Bartmann, Detailee; Andrea Chapman, Detailee; Ann Cammack, Tax Counsel; and David Burt, 

Detailee. Republican Staff: Chris Campbell, Staff Director; Mark 

Prater, Deputy Chief of Staff and Chief Tax Counsel; and Jim 

Lyons, Tax Counsel. 

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR 

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE 

The CHAIRMAN. The committee will come to order. 

Albert Einstein once said, ‘‘The hardest thing in the world to understand is the income tax.’’ 

Last week, taxpayers in Montana and across the country filed 

their annual returns. I am sure many of them had the same 

thought that Einstein expressed. We need to simplify the code. Reforming and simplifying the code will make filing taxes easier for 

Americans and reduce uncertainty. 

Today we will look at ways we can improve the taxpayer experience and consider how to deal with the 132 provisions that frequently expire and create uncertainty. We will look at how to effectively use technology to improve communication between the taxpayers and the IRS. 

We know the great majority of taxpayers follow the law, and 

more than 80 percent of taxes are paid on time. This voluntary 

compliance shows that most people are doing their part every 

April. 

But improving the taxpayer experience and creating certainty 

can push that rate even higher. More people voluntarily complying 

with our tax laws will reduce the United States’ annual $450 billion tax gap. Reducing this gap between taxes paid and those legally owed helps ensure the burden will not be passed on to the 

law-abiding Americans who do pay their taxes. 

However, issues with our current system make this difficult. Frequent and last-minute changes to the code and complex procedures 

2 

create uncertainty and confusion. Too many Americans can tell you 

what a nightmare going through an audit or appealing a decision 

with the IRS can be. Taxpayers become discouraged when they 

cannot understand what they owe or why they owe it. 

One IRS process that is particularly hard on taxpayers is the correspondence audit. This audit is done through letters rather than 

face-to-face meetings. Often these are simple audits that could easily be resolved through a short conversation, but instead they are 

drawn out over months or even years. 

Taxpayers often cannot reach anyone at the IRS to talk to, and, 

if they ever do, the IRS representative is often unfamiliar with 

their case and none of their submitted documents has been considered. 

Correspondence audits are just one glaring example. There are 

others. One is staffing. IRS staffing is a major concern. In my 

hometown of Helena, MT, the Helena IRS walk-in center is only 

open part-time with temporary staff. When people travel across a 

State as large as Montana to reach an IRS official, they should be 

able to receive help during normal business hours. 

We cannot forget that filing taxes is one of the most direct relationships many Americans have with their government. The IRS 

needs to make compliance easier on taxpayers and needs to make 

the process more simple. IRS must explore innovations and new 

technologies to use resources efficiently. Private industry has successfully incorporated technology to make things easier. IRS needs 

to do the same. 

As we consider tax reform, we have an opportunity—indeed, an 

obligation—to improve the taxpayer experience. Through tax reform, we can reduce the compliance burden. We can make things 

easier for folks every April. 

So let us reform the code to give taxpayers more certainty and 

more predictability. Let us make it easier for taxpayers to work 

with IRS to resolve issues more quickly and correctly. Let us take 

the right steps to improve the taxpayer experience. 

[The prepared statement of Chairman Baucus appears in the appendix.] 

The CHAIRMAN. I might say to all those here, I am going to have 

to leave. Senator Cardin will take over and chair this hearing. And 

we are going to be shuffling back and forth a little bit. Senator 

Hatch is going to come a little later. There is just a lot going on 

right now. One for me is the Ag conference and looking at a farm 

bill. 

It is not meant to be disrespectful of all of you witnesses. We are 

still listening, taking testimony, asking questions, and doing the 

very best we can. So please bear with us. 

Our first witness is Mr. Jim White, Director of Tax Issues at the 

U.S. Government Accountability Office. Thank you, Mr. White. 

Second, Mr. Troy Lewis, vice president at Heritage Bank in Saint 

George, UT and owner of Lewis and Associates, an accounting firm 

in Saint George. 

Next, Beth Tucker, the Deputy Commissioner for Operations 

Support for the Internal Revenue Service. Thank you, Ms. Tucker. 

3 

And finally, Ms. Teresa Thompson. Ms. Thompson is the Local 

Taxpayer Advocate for Montana. Thank you very much, Ms. 

Thompson, for coming out here. 

Our customary practice is for witness statements to be automatically submitted for the record and each of you to speak about 5 

minutes. 

We will start with Mr. White. Unfortunately, I have to leave and, 

as I said, Senator Cardin will take over until Senator Hatch comes. 

And we will work it out. 

Thanks very much. 

Why don’t you proceed, Mr. White? 

STATEMENT OF JAMES WHITE, DIRECTOR, TAX ISSUES, 

GOVERNMENT ACCOUNTABILITY OFFICE, WASHINGTON, DC 

Mr. WHITE. Chairman Baucus, Senator Cardin, Ranking Member 

Hatch, and members of the committee, I am pleased to be here to 

discuss improving the taxpayer experience and voluntary compliance. 

As you know, the U.S. tax system depends heavily on taxpayers 

calculating their tax liability, filing a return, and paying what they 

owe on time without intervention from the IRS. This is often referred to as voluntary compliance. 

Voluntary compliance is influenced by a number of factors, including, one, the quality of IRS’s assistance, such as its telephone 

help line and website; two, knowledge that IRS’s enforcement programs are effective and that noncompliance will not go undetected; 

and three, a belief that the tax system is fair and enforced on all— 

that is, that one’s friends, neighbors and business competitors are 

paying their fair share. 

In addition, voluntary compliance is affected by third parties who 

assist taxpayers, including paid tax return preparers, tax preparation software companies, volunteer tax assistance sites run by private organizations, and third parties such as employers or banks 

that provide year-end summary information about income or expenses. 

The taxpayer experience also depends on how IRS deals with taxpayers who do not voluntarily comply, either intentionally or unintentionally. 

I now want to summarize how IRS is doing at providing assistance to taxpayers. In a nutshell, IRS’s service is not what it should 

be. Taxpayers who want to speak to an IRS telephone assistor actually got through at a rate of 68 percent so far this year, a drop 

of 7 points from last year and well below the 82 percent rate in 

2007. Wait time to speak to an assistor this year has averaged 16 

minutes. At the same time, IRS is falling further behind in processing paper correspondence from taxpayers. 

Given the tight budget environment and increasing demands 

being made of IRS, how can the taxpayer experience be improved? 

Innovation has to be part of the answer, including more self-service 

tools. The goal here should not be simply to shift taxpayers away 

from expensive live assistance. The goal should be to improve service by, for example, making it faster. 

4 

One example is checking the status of amended returns. Taxpayers must now wait to talk to a live assistor. Automated assistance might be faster. 

IRS is working on an Internet strategy costing hundreds of millions of dollars, and we have made several recommendations to 

make it more specific, such as estimating costs and benefits and 

laying out a time frame for implementing the strategy. 

Expanded information reporting. Information reporting can make 

it easier for taxpayers to comply and reduce the need for burdensome audits. Two suggestions we made for additional information 

reporting cover payments for services that businesses make to incorporated contractors and payments for services made by owners 

of rental real estate. 

Better leveraging third parties. About 90 percent of tax returns 

are now prepared by paid preparers or tax preparation software, 

intermediaries between IRS and taxpayers. Using data collected on 

preparers as part of the new regulatory regime, IRS should be able 

to better identify problem preparers and take remedial actions, 

such as education or enforcement. The same point applies to tax 

software. 

Modernized information systems. IRS has made great strides developing its capacity to manage IT acquisition and development, 

but it needs to implement the next two phases of CADE 2, its modernized taxpayer account database. 

Pre-refund compliance checks. This is part of the Commissioner’s 

vision for the future of IRS. More verification before issuing refunds could benefit taxpayers by catching errors before interest and 

penalties accrue. It could also reduce the need to resort to expensive and burdensome processes for trying to collect money after it 

has gone out the door. 

Tax code simplification. In addition to the frustration of figuring 

out tax liabilities and the need for complicated financial recordkeeping, tax complexity affects taxpayers in other ways. A surprising number overpay. Some make bad financial decisions. For 

example, in our work on higher education assistance, we found taxpayers selecting the wrong program from the perspective of their 

own finances. 

In addition, the stability of the tax code matters. Changes to the 

tax laws introduce opportunities for new errors by taxpayers. We 

have reported in the past how IRS’s telephone volume is driven, in 

part, by taxpayer questions about tax law changes. 

In summary, taxpayer service will not be improved by doing 

more of the same. It will require innovation and a variety of approaches. 

Mr. Chairman and Ranking Member, that completes my statement. I would be happy to answer questions. 

[The prepared statement of Mr. White appears in the appendix.] 

Senator HATCH [presiding]. Thank you. 

Let us go to you, Mr. Lewis. 

STATEMENT OF TROY LEWIS, LEWIS AND 

ASSOCIATES, CPAs, LLC, DRAPER, UT 

Mr. LEWIS. Chairman Baucus, Ranking Member Hatch, and 

members of the Senate Finance Committee, I am honored and very 

5 

appreciative of this opportunity to address you on today’s topic of 

improving the taxpayer experience. 

My written testimony contains one basic recurring theme. The 

lessons learned from the 2011 filing season suggest that there are 

things that can be done to improve the taxpayer experience. With 

the correct leadership, focus, and effort, the taxpayer experience 

can be improved. 

In my written testimony, I suggest, among other things, that the 

taxpayer experience can be improved by and through, one, meaningful tax reform; two, simplification of the existing laws; three, the 

IRS improving the correspondence audit process; and four, suspending the 1099–B matching program of IRS with respect to reported tax basis for the 2011 tax year. 

One, meaningful tax reform. In the long term, the taxpayer experience will be improved by reforming the tax code. Whether I am 

teaching a class or tax planning for a client, I often ask myself if 

the tax code of today really achieves the objectives that former 

President Ronald Reagan laid out back in 1984, the last time that 

the Congress set out to recodify and modify the existing tax laws, 

and that being that the United States tax code and system needed 

to be fair, encourage growth, and be simple. 

To be honest, at times, it is hard for me to see each one of those 

elements in our current tax code. Most of these terms are relatively 

defined. This individual relativism makes the process of reforming 

the code painful and spirited. 

In order to make serious progress and reform the code, it will 

take a major undertaking by all parties involved. And let me add 

my voice to the process by saying such effort is worth the end result. 

Two, simplification of our existing tax laws. In the short term, 

while Congress studies how to reform the tax system, I would suggest that there are progressive steps that can be considered to improve the taxpayer experience. Chief among those would be to simplify the tax law. 

One of the few ways I suggest this could be accomplished is by 

resolving some of the uncertainty of the tax laws attributable to 

the so-called tax extenders. I cannot with any surety tax plan for 

a client today with respect to the 2012 tax year regarding issues 

such as the purchase of new equipment or the ability to generate 

a research and experimentation credit because the laws for these 

items expired at the end of last year. And I cannot predict whether 

or not those are going to be retroactively made effective back to the 

start of 2012 so that there is no lapse in coverage. 

The uncertainty associated with this annual list of extenders 

weakens the taxpayers’ confidence. This uncertainty also causes inaction on the part of the taxpayer. The law today is clear, but the 

possibility of a potential law change tomorrow that would impact 

behavior already undertaken earlier this year is paralyzing. 

Three, correspondent audit process. In my written testimony, I 

discuss the need for improvement in the IRS correspondent examination process. As less budget dollars are allocated to the office 

and field audit examination process by IRS, the pressure to conduct 

more audits through the correspondence process will increase. 

6 

I suggest in my written testimony steps that should be considered to better this program. The program can be refined and significantly improved with the proper leadership and guidance. 

Four, 1099–B matching suspension. During 2011, the Form 

1099–B reporting was modified such that brokers were required for 

the first time to report to taxpayers the cost basis of sold securities 

of newly acquired assets. In addition, the reporting entity was also 

required for the first time to segregate each transaction into categories based upon certain criteria. 

It is very possible now that instead of an individual reporting all 

their stock transactions on one Schedule D, instead they would 

have to initially report such transactions on six different Form 

8949s that would then be summarized into one Schedule D, a new 

process. 

As I provided in my written testimony, during the 2011 tax year, 

CPAs and other tax professionals have reported challenges and 

problems with the information being reported to the taxpayers on 

these Form 1099–Bs. I suggest that the IRS consider standardizing 

the 1099–B form, as well as suspending matching of the tax basis 

amounts for 2011 so that the known and yet unknown issues can 

be resolved without unduly burdening taxpayers. 

In conclusion, I am grateful to the committee for holding these 

hearings. I believe improving the taxpayer experience is critical to 

establishing confidence in the tax system and administration. 

Again, thank you for the opportunity to provide both written and 

verbal testimony to this committee. 

Chairman Baucus, Ranking Member Hatch, and members of the 

committee, this completes my prepared statement, and I would be 

pleased to respond to any questions that you may have at this 

time. 

[The prepared statement of Mr. Lewis appears in the appendix.] 

Senator HATCH. Thank you, Mr. Lewis. We are proud to have you 

here from Utah and appreciate your testimony very much. 

Ms. Tucker, we will turn to you. 

STATEMENT OF BETH TUCKER, DEPUTY COMMISSIONER, 

OPERATIONS SUPPORT, INTERNAL REVENUE SERVICE, 

WASHINGTON, DC 

Ms. TUCKER. Chairman Baucus, Ranking Member Hatch, and 

members of the committee, thank you for the opportunity to testify 

on the 2012 filing season and the IRS’s efforts to improve the taxpayer experience. 

We strongly believe that it is important to provide quality customer service not only during the filing season, but throughout the 

year and in the post-filing season environment, as well. We also 

recognize that one size does not fit all when it comes to serving taxpayers and improving their experience with the IRS. We have a 

highly diverse customer base, and we must meet taxpayers’ different needs when and where they want it, ranging from smart 

phone apps online to self-service applications to traditional service 

channels. 

Improving the taxpayer experience also means helping taxpayers 

get it right from the start. And with 9 out of 10 taxpayers using 

a paid return preparer or commercial software, our return preparer 

7 

program can do just that. By ensuring a basic level of competency 

and rooting out unscrupulous preparers, it can help taxpayers 

avoid potentially costly problems down the road. 

Tax software has also become popular because it guides taxpayers through the filing process, prompting them to report income, reminding them of benefits, and helping them avoid errors. 

Mr. Chairman, let me turn to the 2012 filing season, which is 

winding down and going smoothly. As of April 14, 2012, the IRS 

received over 109 million individual returns. We have issued more 

than 86 million refunds for a total of $237 billion, with the average 

refund being approximately $2,700, about the same as last year. 

Of note, the individual e-file rate continues to trend upward this 

year, a very positive development, while paper returns continue to 

fall. In a challenging budget environment like we face at IRS, the 

cost savings are substantial. It costs IRS $0.15 to process an electronic return versus $3.50 for a paper return. 

Irs.gov also remains the favorite source of information for millions of taxpayers. As of April 14, 2012, there were over 225 million 

visits, a 22-percent increase over the same period last year. 

We are also offering on irs.gov helpful interactive tax tools, such 

as ‘‘where is my refund,’’ the earned income tax credit assistant, 

interactive tax assistant, and the ‘‘Get Free Tax Help Act.’’ 

Under the leadership of Commissioner Shulman, we are continually working to improve the services we provide taxpayers. One 

of the most important achievements in this area occurred earlier 

this year. It was largely invisible to taxpayers, but will be providing meaningful and tangible benefits to them and our tax system for years to come. 

I am speaking of the standup of our new customer account data 

engine, also known as CADE 2, that will allow the IRS to go from 

weekly batch processing to daily processing for the first time in 60 

years. 

CADE 2 addresses the multitude of issues that historically created challenges and problems in the tax system. It will provide 

more up-to-date information at the fingertips of our customer service representatives that will enable them to faster resolve taxpayer 

account issues and account adjustments, both of which will greatly 

help taxpayers, as well as the IRS. 

CADE 2 will also correct one of the biggest problems we have. 

A taxpayer calls about a payment he or she has made, but our representatives cannot tell whether it has been posted or not. That 

will change because of the daily processing that CADE 2 affords. 

CADE 2 will also eliminate structural technology problems that 

could lead to time lag problems, such as when notices are sent to 

taxpayers. 

The CADE 2 database will also allow the IRS to consider offering 

a wider range of web-based self-initiated service solutions that 

could fundamentally change the way that taxpayers interact with 

the Internal Revenue Service and also provide for greater operational efficiencies. 

A good example is the electronic transcript delivery system on 

irs.gov that we plan to launch later this year. This initiative will 

enable a taxpayer to securely send a transcript to an authorized 

8 

third party. As a result, taxpayers will gain access to their tax 

records with greater efficiency and decreased burden. 

As I mentioned in my opening statement, we are providing a variety of service channels to meet different and evolving taxpayer 

needs in a balanced fashion. One innovative program in particular 

I wanted to mention is virtual service delivery, which has great potential to improve the taxpayer experience. 

Currently located in 13 sites, it uses video communication technology to deliver a number of services to taxpayers—such as assistance with letters, notices, tax law, procedural questions—and allows taxpayers to seek different service delivery options outside of 

the traditional brick-and-mortar IRS facility. 

Mr. Chairman, Ranking Member Hatch, this concludes my oral 

testimony. I would be happy to answer any questions you may 

have. 

[The prepared statement of Ms. Tucker appears in the appendix.] 

Senator HATCH. Thank you so much. 

Ms. Thompson, we will turn to you now. 

STATEMENT OF TERESA THOMPSON, LOCAL TAXPAYER 

ADVOCATE FOR MONTANA, TAXPAYER ADVOCATE SERVICE, 

HELENA, MT 

Ms. THOMPSON. Chairman Baucus, Ranking Member Hatch, and 

members of the Senate Finance Committee, thank you for inviting 

me to testify today regarding filing season 2012 and the assistance 

the Taxpayer Advocate Service provides in Montana. 

This filing season has seen challenges in both Montana and the 

country as a whole. I will highlight five points from my written testimony that deserve emphasis. 

First, although Montana may not be as populated as other 

States, its individuals should be afforded all services provided by 

their Federal Government. The IRS must be available to them. 

Taxpayers should be able to reach an IRS employee by telephone 

or by visiting a walk-in office when they have questions or other 

concerns about Federal income taxes. 

Unfortunately, many taxpayers cannot get through on the IRS 

toll-free lines or cannot visit walk-in sites because they are not 

open. For example, the Helena walk-in office, it is open only on limited days and for limited hours. 

So taxpayers call our office as the only available alternative. But, 

because of budget constraints, my office is not even staffed with a 

secretary to answer phone calls. Unless staffing levels improve, my 

staff and I will continue to be drawn away from the taxpayers who 

need our help the most—those assigned to the Taxpayer Advocate 

Service. 

I would also like to point out that the IRS does not have an appeals officer or a settlement officer in Montana and numerous other 

States. Taxpayers should be afforded access to these officers locally. 

Their knowledge of local economic issues relevant to taxpayer cases 

is important to ensure fair and impartial hearings. 

Second, Montana would be the perfect place for piloting 2-way 

video conferencing with taxpayers because of its geographic size 

and weather conditions at various times during the year. IRS problems do not always happen when there is good weather in MonVerDate Nov 24 2008 20:52 May 14, 2013 Jkt 000000 PO 00000 Frm 00012 Fmt 6633 Sfmt 6633 R:\DOCS\80396.000 TIMD
9 

tana. People cannot travel to Helena to visit my office or travel to 

any of the walk-in offices throughout the State when road conditions are dangerous. And getting through on the toll-free number 

is always a gamble. 

Why not harness technology that is already available and provide 

top-notch service to our taxpayers by utilizing 2-way video conferencing? Two-way video conferencing would be an effective way of 

delivering government services to a diverse population and could 

alleviate taxpayer frustration and confusion. 

Third, identity theft is a national epidemic, and, when the theft 

has tax consequences that cause economic harm to taxpayers, they 

often seek help from the Taxpayer Advocate Service. The IRS 

should prioritize assistance to victims of tax-related identity theft. 

A crime has been committed, and, as such, the victims should be 

made whole as soon as possible. 

This requires dedication of resources and strategic casework 

planning both on the front end to catch the identity theft before the 

refund is issued, and on the back end when the damage has already been done and the taxpayer needs to be made whole. Unfortunately, budget shortfalls resulting in staffing cutbacks have hindered these efforts. 

Fourth, correspondence audits can be confusing and impersonal. 

Documentation sent in by taxpayers or their representatives to 

verify items on tax returns are sometimes never associated with 

the case. 

What happens to this mail? The responsibility for a correspondence audit should be given to a single IRS auditor who will work 

the case from beginning to end, as we do in the Taxpayer Advocate 

Service. The auditor should contact the taxpayer by telephone or 

through 2-way video conferencing when that is available. 

Correspondence audits should be limited to returns with specific, 

clear-cut issues, and are not well-suited to complicated issues like 

business expenses. 

Fifth, there are seven federally recognized Native American 

tribes in Montana. These tribes have a unique legal status which 

should not be overlooked when Congress writes legislation for income, expenses, and credits. 

At times, TAS casework reflects this legislative omission. When 

a Native American child adopted from a reservation does not meet 

qualifications for the adoption credit, as currently spelled out in the 

Internal Revenue Code, my opinion is that a part of this country 

has been overlooked. 

I am honored to be here today and would be happy to answer 

your questions. 

[The prepared statement of Ms. Thompson appears in the appendix.] 

Senator HATCH. Thank you so much. We really appreciate the 

testimony of each of you and look forward to asking you some questions. 

Maybe I can just make my opening remarks at this point, and 

then we will go into questions. I will probably turn to you first. 

How is that? I think that is appropriate. 

10 

OPENING STATEMENT OF HON. ORRIN G. HATCH, 

A U.S. SENATOR FROM UTAH 

Senator HATCH. Though you would not know it from the fiscal 

policies being advanced by President Obama, this Nation faces a 

real crisis in just a few months. What some have called ‘‘taxmageddon’’ is rapidly approaching. 

Unless Congress acts appropriately come January 1, 2013, Americans will be hit with the largest tax increase in history. Now, this 

record-breaking tax increase will hit every American who pays income taxes. Small business owners will face a top marginal rate 

hike of 17 percent. 

The number of farmers and small businesses that will face a 

death tax will grow exponentially. Do not forget, the alternative 

minimum tax patch has already expired, leaving 26 million middleincome families and individuals paying $92 billion in stealth taxes 

in just 8 months. In fact, those 26 million families and individuals 

are required by law to have already made their first estimated tax 

payments this year. 

The rate of tax on dividends will nearly triple from 15 percent 

to 43.4 percent. Now, the President has actually proposed this massive dividend tax increase in the latest version of his annual taxand-spend budget that is still supported by exactly nobody. And the 

rate of tax on capital gains will increase by 59 percent from 15 percent to 23.8 percent. 

Now, these tax increases are ones for the record book, and Congress should have already prevented them from occurring. They are 

ticking time bombs, in my opinion, for families, individuals, and 

the American economy. Instead, the Senate continues to dawdle on 

the non-starter provisions like the Buffett tax. That so-called deficit 

reduction proposal is so backwards that it actually loses $793 billion over the next 10 years if it is implemented in the way proposed 

by President Obama in his most recent budget. That is, if the 

Buffett tax replaces the AMT, as President Obama says it should, 

we actually increase the deficit by $793 billion over the next 10 

years alone. 

Unfortunately, some view the expiration of such a large part of 

our tax code at the end of the year as a bonanza for bigger government. Deploying the tired rhetoric of class warfare, they welcome 

these tax increases, which will finance even higher government 

spending. 

But make no mistake about it. This impulse to increase taxes at 

all costs risks a recession. Congress should come together and act 

to prevent this historic tax increase that is hanging over the nation’s head like the Sword of Damocles. Doing so would greatly improve the taxpayer experience by giving taxpayers more predictability and allowing the IRS to put out more complete and timely 

guidance for taxpayers, points that some of you have made. 

With respect to the IRS’s performance when it comes to the tax 

filing experience, I will say that one thing that stands out is its 

stated goal of answering 61 percent of phone calls from taxpayers. 

Now, I have heard of setting the bar low so that it is easy to exceed 

expectations, but 61 percent of phone calls answered is simply not 

good enough. It would earn a student a D-minus, at best, and that 

is probably grade inflation. 

11 

On this issue, I would give the IRS a failing grade, and I suspect 

that the nearly 40 percent of taxpayers whose calls go unanswered 

would probably agree. It is a real problem to us. 

[The prepared statement of Senator Hatch appears in the appendix.] 

Senator HATCH. I would like to extend, like I say, a special welcome to Mr. Troy Lewis, who comes from Utah and has a wide 

array of experience with taxes. He is an adjunct professor at 

Brigham Young University. He owns his own CPA firm and is vice 

president of Heritage Bank in Saint George, UT. He spent the majority of his career at a large accounting firm in Salt Lake City. 

So I want to thank you all for coming this morning. It means a 

great deal that we could have your expertise in this area. And this 

is one of the hearings that we have been having with regard to tax 

matters, and I want to personally pay tribute to our chairman for 

being willing to go through so many hearings on the tax situation 

that we are all so concerned about. 

Let me turn to the distinguished Senator from Delaware—— 

Senator CARDIN. Maryland 

Senator HATCH. Maryland. 

Senator CARDIN. But a University of Pittsburgh graduate. 

Senator HATCH. A University of Pittsburgh graduate. I did not 

realize that you had that great experience until you came to the 

Senate. 

Senator CARDIN. Senator Hatch, thank you very much. 

Senator HATCH. I am sorry to mess up your State. I apologize. 

Senator CARDIN. Do not mess up our State. It is a great State. 

Senator HATCH. It is. 

Senator CARDIN. Let me thank Senator Hatch and thank all of 

our witnesses here for their testimony and for your work. 

I want to go back, I guess, a little over a decade ago when we 

had the commission that looked into the IRS. Then-Congressman 

Portman was one of the leaders. He needed a partner in the House 

of Representatives to advance those proposals. So I joined him, and 

we were able to get some significant reforms done in the IRS. 

As Ms. Tucker knows, I have recently been out to visit with our 

IRS employees to thank them. I think they are doing an incredible 

job. They are being asked to do more with less under very stressful 

conditions, and I think they are doing their best, and we are very 

proud of their public service. 

So I want to start off with the fact that I think we have some 

very dedicated people who are working to collect taxes, which is 

never a popular thing to do, but an extremely important role for 

our society. 

But the recommendation about a decade ago was to modernize 

the IRS with technology and to instill more consumer function to 

the IRS so that it would be more consumer-friendly, based upon 

the recognition that voluntary compliance dictated that type of a 

model. 

So, back when we started looking at this, I would say the telephone connection rate was well below what it is today, and we 

brought it up to levels that we thought were where it should be, 

and now we are falling back in the wrong direction. 

12 

So that is a major concern to me, and I think it should be a 

major concern to this committee and our country. And I expect that 

a good part of this has been the budget and failure to provide the 

type of support for this agency. 

It is not only the number of personnel. It is also the equipment 

and the technology and all of the above. And I think we need to 

get back to that if we are going to be able to, again, meet the needs 

of our consumers. 

I think, Ms. Thompson, your point about offices not being open 

during normal business hours, that is unacceptable. That is unacceptable. And the connection rate of in the 60s is unacceptable. We 

need to have that in the 90s. 

So I think we need to refocus again on making the IRS a more 

consumer-friendly group, but do not expect it to perform miracles 

as Congress cuts the budgets. Now, some of you have mentioned, 

properly, and so has Senator Hatch, that Congress could do a lot 

of things to help you. We could simplify the tax code. We could do 

tax reform. We could pass some of the information issues that, Mr. 

White, you pointed out. 

All of that, I think, would be helpful, but I think a critical part 

is to give the type of support to the IRS that it needs. And the interesting point is, all of the scorekeepers here tell us that if we 

made the resources available, IRS would collect more money. 

So, from the point of view of helping our budget deficit, we are 

shortchanging our budget deficit by what we are doing on the support for the IRS. 

I want to ask a specific question on ID theft. Ms. Thompson, you 

raised that issue. And I have had a couple cases in my office of taxpayers who have had their identification stolen and fraudulent efforts to get refunds using an ID of someone else. In one or two of 

these cases that I have looked at personally, the individual taxpayer was not notified until many months later. 

Ms. Tucker, I just really want to know. I understand you have 

to do certain investigations. I know you have to confirm what happens. In these cases, what normally happens is someone has filed 

a fraudulent return in an effort to get a refund using someone 

else’s identity. Then the real taxpayer files their tax return. So you 

look at the two and you say something is not right here. 

But should it take months before the victim of the identity theft 

is notified? 

Ms. TUCKER. First of all, Senator Cardin, thank you so much for 

the kind words you expressed to the IRS workforce. You are absolutely right. The 97,000 men and women of IRS are doing their 

best every day for our taxpayers and to ensure that we have a 

quality tax administration system. 

As we have talked about before, identity theft is one of the most 

vexing and complex tax situations that we are seeing right now at 

IRS. Unfortunately, these fraudsters, the perpetrators, they come 

in, they file a tax return, as you indicated. That is the first return 

in. We then subsequently receive a return from the legitimate taxpayer or even potentially another return from another fraudulent 

taxpayer. 

And so then we have to go about the process of doing the validation of, are you really who you say you are? And that takes time. 

13 

We have dramatically increased our staff who are working identity 

theft. In fact, by the end of this calendar year, we will increase our 

staffing 5 times over. We will have roughly 2,500 folks going at this 

work. 

But, unfortunately, it is complex. It takes time. 

Senator CARDIN. That is an incredible number. And we know it 

is the fastest-growing—I think it is the fastest-growing crime in 

America. At least the last time I checked, it was the fastestgrowing crime in America. And it is pervasive in so many different 

areas. 

IRS returns is certainly just one of many areas in which people’s 

identities have been compromised and they themselves have been 

compromised. I would just urge you to do everything you possibly 

can to inform the victim at the earliest possible stage. Now, we 

have taken steps, when computer information has been compromised, to make sure those who are potential victims of identity 

theft are notified at the earliest possible moment. 

I think you need to be able to at least identify that someone’s 

identity has been compromised and let him or her know about it 

at an early stage so that they are aware of it. 

And I understand you would like to have all the information in 

place before you go forward, but I can tell you, the anxiety of knowing that you have been victimized, and knowing that it was done 

6 months ago and you are just finding out about it, adds to the 

trauma. 

Thank you, Senator Hatch. 

Senator HATCH. Thank you, Senator Cardin. Sorry about your 

State. I still have not gotten awake, I think. [Laughter.] 

I have enjoyed your testimony, every one of you, and, frankly, 

you have brought some pretty important points out. 

Let me just say this. Let me ask you this question. And I am concerned about the 61 percent, Ms. Thompson. I am concerned about 

that. And there is an average wait time, I think, of around 19 minutes. 

It is a tough job you have. So I am the last to try to find major 

fault with it. But it would be better if we could somehow figure out 

how to do that. And then again, we are not doing our job up here 

well enough for you, either, as far as I am concerned. 

Let me just ask this question. Levels of taxpayer service have already decreased at the IRS. If the health spending law is implemented—we are talking about Obamacare, or the Affordable Care 

Act, whichever you care to choose—but, if the health spending law 

is implemented, the IRS would be forced to deal with administering 

tax credits that are given to 23 million people who are newly enrolled in the health exchanges by, I think, 2019. In addition, 3.9 

million people will be subject to the individual mandate penalty, 

according to CBO’s April 22, 2010 analysis, and the IRS is the 

agency responsible for administering that penalty. 

Therefore, will not levels of taxpayer service decline even further 

as the IRS resources for taxpayer services are diverted to deal with 

the health spending law? 

How do you handle that problem? It is not one of your own choosing, I know. 

14 

Ms. TUCKER. Let me first talk about our overall level of customer 

service. So, the 61-percent figure that folks have talked about 

today, that was our projected level of service based on our budget 

allocation. 

So I think that we have talked about this with the committee before. IRS resources were down by roughly 5,000 employees at this 

point in the filing season this year. Of that 5,000, roughly 2,000 

employees were down in the taxpayer service area. 

So, as we have started this filing season, based on our available 

resources, based on our available budget, we projected a level of 

service of 61 percent. Now, the good news—trying to be the eternal 

optimist—our level of service coming out of this point in the filing 

season is actually 67.5 percent, and that increase, we believe, is 

due to a couple of things. 

Number one, all of the other automated tools that we have introduced. As I mentioned earlier, the taxpayers coming to irs.gov have 

significantly increased this year. We have more folks using the 

automated phones assistor application. We have more people using 

our interactive tax assistors. We have more folks using the mobile 

app to check information. 

So we actually have achieved a better level of service on our 

phones than we had anticipated based upon our funding situation, 

just like any other program. The IRS worked to implement the tax 

provision associated with the Affordable Care Act. We will take 

those provisions just like we do any other new tax law change, and 

we will work that into our available budget, staffing, and resources. 

The other thing that we are doing is—to your point earlier about 

how we have to continue to focus on the customer experience—so 

much of the work that we are doing right now on the technology 

front is really going to change the way that IRS is able to interact 

with taxpayers, not only with increased online services and online 

applications, but things like my colleague from Montana talked 

about: the increased use of things like virtual assistors. 

So at IRS, it is always a balancing act, and we come to work 

every day trying to do our very best for the taxpayers based on our 

available funding and staffing. 

Senator HATCH. I appreciate that. 

Let me just ask a question for the whole panel, and we will start 

with you. And that question is this. If you were given the power 

to change one thing about our tax system to improve American taxpayers’ experience with paying taxes, what one thing would each 

of you change? Start with you. 

Mr. WHITE. If it is literally one thing, I think it would have to 

be the complexity of the tax code. That would have the biggest impact. Now, that is a tax policy change. 

On the administrative side, if I was limited to tax administration, then I think the change that needs to be made is in terms of 

innovation, the problems that have been discussed so far, taxpayers 

being able to get through on the phones or dealing with ID theft. 

There are long-term options there that hold out a lot of potential 

for solving some of those problems. Trying to deal with them 

through traditional methods—just getting better at answering the 

telephone or dealing with ID theft cases given current technology 

15 

and current information available to IRS—is not going to be very 

effective. It is going to take a long time for taxpayers to be notified. 

So, if we can think in more innovative ways—and IRS, I give 

them credit, is looking at some different approaches. Being able to 

match tax returns to W–2s before issuing refunds would go a long 

way to preventing ID theft from being successful in terms of committing tax fraud. Thinking about how to leverage the tax preparation community and tax preparation software to answer taxpayers’ 

questions and head off the need for them to call IRS in the first 

place would solve some of the telephone call problem at IRS. 

Some people need to call IRS, and only an IRS assistor can help 

them. But a fair number of the calls to IRS do not have to be answered today by a live assistor. 

Senator HATCH. Thank you, Director White. We appreciate the 

work you do, and your whole organization. 

Mr. Lewis? 

Mr. LEWIS. Thank you. Limited to one item, I would have to say 

tax reform/tax simplification. The whole process of the tax filing is 

a unique business relationship because, in the private industry, for 

instance, in my accounting firm, if I was unresponsive, if I did not 

pick up the phone, if I did not answer questions timely, if I chose 

not to provide accurate information, eventually the client would 

just move on and go somewhere else. 

Unfortunately for the taxpayers, one thing is certain—next year 

they are going to be dealing with the same folks. There is really 

not a brand X that you can choose. So that is one point. 

The other point I think I would make would be that the code 

today is so complicated that I think the average American really 

does not even have a sense of what they owe. They completely rely 

on what the software tells them or what their paid preparer tells 

them. 

If you were to ask someone, ‘‘Just how much money do you think 

you are going to owe this next year,’’ their only sense would be, 

‘‘What I owed last year.’’ It would just be a relative comparison. 

But they really do not have a good feel of how taxes impact them. 

And when they get so far removed, I think you lose confidence 

in the system. If there was more of a direct—if it was simple 

enough that they felt a direct correlation between what they did 

and what they owed, I think that would increase and improve the 

taxpayer experience. 

Senator HATCH. Thank you. 

Yes? 

Ms. TUCKER. I will sound like a broken record, but it is the simplification issue, as my colleagues on the panel have stated. We 

know that our ability to clearly communicate with the taxpaying 

public about their obligations to file and pay is made much easier 

the less burden that there is in interpreting the tax law, the regulations, the guidelines. So anything that drives simplification, we 

believe is better for our taxpayer. 

I guess the other thing, if today is our wish list day of what we 

think would help us, in particular, at IRS, I think we are very, very 

concerned about the uncertainty for the remainder of this tax year. 

Believe it or not, we just wrapped up filing season last week, but 

our staff is already busy working, planning for the next filing seaVerDate Nov 24 2008 20:52 May 14, 2013 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6633 R:\DOCS\80396.000 TIMD
16 

son. And that includes not only programming our computer systems, revising our forms, preparing our publications, and, as Commissioner Shulman stated during some recent testimony, we are 

very, very concerned about the adverse implications we could have 

going into the next filing season if we do not have certainty on the 

expiring provisions or new provisions that could be enacted. 

Senator HATCH. I have a very high opinion of Mr. Shulman and 

you. We would really appreciate if you would weigh in really heavily on what changes ought to be made and what kind of language 

should be used. You are great experts. 

We will go to you, Ms. Thompson. 

Ms. THOMPSON. Well, I am sorry, I am going to have to make it 

4-for-4. Tax simplification is my long-term desire or wish for this 

country. It has gotten to where people call, they do not understand. 

They just do not understand the complexity of what is going on 

with their tax returns. 

I do not even want to repeat everything they said, because I 

agree with everything my co-panelists have said. In the short-term, 

we have to deal with this identity theft. If you will notice, in my 

written testimony, the Taxpayer Advocate Service cases not only in 

Montana, but in the country, are skyrocketing from the ID theft, 

and there are sad cases of these people coming in who need these 

refunds—the correct people coming in. We have not had any uncorrect people yet come to us, but that could happen, I suppose. 

But the correct people have come to us and are desperate for 

their refunds. They are expecting the refunds that they get or that 

are due them, and when they find out someone else has filed under 

their numbers, they are devastated. 

It is a very personal crime that is being committed against them, 

and we do our best in the Taxpayer Advocate Service to get them 

their refund as soon as possible. 

But those are my two wishes. 

Senator HATCH. I appreciate that. 

Senator Cardin, I have to leave, so I am going to turn this over. 

Senator CARDIN. Let me turn it over to Senator Wyden. 

Senator HATCH. I am sorry. I did not see Senator Wyden. 

Senator WYDEN [presiding]. Thank you, Senator Cardin and Senator Hatch. 

It has been a great panel. I have been out in the tax reform precincts for almost a decade now. It really started with Rahm Emanuel, who was then on the House Ways and Means Committee and 

had been trying to build a bipartisan coalition for tax reform, and 

then Senator Gregg joined the cause, and then, of course, he retired, and now I have been partnering with Senator Coats, the Republican Senator from Indiana. 

And, as I listened to the points that the four of you made, I think 

you give us, particularly at this critical time when, with the expiring provisions of the Bush tax cuts, people are talking about what 

is next, you really give us the foundation that we have been trying 

to build for the last decade for tax reform, and I want to go over 

just kind of one key part of it. 

It seems to me all of you are, in effect, articulating the position 

that a simpler tax code that makes it easier to comply and harder 

to cheat is going to be better for the vast majority of Americans 

17 

and businesses. And by reducing the tax gap, that is also going to 

help us close the Nation’s deficit. 

That is a winning proposition. And I want to see if I can—particularly with you, Ms. Thompson, and you, Mr. Lewis, not to insult 

our Washington witnesses, but to kind of hear from particularly 

out in our part of the country, the west, their thoughts on one 

other key kind of subject, and that is, the longer you look at this, 

the more convinced you become that the heart of the complexity 

problem, this myriad array of incomprehensible provisions in the 

tax code, involves a relatively small number of people, the people 

who tend to be well-off financially and, over the years, have had 

lobbyists and various kinds of experts try to—and they have been 

extremely successful—try to advance provisions in the tax law that 

will promote their interests. And that is their right. That is what 

we do in a free country. 

I am wondering about your thoughts about the idea that, if we 

get rid of these provisions, these ones that are extraordinarily complicated and tend to benefit a relatively small number of people, 

will not the whole country be better off because we will be able to 

address those broader goals that you identified, reduce cheating, 

close the trade gap, and also be fair to them, because that was 

done, for example, in 1986, where everybody felt that they were 

given an opportunity to get at it? 

So my question—and maybe we can start with you, Mr. Lewis— 

do you share this view that the lion’s share of these special interest 

tax breaks, tax expenditures, go to a relatively small number of 

people and that the whole country can benefit by going after those 

kinds of breaks to broaden the base and hold down rates for everybody and achieve the goals that you have been talking about? 

Mr. LEWIS. Thank you for your question. The question of how big 

should the base be is one that we have debated here for several 

years. The question of complexity is a separate component. 

So let us deal first with the base. I think Ann Landers had the 

basic quote attributed to her that said, ‘‘One doesn’t know how 

much to be grateful for something until you have to pay taxes on 

it,’’ the concept being that, if you have some skin in the game, you 

have some substance and you have a connection. 

I think there is a lot of truth in that. Even if it is something— 

I mean, more than 50 percent of the U.S. households pay no Federal income tax. That is a disconnect. It is sort of a—it is a disincentive. You do not pay, you do not have any vested interest, and 

there is that debate we can have. 

But as far as the base itself, I see a wider base being a positive. 

As far as the complexity issue, you are correct: a lot of the provisions are specialized. There are several provisions, though, that we 

have in today’s tax code which I would suggest offer complexity for 

the average American; for instance, education. This last semester 

that I taught a taxation class, I had to teach them that there were 

five, six different potential ways that you could deal with expenses 

you paid to go to college. 

That is complex for people. They want, ‘‘Do I get a credit?’’ Well, 

yes, but it depends on which credit, and it depends on if they have 

ever been convicted of a felony for drug possession. Was it a misVerDate Nov 24 2008 20:52 May 14, 2013 Jkt 000000 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 R:\DOCS\80396.000 TIMD
18 

demeanor? All right, then. There are all these little exceptions to 

the rules, and that gets to be burdensome, I think. 

Retirement plans. You will see in my written testimony, there 

are a lot of different retirement plans. I think we can simplify a 

lot of those type provisions, which would give that mass reduction. 

It would give some stability to the system, and it would take out 

a lot of the complexity. 

As far as specific provisions, yes, a lot of the provisions that you 

referenced do tend to take on a very unique single class, and I 

think we can do a lot in that regard to limit the complexity by targeting those. 

Senator WYDEN. And how about you, Ms. Thompson? It is a question of the lion’s share of the benefits from most of these special 

interest tax breaks going to a relatively small number of people 

and, by rooting those out, we get a simpler system and one that, 

in my view, is going to do more to encourage growth for the country. 

Ms. THOMPSON. Well, I am going to make a political statement, 

but in general, the—— 

Senator WYDEN. We have never had any political statements 

here. [Laughter.] 

Ms. THOMPSON. The Taxpayer Advocate Service tries to stick to 

the tax administration, and we avoid commenting on tax policy like 

rich versus poor. 

Senator WYDEN. This is not a rich versus poor issue. This is a question of, when I take out the $1 trillion worth of tax expenditures, they seem to go to a small number of these special interests. 

And then I hear you all tell me about complexity, and I say, would 

it not make for a simpler system to, in effect, root those out and 

ensure fairness for everybody, not hurting any one class, but ensuring fairness for everybody? 

Ms. THOMPSON. Well, I am sure it would. But to Mr. Lewis’s 

point, even the basic credits—of education credit, pension, IRAs— 

there is so much complexity. Even in the earned income tax credit 

now, it is complex—if you are related this way, if you are not related that way. 

I mean, there is just complexity even at the lower levels that, 

personally, I think, should and could be simplified for people filing 

their tax returns. 

Senator WYDEN. Well, you are surely right about that. We saw, 

for example, in the economic recovery legislation, the extra relief 

that was provided to those people, and our friends at the IRS can 

recall all the problems that middle-income and low middle-income 

people had signing up for that. They could not figure out how to 

do it. 

Again, it comes back to the argument for tax reform. I would say 

to members here on this committee, I would say, here we are having debates about the Recovery Act. Most Americans had no idea 

that there were any tax provisions in that, and they said, ‘‘Oh, this 

is just another big kind of spending bill,’’ because the system, as 

you have outlined, is so big and so complicated. 

Even when there is a tax break for somebody, people cannot figure it out, and they cannot figure out how to get it, which is what 

we saw in the Recovery Act. 

19 

Let me just ask one last question, if I might, for you, Mr. Lewis. 

You make another good point with respect to the problems that the 

small businesses have in terms of being overwhelmed by tax law 

changes at the end of a year. 

My sense is that this year, this is going to be particularly acute. 

In other words, the warning lights that you and Ms. Thompson 

have talked about in the past with respect to the end of the year, 

this is going to be an even greater problem at the end of this year, 

because the Congress will be faced with a lame duck end of these 

provisions and the like. 

What is your assessment of how bad this problem is going to be 

for small businesses at the end of this year with so much on the 

schedule to expire? 

Mr. LEWIS. Thank you for the question. There are two aspects of 

the extenders. There is the taxpayer reaction, the taxpayers who 

will actually go out and do something about the tax laws. There is 

the administration aspect as well. So let us deal with it first. It is 

paralyzing. Today, Mr. Wyden, if you were my client, if you came 

to me and you said, ‘‘My estimated tax payment was due a couple 

weeks ago for the first quarter,’’ I really could not tell you what 

that is going to be. 

I can tell you, historically, that the Congress has typically gone 

back and retroactively made all these things applicable, but I cannot tell you whether that is going to occur or not. As you mentioned, with the political environment, with the potential push for 

some summer legislation, but, quite frankly, in an election year 

and everything else, I fear that it will come down to the end of the 

year. 

Does it have an impact? Absolutely, because today, for instance, 

even in a normal year, without the extenders, the depreciation that 

you are going to receive on a purchase of a fixed asset, you will not 

really know what that number is until you know several other components: what is my income for the year, what are my other asset 

purchases going to be today, and, more importantly, what are they 

going to be in the last quarter of the year? 

I mean, there are all these other tax rules. But on top of that, 

if you are going to insert, ‘‘Well, they might raise the section 179 

limitation, they may put back more than 50-percent bonus,’’ I think 

that businesses are keenly aware of the uncertainty, and it paralyzes. 

I do not know that they do anything counter, but they do not do 

anything pro. 

Administratively, if I may—— 

Senator WYDEN. Go ahead. 

Mr. LEWIS. Administratively, I think you then have to say, what 

is that going to do in terms of the IRS, and Ms. Tucker could answer that. But my sense is, yes, this is a big one. All these other 

ones have just sort of—we have had a little bit here, maybe 10 provisions, but now with the expiration and the sunsetting of the 10- 

years-ago so-called Bush tax cuts and the patch that we did for the 

estate tax and all of these things, they have all sort of just been 

pushed to this year. It is a culmination, and it does worry me. 

Senator WYDEN. I think that is a very thoughtful answer, and 

that was really the question that I was trying to get at. 

20 

I think there is no doubt that, generally, when the Congress is 

looking at a lame duck session, small businesses, in particular, are 

saying to themselves, ‘‘Oh, my goodness, what are they going to 

think up now?’’ 

What you have done, though, is addressed the question I was 

most interested in. I think all of those concerns—the lack of certainty, the lack of predictability, what is coming at the end of the 

year—are going to be multiplied several times over during this 

kind of November–December period with the prospect of a lame 

duck session. 

You all have been a great panel, and we are going to have to 

have you in the tax reform debate. 

Mr. Chairman, you have given me a lot of time, and I thank you. 

Senator CARDIN [presiding]. I thank Senator Wyden for his comments. I think we all share the concern of the uncertainty and 

what is going to happen come tax planning, whether it is by the 

IRS or by individuals or businesses, how they go about doing it for 

the next tax season. 

I just want to ask one additional question, Ms. Tucker, as it relates to identity theft. I think Ms. Thompson raised this also, with 

the number of people who are being victimized, as to what the IRS 

is doing proactively to help minimize identity theft. And let me just 

give you one example. 

I have seen instructions in this tax season that all documents 

that you send to the IRS should include your identification number, 

your Social Security number, including the remittance checks. 

I would hope that the IRS is taking proactive steps to tell those 

who give advice to tax filers to only use the last four numbers and 

not to use the entire identification number. Are you doing things 

like that to try to minimize the risk of identity theft? 

Ms. TUCKER. Let me address where we are seeing the source of 

the identity theft. We are very cognizant that the folks who are 

coming into IRS victimized by identity theft, that their Social Security number or their identity has not been compromised through 

the filing process. 

So in other words, these perpetrators are getting the Social Security number, they are getting the identifying information outside of 

the tax system. 

They are just using the tax system as a way to come in and 

get—— 

Senator CARDIN. Let me just clarify. When you write a tax remittance check and you put your Social Security number on it, it is 

very possible that the integrity is maintained through the entire 

system while IRS has it in custody. 

Ms. TUCKER. Yes. 

Senator CARDIN. But that check goes other places, and there may 

not be the same degree of integrity as it goes through the banking 

system or as it goes through wherever else those checks end up. 

My question is pretty direct. There should be no need for you to 

have the full identification number on a remittance check or other 

documents where you are just trying to make sure you are attaching it to the right document. 

Would not the last four numbers satisfy that? And do you have 

direct instructions to tell people who are responsible for giving adVerDate Nov 24 2008 20:52 May 14, 2013 Jkt 000000 PO 00000 Frm 00024 Fmt 6633 Sfmt 6633 R:\DOCS\80396.000 TIMD
21 

vice to taxpayers not to include the full number on such a document? 

Ms. TUCKER. So a couple of things that we are doing. You are 

probably aware that a lot of the taxpayer notices that we mail out, 

in the past, typically did have the full Social Security number on 

it. And we have initiated a whole host of notice improvement initiatives where we are using bar coding, scanning only the last four 

digits. Simply because of that reason, the less identifying information that is circulating around, obviously, the better for all taxpayers. 

With regard to the question about the identifying information on 

the actual payment check, we will need to go back and look into 

that for you. 

I know a lot of it has been to make sure, especially with paper 

returns, as they come in to a large processing center, a lot of times, 

the checks are split from the return for us to get that deposit in 

in a timely manner. And so for us to properly credit that payment 

to your account, we would need to know the Social Security number 

to get that process through. 

But let me go back and look at that and come back to you. 

Senator CARDIN. I would appreciate that. I remember looking at 

some of the internal procedures here in the U.S. Congress where 

they used our identification numbers—certainly in health claims— 

where they used our Social Security numbers, and it was amazing 

how many times it was not necessary. 

You are only as strong as your weakest link, and the more people 

who have access to Social Security numbers, the more vulnerable 

we are. 

So I would hope that the IRS, which is now having to employ 

2,500 people to deal with identity theft, would take a very proactive 

role to show best practices for the best possible security we have 

and not put full Social Security numbers on documents that are 

handled by individuals outside the IRS. A remittance check gets 

handled outside the IRS. 

So I would hope you would be able to give explicit instructions 

to those who help prepare returns that they should not be putting 

the full Social Security number on a remittance check, because I 

do think that makes us all more vulnerable to identity theft. 

Ms. TUCKER. Let us go back and look at this issue. 

Senator CARDIN. I would appreciate that. 

Once again, let me thank all of our witnesses. I found this hearing to be very instructive. We have the message about simplicity, 

we have the message about tax reform, and we also, I think, understand the importance of our constituents having convenient service, 

accurate service, to be able to comply with the tax code. 

I think most individuals really do want to voluntarily comply, 

but, with the complexity and the uncertainty and the lack of getting information, it makes it difficult for that, in fact, to be at the 

level that we expect it to be. 

With that, the hearing will stand adjourned. 

[Whereupon, at 11:19 a.m., the hearing was concluded.] 

(23) 

A P P E N D I X 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD


80396001.eps
24 


80396.002

Correspondence audits are just one glaring example. The problem points to larger issues taxpayers have 

when trying to work with the IRS. 

IRS staffing is another area of concern. In my hometown, the Helena IRS walk-in center is only open 

part-time with temporary staff. When folks travel across a state as big as Montana to reach an IRS 

office, they should be able to receive help during normal business hours. 

We know budgets are tight, and we have to make tough choices about what we can afford. But we can't 

forget that filing taxes is one of the most direct relationships many Americans have with their 

government. 

The IRS needs to make compliance easier on taxpayers, and we need to make the process simpler. 

The IRS must explore innovations and new technology to use resources efficiently. Private industry has 

successfully incorporated technology to make things easier for customers. The IRS needs to do the 

same. 

As we consider tax reform, we have an opportunity - and an obligation - to improve the taxpayer 

experience. Through tax reform, we can reduce the compliance burden on taxpayers. We can make 

things easier for folks every April. 

So let us reform the tax code to give taxpayers certainty and predictability. let us make it easier for 

taxpayers to work with the IRS to resolve issues quickly and correctly. And let us take the right steps to 

improve the taxpayer experience. 

### 
25 


80396.003

STATEMENT OF HON. ORRIN G. HATCH, RANKING MEMBER 

U.S. SENATE COMMITIEE ON FINANCE HEARING OF APRIL 26,2012 

TAX FILING SEASON: IMPROVING THE TAXPAYER EXPERIENCE 

WASHINGTON - U.s. Senator Orrin Hatch (R-Utah), Ranking Member of the Senate Finance 

Committee, today delivered the following opening statement at a committee hearing 

examining ways to improve the tax filing experience for American taxpayers: 

Though you would not know it from the fiscal policies being advanced by President 

Obama, this nation faces a real crisis in just a few months. What some have called 

taxmaggedon is rapidly approaching. Unless Congress acts, come January 1, 2013 Americans 

will be hit with the largest tax increase in history. 

This record-breaking tax increase will hit every American that pays income taxes. Small 

business owners will face a top marginal tax rate hike of 17 percent. 

The number offarmers and small businesses that will face the death tax will grow 

exponentially. 

Don't forget, the alternative minimum tax patch has already expired, leaving 26 million 

middle-income families and individuals paying $92 billion in stealth taxes in just 8 months. In 

fact, those 26 million families and individuals are required by law to have already made their 

first estimated tax payments this year. 

The rate of tax on dividends will nearly triple, from 15 percent to 43.4 percent. The 

President has actually proposed this massive dividend tax-increase in the latest version of his 

annual tax-and-spend budget that is still supported by exactly nobody. 

And the rate of tax on capital gains will increase by 59 percent, from 15 percent to 23.8 

percent. 

These tax increases are ones for the record book, and Congress should have already 

prevented them from occurring. They are a ticking time bomb for families, individuals, and the 

American economy. 

Instead, the Senate continues to dawdle on non-starter proposals, like the Buffett Tax. 

That so-called deficit reduction proposal is so backwards, that it actually loses $793 billion over 

the next ten years if it is implemented in the way proposed by President Obama in his most 

recent budget. That is, if the Buffett Tax replaces the AMT as President Obama says it should, 

we actually increase the deficit by $793 billion over the next ten years alone. 

Unfortunately, some view the expiration of such a large part of our tax code at the end 

of the year as a bonanza for big government. Deploying the tired rhetoric of class warfare, they 

welcome these tax increases, which will finance every higher government spending. 
26 


80396.004

But make no mistake about it. This impulse to increase taxes at all costs risks a 

recession. Congress should come together and act to prevent this historic tax increase that is 

hanging over the nation's head like the Sword of Damocles. Doing so would greatly improve 

the taxpayer experience by giving taxpayers more predictability and allowing the IRS to put out 

more complete and timely guidance for taxpayers. 

With respect to the IRS's performance when it comes to the tax filing experience, I will 

say that one thing that stands out is its stated goal of answering 61 percent of phone calls from 

taxpayers. I have heard of setting the bar low so that it's easy to exceed expectations, but 61 

percent of phone calls answered is simply not good enough. It would earn a student aD-minus 

at best, and that is probably grade inflation. 

On this issue, I would give the IRS a failing grade, and I suspect that the nearly 40 

percent of taxpayers whose calls go unanswered would agree. 

And I would like to extend a special welcome to Mr. Troy Lewis who comes from Utah 

and has a wide array of experience with taxes. He is an adjunct professor at Brigham Young 

University, owns his own CPA firm, is a Vice President at Heritage Bank in Saint George, Utah, 

and spent the majority of his career at a large accounting firm in Salt Lake City. I want to thank 

you all for coming here this morning. 

### 
27 


80396.005

TESTIMONY OF TROY K. LEWIS, CPA 

BEFORE THE SENATE FINANCE COMMITTEE 

U.S. SENATE 

HEARING ON 

TAX FILING SEASON: IMPROVING THE TAXPAYER EXPERIENCE 

April 26, 2012 

Chainnan Baucus, Ranking Member Hatch, and members of the Senate Finance Committee 

("Committee"); I appreciate this opportunity to address the topic of improving the taxpayer 

experience. My name is Troy Lewis. I am a Certified Public Accountant ("CPA") and Vice 

President with Heritage Bank a small community bank in St. George, Utah. I am also the sole 

proprietor of a small CPA firm, Lewis & Associates, CP As, LLC based in Draper, Utah, as well 

as an adjunct professor of accounting and taxation at Brigham Young University in Provo, Utah. 

I also currently serve as a member of the American Institute of Certified Public Accountants' 

Tax Executive Committee. My testimony today is based primarily on my experience in 

perfonning tax -related work for small businesses, individuals and other tax professionals through 

my current role with Heritage Bank, my current CPA firm practice, my service on the AICPA's 

Tax Executive Committee, as well as my previous professional positions with national 

accounting firms. 

I believe the taxpayer experience can be improved through Congressional oversight and action, 

administrative actions and guidance as well as overall improved communication. In this context, 

my comments focus on the following areas of concern and opportunity for improvement: (1) tax 

refonn; (2) correspondence examinations; (3) due dates; and (4) basis reporting. 

1. TAX REFORM 

The Internal Revenue Code ("Code"), Treasury Regulations, and other administrative 

pronouncements impose too many compliance and filing burdens on small businesses. 

Accordingly, to improve the taxpayer experience, tax refonn should encompass simplification 

proposals designed to alleviate the complexity and burdens placed on small businesses. Many 

small businesses are organized as entities other than C corporations. Tax refonn therefore 

cannot merely involve changes to corporate tax rates or other tax provisions targeting C 

corporations if the desired impact is to help all small businesses overcome the burdens and 

complexities of tax compliance. These improvements must target other key areas. 

There are a number of areas in the Code that impose substantial burdens on small businesses and 

individuals, including "pass-through entities" such as partnerships and S corporations. 

Simplification is needed in areas such as depreciation, the Alternative Minimum Tax ("AMT"), 

certain partnership tax provisions, education deductions and credits, retirement plans and small 

business provisions that exclude non-corporate entities. A key point that would also significantly 

improve the taxpayer experience would be minimizing the overall uncertainty throughout the 

Code and expanding provisions intended to help small businesses and individuals specifically 

focusing on non-corporate entities. 
28 


80396.006

Depreciation 

Depreciation is an area that should be simplified in order to improve the taxpayer experience. 1 

The depreciation methods required by the Code are different than those used for financial 

accounting. There are differences in depreciation methods between financial and tax accounting 

methods based primarily upon the different conventions, recovery period and different rules 

based upon when the asset was purchased. In recent years, there have also been provisions 

added to provide for "bonus" depreciation and increased recovery amounts under Code Section 

179. An asset bought during 2012 might have several different calculated basis recovery 

amounts depending upon whether or not it was purchased new, when it was purchased, the 

amount of taxable income of the taxpayer for the tax year and the amount and the timing of other 

assets that will be purchased by the taxpayer during the year. Taxpayers therefore don't know 

what to expect in terms of basis recovery on an asset purchased in January 2012 until at least 

December 2012. This delay produces uncertainty and distrust in the tax system. Planning for the 

net cash flow from the purchase of an asset in such a case is difficult at best. 

There are several depreciation "books" often maintained by a business on the same exact assets. 

It is not uncommon to find depreciation records being maintained for financial accounting, 

regular tax, AMT and then depending upon the states in which the business operates a whole 

new set of tax books using state specific modified rules. In the end, the purpose of the 

depreciation rules is to provide a consistent approach for the recovery of cost basis for assets 

used in a trade or business. However, because of the various depreciation books required to be 

maintained, the whole area of depreciation has led to excessive complexities. The taxpayer's 

experience will be improved if Congress will work to modify the depreciation process so that the 

redundancy of multiple calculations to calculate the cost basis for the same asset potentially six 

or seven different ways (if multiple states are involved) is reduced. 

In recent years, Congress has acted in some limited form to reduce such complexity by 

increasing the Code Section 179 limits and expandilJg the definition of qualified Section 179 

property to include qualified leasehold property. Such action did reduce the administrative 

burdens placed on small business. I commend Congress for such actions. The small business 

owner needs more of this type of solution in the future to reduce complexity. 

Depreciation rules should be simplified to provide for a more basic approach with fewer 

alternative methods which would serve to not only reduce confusion and unintended 

consequences but also to permit taxpayers to better plan for their capital needs in the future. 

Alternative Minimum Tax 

Small businesses, including those operating as pass-through entities, are increasingly more 

vulnerable to being subject to AMT. The AMT was created to ensure that all taxpayers pay a 

1 See Background and Present Law Relating to Cost Recovery and Domestic Production Activities prepared by the 

Staff of the Joint Committee on Taxation for a Public Hearing before the Senate Committee on Finance on March 6, 

2012, JCX-19-12. 
29 


80396.007

minimum amount of tax on their economic income regardless of the regular income tax laws. 

The AMT is one of the tax law's most complex and least understood components.2 

As you know, the AMT is a separate and distinct tax regime from the "regular" income tax that 

requires the taxpayer to make a second, but parallel computation of their taxable income. This 

second parallel system is applicable to not only large businesses but also small businesses 

operating in various entity forms. 

Small businesses must maintain complicated annual records to be used in computing the AMT as 

well as any resulting credits that may be utilized in the future to reduce the taxpayer's regular tax 

liability. This second calculation often produces complications and unforeseen adjustments that 

produce unanticipated results for small business owners. The calculation related to the AMT 

credit alone can be difficult as the taxpayer is forced to separate AMT differences between 

adjustment and preference items and to recalculate the AMT for a given year to determine the 

extent the AMT is as a result of anyone particular item. 

The number of taxpayers facing potential AMT liability is expanding significantly. Middle-class 

taxpayers with basic itemized deductions can be subject to the AMT for no other set of reasons 

other than the fact that they pay real estate taxes on their home, pay income taxes to a state and 

have several dependent children. 

Today, Congress continues to extend the AMT exemption amount or the so-called AMT patch 

on a year by year basis in order to provide individual taxpayer inflation-adjusted relief from the 

AMT. This process produces annual uncertainty for middle-class taxpayers. The number of 

taxpayers currently paying some amount of AMT is at a historical high. Without the added 

annual AMT patch the amount of impacted middle-class taxpayers would clearly rise 

significantly. 

Due to the increasing AMT complexity, the AMT's impact on unintended taxpayers, and AMT 

compliance problems, I suggest Congress strongly consider repealing the individual AMT 

altogether. However, I recognize that simply eliminating the AMT would generate a large loss 

of tax revenue that would accompany such a move. AMT repeal is perhaps best accomplished as 

part of an entire Code reformation project. In the end, eliminating the AMT in exchange for 

modifying and simplifying some existing regular tax provisions will work to simplify the Code 

and to therefore increase the confidence in the tax system by many middle-class taxpayers. 

While the objectives of the AMT are well known and perhaps supportable, it is my opinion that 

the burdens on small businesses and individuals can be reduced without unduly compromising 

revenue generation objectives. 

2 See Present Law and Background Relating to the Individual Alternative Minimum Tax prepared by the Staff of the 

Joint Committee on Taxation for a Public Hearing before the Senate Committee on Finance on June 27,2007, JeX38-07. 
30 


80396.008

Certain Partnership Tax Provisions 

Partnership tax rules are among some of the most complex in the Code. Yet because of the 

federal tax law's flexibility in utilizing partnerships, these partnership entities still remain a very 

popular choose among small businesses today. Many small businesses are organized in such a 

way as to permit them to be taxed as partnerships. 

However, the tax implications of various transactions for partners in a partnership are often very 

different from shareholders in C or S corporations, or even sole proprietorships. The result is 

that there can be inequality of taxation outcomes strictly based upon entity type even when there 

appears to be very little policy reason for such a distinction. 

Today there exist two particular partnership related issues that are in need of improvement: 

First, in most cases, a partner in a partnership is not allowed to receive a W -2 for the services he 

or she may provide to a partnership during the year but rather such earnings are taxed as selfemployed compensation through allocations of earnings. This treatment is inconsistent with how 

a similarly-situated shareholder would be taxed related to their performing services for an S or C 

corporation. In the end, the same amount of payroll taxes will have been paid to the government 

but because of the entity differences, the partner/owner is treated differently. This particular 

payroll issue has caused tremendous confusion and misinformation within the tax preparer 

community. Compliance with and respect for the laws governing this partner/self-employment 

tax issue is at a low point. This portion of the law remains somewhat unsettled based partially 

upon Congressional action and inaction3 and the IRS current stance.4 As a result, there is a wide 

degree of interpretation of the law based primarily upon the lack of Congressional action. I 

would urge Congress to act to resolve this discrepancy. My sense is that the Social Security 

Trust Fund is collecting far less in taxes than it ought to collect in this area simply because the 

law has not been made clear enough to taxpayers and their tax advisors. Resolving this issue will 

also not only stabilize the payroll collection for partners but it could also potentially resolve for 

the need for unnecessary controversy between taxpayers and the IRS. Most importantly, 

allowing W-2 treatment for services would also enhance the taxpayer experience jn that there 

would be certainty. 

Second, partners that participate in the trade or business of their respective partnerships should 

be assessed self-employment taxes based upon the fair value of their services. Likewise, partners 

should be allowed to separate a return on their invested capital from their distributive share 

attributable to their service. Congress should consider adopting legislation that would permit 

such separations in interest so that the amount of self-employment income assessed to each 

paItner would be more certain. By adopting legislation that permits such a distinction, Congress 

would help to resolve present-day confusion and misinformation in this area as well as provide 

for a more uniform and predictable outcome between entity types. 

3 See Section 935 of the Taxpayer Relief Act of 1997 

4 Proposed Treasury Regulation Section Ll402(a)-2 
31 


80396.009

Education Deductions and Credits 

By my last count there are currently two income tax credits, four income tax deductions and two 

different and distinct types of educational savings plans designed to accomplish and encourage 

taxpayers towards the same basic goal: that of encouraging Americans to seek out higher 

education. Each one of these ideals is fundamentally sound in its approach. Each serves a 

purpose. Over time these various provisions has been adopted on a year by year approach. 

Looking back, it is very easy to see why we have collected such an eclectic group of commonminded provisions. But each different provision has its own separate limitations, phase-outs, 

maximum and minimums, and overall applicability requirements. This multi-choice experience 

confuses taxpayers and their advisors and often can lead to different "best" answers on a year by 

year basis based upon a taxpayer's individual situation. 

In my view, the time has now come to simplify and reduce such provisions. We don't need all of 

these different provisions to motivate and encourage the citizens of this country to seek out 

higher education. I urge Congress to combine and merge several of these provisions such that 

the number of available choices for taxpayers will be limited to a brief conversation with their 

tax advisor instead of today's process of making various assumptions to predict the "right" 

potential educational option for a taxpayer. 

Numerous Retirement Plans 

There are too many options for retirement plans that businesses need to consider before deciding 

which is appropriate for them. These options include a SEP, SIMPLE, SARSEP, 401(k), profit 

sharing plan, defined benefit plan, money purchase plan, ESOP, SIMPLE 401(k), Solo 401(k), 

among others.s Some plans are only available to employers with a certain number of employees 

while other plans require mandatory contributions and higher administrative burdens. Some of 

the administrative burdens would include annual return filing, discrimination testing, etc. To 

determine which plan is right for their business, owners must often consider their cash flows, 

projected profitability, anticipated growth of the work force, and expectations by their employees 

and co-owners. What plan type is right for a small business owner might change from year to 

year based upon the operational changes ofthe business. 

It appears that the diversity of plans came about because of Congress' intent to create plans for 

small business owners that were easier to manage, allowed for more flexibility in funding, and 

created choices for different sized entities. Over the years, however, as new and existing plans 

have been added, modified, adjusted, expanded and limited, the complexity associated with the 

general good intent of the provisions has risen dramatically. We are now at a point where the 

choices can be overwhelming and many are too complex or costly for the small business owner 

to be able to benefit. I urge Congress to act to phase out and merge several of these plans into 

jl.lst a few simple choices whereby Americans and their employers would receive more 

encouragement to save for retirement in a tax-deferred, simple and uncomplicated manner. The 

status-quo is too unnecessarily complicated. 

5 See Present Law and Background Relating to the Tax Treatment of Retirement Savings, Prepared by the Staff of 

the Joint Committee on Taxation, for a Public Hearing before the Senate Finance Committee on September 15, 

2011. 
32 


80396.010

Small Business Provisions that Exclude Non-Corporate Entities 

Some tax provisions that have been passed by Congress are applicable only to businesses 

operated in C corporation form. For example, laws designed to allow a certain percent of gain 

recognized on the sale of the certain stock of a business under Code Section 1202 or a potential 

deferral from the sale of a business under Code Section 1045 (Qualified Small Business Stock) 

are applicable only to businesses and their owners operating in C Corporation form. There 

appears to be little policy reason why such benefits could not be extended to businesses operated 

for instance, in partnership form. 

Under Code Section 118, C corporations are allowed to receive contributions to their capital on a 

tax-free basis from non-owners under certain limited situations. This provision is often utilized 

to allow municipalities to partially fund community improvement projects with for-profit entities 

in a way that does not needlessly generate taxable income to the for-profit entity. However, 

Code Section 118 does not apply to businesses organized and conducted as partnerships. A large 

percent of new businesses being formed today are done so as federal taxable partnerships. Thus, 

a contribution from the local municipality to an entity to construct the same local improvement 

project might be taxable as gross income to one taxpayer operated as a partnership and nontaxable to the taxpayer operating as a C corporation. When two similarly situated taxpayers in 

the same business find themselves in a very different tax positions relative to a contract with a 

municipality for no reason other than entity choice, taxpayer confidence in the taxing system, 

and their sense of fairness, is weakened. 

As future modifications to the Code are made or as new provisions are added, I would urge 

Congress to include in the dialog the concept of entity choice and current business practices. I 

believe that a recognition that many small businesses today are formed in the pass-through entity 

form will lead Congress to design incentives and Code modifications to better allow the majority 

of new businesses to take full advantage of well intentioned Congressional changes. 

Uncertainty of Tax Law 

Although the IRS attempts to educate taxpayers regarding new tax laws, which are passed after 

the tax year has commenced, taxpayers are often unable to or often fail to take full advantage of 

the intended benefits. Even in today's electronic communication age, business owners often find 

themselves unaware of tax law changes until after the close of the year when they meet with their 

tax professional to prepare their income tax return. Thus, most tax motivating provisions in the 

Code which involve immediate applicability and are effective for only a short period of time 

often go unnoticed and unappreciated by many taxpayers. This failure of the taxpayer to be 

notified is a shortcoming of the system, and, in my view, substantially reduces the effectiveness 

of the laws which Congress has enacted for various short-term objectives. 

In 1788 in the Federalist 62, James Madison wrote: 

In another point of view, great injury results from an unstable government. The want of 

confidence in the public councils damps every useful undertaking, the success and profit 
33 


80396.011

of which may depend on a continuance of existing arrangements. What prudent merchant 

will hazard his fortunes in any new branch of commerce when he knows not but that his 

plans may be rendered unlawful before they can be executed? What farmer or 

manufacturer will lay himself out for the encouragement given to any particular 

cultivation or establishment, when he can have no assurance that his preparatory labors 

and advances will not render him a victim to an inconstant government? In a word, no 

great improvement or laudable enterprise can go forward which requires the auspices of a 

steady system of national policy. 

During the last few years there has been a fair amount of tax legislation designed to stimulate the 

economy. Small businesses can be overwhelmed by the barrage of changes to the tax laws and 

regulations which occur late in the tax year and leave many taxpayers with neither the time nor 

the ability to evaluate properly the impact of the changes on their businesses. For example, 

during 2011, a taxpayer, needed to choose the correct and most beneficial depreciation method 

from a menu of choices, which necessitated cumbersome alternative computations. Taxpayers 

buying new equipment in 2011 had to evaluate their cost basis recovery options by potentially 

selecting one of several ways to recover the cost of the equipment with each having its own set 

of qualifications, criteria for applicability and speed of recovery. All of these computations 

related to the same basic objective: basis recovery of the purchase of an asset. 

Actions regarding the use of temporary provisions have also created uncertainty. While some 

measures, such as those designed for economic stimulus, may be appropriate for temporary and 

sporadic use, temporary tax provisions, including many incentive provisions, have become far 

too common.6 The uncertainty associated with this annual list of extenders weakens the 

confidence in the tax system by the taxpayer. 

These somewhat frequent changes to the Code also work to lessen the confidence of the general 

public in the United States taxation system overall. The initial First-Time Homebuyer Credit is 

an example of a stimulus concept that was somewhat well received initially but in the end may 

have been tarnished somewhat by the very taxpayers that availed themselves of the tax credit. 

The home builder and real estate community did a reasonable job of educating the general public 

of this provision. In Heritage Bank's lending area we saw some increased buying activity as a 

result of this credit. The credit provided first time homebuyers with an income tax credit in the 

year of the initial purchase of their residence with the mandate that such tax benefit be recaptured 

back into subsequent succeeding tax returns over the next fifteen years. Then after the 

applicability of the initial credit expired, an extension/modification of the income tax credit was 

provided that not only raised the amount of the potential credit but also waived the recapture of 

any of the prior credit benefit. Thus, two first-time home buyers living side by side separated 

only by a few months in the closing of their respective homes found themselves in completely 

different tax situations. Make no mistake that the first homeowner that availed themselves on the 

initial credit received exactly what they bargained for but such cannot hide the fact that once the 

first buyer realized that but for a few months their situation was far less favorable to that of their 

neighbor, the first buyer was disappointed and their level of reliance and trust in the tax system 

was shaken. 

6 See List of Expiring Federal Tax Provisions 20 11-2012, Prepared by the Staff of the Joint Committee on Taxation, 

January 6, 2012, JCX-I-12, 
34 


80396.012

In the course I taught at BYU this past winter, one of the most difficult subjects to teach was that 

of the self-employment tax; not because of technical difficulty but rather due to uncertainty. In 

mid February 2012, I was asked by a student, after teaching the self-employment tax law as it 

applied to 2011, to explain how the self-employment tax was to be calculated for 2012. I 

explained that I could only accurately predict what the law would provide through the end of 

February 2012 as the 2% employee portion of the payroll reduction mayor may not be extended 

for the entire 2012 tax year like we had just seen in 2011. The student asked how a small 

business owner could possibly plan or prepare for the 2012 tax year then not knowing what law 

would be effective in six months let alone in two weeks. For that question, I had no good 

answer. 

Although there are often good reasons which may argue for a quick change in the Code and/or 

for a short-term stimulus provisions, I would submit that such changes often will have significant 

unintended consequences. As part of the tax reform movement, I would urge the Congress to 

have a bias to minimizing provisions that are either short-lived or retroactive. By doing so, I 

believe that Congress will enhance the confidence of taxpayers in the United States taxation 

system and further provide a definitive course that will allow taxpayers to adequately plan for 

their future while improving the taxpayer experience. 

2. CORRESPONDENCE EXAMINATIONS 

According to the IRS Oversight Board, correspondence examinations have grown from 72 

percent of all IRS examinations in fiscal year 200 I to 78 percent in fiscal year 20 I 07

• Of even 

further significance, these statistics are even more startling when taking into account that 

correspondence audits amounted to 54 percent of all examinations in fiscal year 2000. 8 Further, 

according to a 2009 report by National Taxpayer Advocate Nina Olson, "IRS employees spent 

an average of only 1.6 hours in 'direct time' on each correspondence examination in FY 2008, as 

compared to 8.5 hours on each office examination, and 46.4 hours on each field examination.,,9 

The IRS Oversight Board's stated goal of developing the correspondence examination into a 

more efficient and taxpayer friendly method of examination is commendable. However, the 

program as it exists today is in need of improvement. 

Improvements for the Correspondence Examination Program 

I have spoken with a number of CPAs in my local community about the problems taxpayers have 

faced with correspondence examinations. These CPAs have raised concerns about: (I) the 

excessive time it takes the IRS to resolve a taxpayer's case; (2) the great difficulties taxpayers 

face when trying to contact the IRS to obtain information regarding the status of their 

correspondence audit case; (3) the numerous telephone inquiry calls taxpayers or their tax 

representative make to the IRS which go unreturned; and (4) the IRS employees routinely 

closing cases without having reviewed correspondence submitted by the taxpayer. The IRS will 

7 IRS Oversight Board letter, dated January 11, 2012, to Edward Karl, AICPA Vice President-Taxation. 

S National Taxpayer Advocate 2009 Annual Report to Congress, December 31, 2009, Volume 1, page 158. 

9 Ibid, page 15&. 
35 


80396.013

need to continue to address these kinds of issues in order to reduce taxpayer's burdens related to 

correspondence audits. 

IRS delays in the posting or proper handling of correspondence mailed by a taxpayer to the IRS 

stands out as a huge concern of CPAs about the correspondence examination program. This is 

consistent with a February 2011 report of the Treasury Inspector General for Tax Administration 

(TIGTA).IO According to the report, the IRS indicated to the IRS Oversight Board in 2009 that it 

would target three areas for improvements regarding its correspondence audit program, including 

mail processing. The TIGTA report discusses a "judgmental sample" of 24 default cases after 

receiving concerns that IRS employees were not following proper procedures in handling 

taxpayer correspondence. In 17 of these cases, it was concluded that IRS staff did not consider 

the taxpayers' correspondence prior to closure of the cases. Moreover, in 10 of these 17 cases, 

the taxpayers' correspondence was not input into the IRS's computer system within the required 

time period, resulting in the IRS employees involved with the correspondence audit program not 

being aware that correspondence had been received prior to closure of the cases. 

The 2011 TIGTA report mentions that the Wage & Investment Division (W&I) began piloting a 

centralized model for processing incoming mail at the Austin Compliance Site in February 2010. 

This pilot provided for the centralization of all mail processing and it included flexibility in 

planning and staffing. The TIGT A report states that the IRS planned on implementing this 

model at all W &1 and Small Business/Self-Employed compliance sites by June 2011. I 

recommend that the Senate Finance Committee obtain updated information from the IRS 

regarding how these new centralized mail processing procedures are presently working. 

Unfortunately, based on the informal reactions of other CPAs, no discernible improvements in 

the handling of taxpayer correspondence mailed to the IRS in response to a correspondence 

examination have been seen. Thus, to the extent problems continue with mail processing, even 

with these new centralized procedures in place, I recommend that the managers of IRS 

employees become more involved with resolving issues with respect to correspondence audit 

cases more than 6 months old. 

With respect to faster account resolution, I suggest that the IRS explore the potential for 

expanding its e-Services suite of web-based products to handle correspondence submitted by a 

tax professional on a taxpayer's behalf. Currently, certain tax professionals with proper 

authorization may use e-Services for disclosure authorization, electronic account resolution, and 

transcript delivery. If e-Services could be expanded to effectively act as a "portal" for 

correspondence submitted on the taxpayer's behalf, I believe significant opportunities might be 

created for resolving correspondence examinations more timely, including the prospects that the 

correspondence submitted through e-Services might be electronically date-stamped as to its 

submission date. 

10 See Treasury Inspector General for Tax Administration Report on "Progress Has Been Made to Re-Engineer the 

Examination Program, but Additional Improvements Are Needed to Reduce Taxpayer Burden, February 18,2011. 
36 


80396.014

Correspondence Examinations and Taxpayer Rights 

In addition to its February 2011 report, TIGTA has released a number of reports raising concerns 

about the correspondence examination program and taxpayer burden. Similarly, in her 2011 

report to Congress, National Taxpayer Advocate Nina Olson raises significant concerns about 

the IRS's ability to respond to telephone calls and correspondence from taxpayers. II I join CP As 

and other tax professionals who support TIGTA's and the National Taxpayer Advocate's 

concerns about the linkage between improving taxpayer service and the ability of the IRS to 

properly address taxpayer rights. The IRS has made positive strides by improving its telephone 

customer service lines and the handling of taxpayer correspondence, but obviously further 

improvements are warranted. 

As part of a correspondence examination, taxpayers are often requested to substantiate specific 

tax deductions like miscellaneous itemized deductions, state and local income taxes, and real 

estate taxes. However, it appears that the IRS may be making this substantiation request to a 

large number of taxpayers who happen to be in an alternative minimum tax position, where these 

types of deductions have no impact on the taxpayer's ultimate tax liability. The net result is a 

"no-change" audit for the taxpayer and a waste of IRS resources. I suggest that the IRS create an 

additional "filter" for its correspondence audit selection process to remove these types of cases 

from the IRS's active case file. My last correspondence audit involved a request to substantiate 

miscellaneous itemized deductions. Knowing that such amounts were fully supportable and 

being unable to contact anyone at the IRS to explain why such efforts on my part would be 

wasted, I simply advised my client to comply rather than to risk a default judgment. Had 

additional filters been in place or had a dedicated person at the IRS been available for 

consultation, the increased time, fees and effort could have been minimized and/or avoided. I 

see signs of progress in the process with the recognition that there is more work to be done. 

3. DUE DATES 

I would like to highlight S. 845, the Tax Return Due Date Simplification and Modernization Act 

of 2011, introduced by Senator Michael Enzi and co-sponsored by Senator Olympia Snowe. 

While many of the original and extended due dates for important tax and information returns 

have been in place for years, S. 845 recognizes that compelling reasons now exist for changes in 

these due dates. This proposed legislation has also received the sup:port of the American Institute 

of Certified Public Accountants and its Tax Executive Committee. 2 

The interconnectedness of business entities and those who own them now demand a more logical 

flow of information between parties. Tax returns no longer serve only as a means for taxpayers 

to self-report and pay their tax liability to the government. Taxpayers, as part of their tax 

compliance process, equally rely upon the return information of others to properly report their 

own tax liability to the government. Individuals, S corporations, C corporations, trusts and other 

partnerships may all invest in or operate partnerships and, if they do, require Schedules K-I 

(Form 1065) before completing their returns. S. 845 highlights that the current two-step due-date 

11 National Taxpayer Advocate 2011 Annual Report to Congress, December 31,2011, Volume One, op. cit., page 9. 

12 Letter to The Senate Finance Committee and House Committee on Ways & Means dated October 8, 2010 by 

Patricia Thompson. 
37 


80396.015

system for most major returns does not reflect a logical flow of information between or among 

parties; and thus, the legislation acknowledges that change in the current due date structure is 

imperative. 

Historically, calendar-year C and S corporations have been required to file their tax returns by 

March 15th (with an extension, to September 15th) while individuals, trusts and partnerships 

have been required to file by Af.ril 15th (with an extension to October 15th). Since January 

1997, when the "check-the-box1 " regulations became effective and "eligible" entities found it 

easy to file as partnerships, the formation of new limited liability companies, limited liability 

partnerships and similar state law entities (collectively, LLEs) increased exponentially resulting 

in a dramatic increase in the number of partnership returns being filed. Understandably, the 

number of individuals and entities, including Sand C corporations, trusts and estates that invest 

in LLEs and other federal tax partnerships has grown significantly causing a dramatic increase 

in the number of taxpayers that rely on information from partnerships and other pass-through 

entities in determining taxable income. 

The use of tiered partnership structures has also increased in recent years - and with it, the 

complexity of tax compliance -- by vehicles such as hedge funds, master limited partnerships, 

business trusts, series LLCs and private equity funds to address nontax issues such as litigation 

and other risks and to facilitate increasingly complex financial transactions. Further, the 

increased complexity of the Code and other tax laws has resulted in the need for significantly 

greater information gathering and analysis. In this new environment, practitioners and taxpayers 

often find that the current ordering of tax return due dates for partner (i.e., individual, C 

corporation, S corporation, trust, or other partnership) and partnership make the timely filing of 

complete and accurate returns difficult, if not impossible to meet. In far too many cases, it has 

become impossible for the ultimate owner of a partnership interest to obtain the information 

needed to prepare tax returns on a timely basis. Increasingly complex partnership transactions 

and reporting requirements have added to return preparation time as additional analysis time is 

needed to ensure accuracy. 

Thus, S. 845 strives to address these problems and improve the prospects for the timely filing of 

the tax returns of partners, returns that are often not prepared by the same individual or firm that 

prepared the partnership's return. I encourage Congress to pass this legislation and help 

modernize the tax return due dates and to correct the mismatch of information flow that persists 

in the system today. By doing so, Congress will continue to improve the taxpayer experience. 

4. BASIS REPORTING 

The IRS views information reporting as a great opportunity for increasing compliance by 

taxpayers. Unfortunately, it can also result in an increase in burden for taxpayers. It is in this 

context that many CP As are concerned about the issue of basis reporting. I have been hearing 

from many CP As about the challenges they faced with respect to the just completed filing 

season. One of the biggest challenges involved the Forms 1099-B taxpayers are receiving from 

brokerage firms regarding the "covered" and "uncovered" securities sales taxpayers made during 

2011. While brokers were generally required to mail the Forms 1099-B to taxpayers by February 

13 See Treasury Reg. §§301.7701-1 through 301.7701-3. 
38 


80396.016

15 to ensure timely filing of a taxpayer's return, it seems like many brokers have had great 

difficulties in compiling and reporting the information correctly to taxpayers on a timely basis. It 

is my understanding that this situation has resulted in major financial institutions having 

requested extensions of the February 15 transmittal due date to taxpayers. 

CPAs are also reporting that wide divergences exist in the format brokerage firms are following 

with respect to reporting information on Form 1099-B. It almost seems as though nobody's 

Form 1099-B is the same from broker to broker. For example, one CPA's client has reported 

that his Form 1099-8 actually lists trades that never took place, or it lists amounts for securities 

trades that are not correct. For other clients, I have heard reports that some brokerage houses 

have inadvertently reported certain securities sales as "covered" when they should have reported 

as "uncovered" and vice versa. I have observed inconsistent reporting in my own practice. 

Another aspect of this dilemma involves the reporting complexities of Schedule D and Form 

8949 which the IRS has adopted for reporting securities sales on 2011 tax returns. The IRS 

appears interested in entering into a dialogue with CP As and other tax professionals regarding 

the complexities with basis reporting. Some possible solutions to the complexities involved with 

basis reporting include (among others): (1) standardization of the way brokers report securities 

sales and basis on Form 1099-8; and (2) a suggestion that the IRS forgo "matching" of basis 

information for purposes of 20 11 tax returns. 

The 2011 tax year was the initial year that would require credit and merchant card-paying 

companies to issue tax filing reports to the merchants that they paid related to credit card 

transactions. Thus, each major credit card company was required to report to each merchant the 

amount of money that was paid to the merchant, above certain levels, related to credit card 

processing payments. The stated intent of the reporting requirement was to increase the tax 

reporting accuracy from businesses related to credit card payments received. These payments 

are reported on the new 1099-K form. 

However, in late December 2011, the IRS, after listening to various constituents and internally 

reviewing the known weaknesses in the initial filing season of the 1099-K, opted to still require 

the filing of the forms but to delay enforcement of compliance as long as there was real intent by 

the reporting parties to comply with the filing obligations. Common thought among the 

practioner community has been that the IRS will not be attempting to match these I099-Ks to tax 

filings until the short-comings in the reporting system can be resolved. I would strongly 

recommend that the IRS be encouraged to do the same thing related to the new 1099-8 reporting 

system. This forgoing of the match will permit the additional issues to be resolved prior to 

needless correspondent type audits being conducted to match against misreported 1099-8 

information. 

Again, thank you for this opportunity to present my views and I wish you well in your efforts to 

improve the taxpayer experience. 
39 


80396.017

WRITTEN STATEMENT OF 

TERESA THOMPSON 

LOCAL TAXPAYER ADVOCATE 

MONTANA 

HEARING ON 

FILING SEASON 2012 

BEFORE THE 

COMMITTEE ON FINANCE 

UNITED STATES SENATE 

APRIL 26, 2012 
40 


80396.018

Chairman Baucus, Ranking Member Hatch, and distinguished Members of the 

Finance Committee: 

Thank you for inviting me to testify about the issues my office faced during the 

2012 tax filing season and the assistance we provide to taxpayers located in 

Montana. I am the Local Taxpayer Advocate (LTA) for the state of Montana. My 

office is in Helena, the state capital, where I have a staff of four extremely 

dedicated advocates to help me serve the taxpayers in Montana. 

There are over 70 Local Taxpayer Advocates like myself around the nation, with 

at least one in every state, the District of Columbia, and Puerto Rico. We are all 

part of the Taxpayer Advocate Service (TAS) , which is an independent 

organization within the IRS. We report to the National Taxpayer Advocate (NTA), 

who in turn is charged with submitting independent reports directly to the Senate 

Finance and House Ways and Means Committees. 

TAS acts as a safety net for taxpayers. Our goal is to help taxpayers resolve 

problems with the IRS that they cannot resolve by themselves. Sometimes 

taxpayers need our help because the IRS is administering the tax law in a way 

that creates or aggravates a financial difficulty, emergency, or hardship. In those 

cases, we compel the IRS to move faster than it normally does. Sometimes 

taxpayers need our help because their cases involve unique facts and the IRS is 

taking a "one-size-fits-all" approach that does not resolve their problems. In 

other situations, the taxpayer has tried to resolve the problem through normal 

channels with the IRS, but the process has simply broken down, making 

resolution impossible without our help. 

The chart below shows the top five issues we have received in the Montana T AS 

office through the first half of fiscal year (FY) 2012. 

Chart 1: Top five TAS issues in Montana, based on percentage of new case 

receipts from Oct. 1, 2011 thru Mar. 31, 2012* 

10.00% 9.3% 9.00% 

8.00% 

7.00% 

6.00% 

5.00% 

4.00% 

3.00% 

2.00% 

1.00% 

0.00% 

Identity Audit Levy Process Injured 

Theft Rework Amended Spouse 

Return Claim 

'Source: Taxpayer Advocate Management Information System (TAMIS) database. 
41 


80396.019

The following chart shows the top five issues in T AS nationwide through the first 

half of FY 2012. As you can see, although my office is relatively small, the cases 

we receive from Montana taxpayers mirror the problems of other taxpayers 

across the country, particularly in identity theft, levy issues, and reworking closed 

audits. 

Chart 2: Top Five TAS Issues nationwide, based on percentage of new case 

receipts from Oct. 1, 2011 thru Mar. 31, 2012* 

18.00% 

16.00% 

14.00% 

12.00% 

10.00% 

8.00% 

6.00% 

4.00% 

2.00% 

0.00% 

Identity Refund Hold Levy 

Theft Wage 

Verification 

'Source: TAMIS database 

Audit Open Audit 

Rework 

Local Taxpayer Advocates, like myself, serve as a bridge between the 

bureaucratic and legal complexity of the IRS and the individual, business. and 

nonprofit taxpayers who sometimes become entangled in that complexity. We 

advocate within the I RS for the taxpayers who need our services. In fact. at T AS 

we call ourselves "Your Voice at the IRS." 

In my testimony today. I will make the following points: 

1. Budget and staff reductions at IRS toll-free sites and walk-in offices are 

making voluntary compliance by Montana taxpayers more difficult. 

2. The introduction of Virtual Service Delivery (VSD) with two-way video 

conferencing between T AS and Montana citizens could make it easier for 

taxpayers in states like Montana to voluntarily comply with the tax law. 

3. The dramatic increase in tax-related identity theft cases in the last few 

years is harming Montana taxpayers, whether or not they are victims of 

tax-related identity theft themselves. 

4. IRS correspondence audits are frustrating, time-consuming, and 

ineffective for many Montana taxpayers. 
42 


80396.020

5. Congress should always consider the unique status of Indian Tribal 

Governments when drafting new federal tax legislation. 

6. The Low Income Taxpayer Clinic in Montana helps disadvantaged 

taxpayers meet their federal tax obligations and protect their rights 

I. Budget and staff reductions at IRS toll-free sites and walk-in offices 

are making voluntary compliance by Montana taxpayers more difficult. 

The TAS office in Montana has experienced staffing cutbacks in FY 2012, as 

have other TAS offices, and the IRS as a whole. For example, my office has not 

had a secretary to answer the phone during the entire filing season. 

a. The IRS does not do a good job of answering its phones. 

As I mentioned previously, mine is the only TAS office for the entire state of 

Montana. As you can imagine, we hear from a wide variety of taxpayers. For 

instance, taxpayers and their representatives call us if they cannot reach an IRS 

toll-free site because the lines are too busy. We also hear from taxpayers who 

live too far away from an IRS Taxpayer Assistance Center (TAC), i.e., a walk-in 

office, to visit personally. Sometimes, we hear from taxpayers who just want a 

"live person" to help them because they cannot navigate through the IRS phone 

system. 

In January, February and March, the phone logs in my office show that we 

answered 717 calls that were not related to cases we were currently working for 

taxpayers in T AS. We provided direction to these taxpayers or answered their 

questions whenever possible. I personally answered about 80 percent of the 717 

calls that were not related to cases. I patiently listened to the callers' frustration 

about the complexity of the tax code and their inability to reach IRS personnel to 

answer their questions. 

b. TAS taxpayers suffer when taxpayers cannot reach the IRS. 

The time my staff and I spend on the phone with these taxpayers takes us away 

from the taxpayers who really need our help. These are the taxpayers whose 

cases we have accepted into T AS because their problems have reached the 

point where they need our advocates to resolve them. 

We assign an employee, called a Case Advocate, who takes personal 

responsibility for the taxpayer's problem until it is fixed. I am privileged to have 

three such employees working for me in Helena, plus an employee called an 

Intake Advocate who screens taxpayers for entry into TAS. My staff consists of 

the most efficient, hard-working group of people I have ever had the pleasure to 
43 


80396.021

work with in my 38 years with the IRS. I am proud to say that they are a 

microcosm of TAS employees throughout the country. 

However, when the IRS cannot answer its phones or staff its walk-in offices, my 

staff and I are frequently pulled away from the very people who have been 

assigned to us because their problems are so serious. The majority of taxpayers 

assigned to my office are Montana residents, so when the IRS cannot answer its 

phones or staff its walk-in offices, Montana residents with the most serious 

problems pay the price. 

As a remedy, I would suggest the following: 

• The IRS needs to answer its toll-free phone numbers so confused and 

frustrated taxpayers get the help they need; and 

• The tax code should be simplified so any taxpayer can understand his or 

her tax obligation and not wonder how it came to be. 

c. There is no IRS Appeals Officer in Montana. 

The IRS has no Appeals Officers in Montana and nine other states, plus Puerto 

Rico, and has no Settlement Officers in Montana and fourteen other states. 1 This 

means that when taxpayers or their representatives need a face-to-face meeting 

with an Appeals Officer, an Appeals "circuit rider" must arrange to travel to 

Montana to meet with them. It would seem appropriate to have an Appeals 

presence in Montana to afford taxpayers the right to an Appeals hearing with 

someone familiar with local tax issues. As noted in the National Taxpayer 

Advocate's 2009 Annual Report to Congress, the Office of Appeals should 

provide a convenient conference opportunity for taxpayers upon their request. 2 

d. The IRS walk-in site in Helena operates part-time and has no 

permanent staff. 

My T AS office is located in the federal building in Helena, which also houses the 

IRS TAC office. What I want to share with you is this rather amazing fact: The 

TAC office in Helena, the capital of Montana, has no permanent staff. IRS 

employees from other offices in Montana rotate into and out of the Helena office. 

Further, during this filing season, the TAC office in Helena has been closed on 

Mondays and Fridays and is open for about five hours per day on Tuesdays and 

1 According to recent data, ten states do not have Appeals Officers. They are Alaska, Arkansas, 

Idaho, Kansas, Montana, New Mexico, North Dakota, Rhode Island, Vermont, and Wyoming. In 

addition, 15 states do not have Settlement Officers. They are Alaska, Arkansas, Delaware, 

Hawaii, Idaho, Iowa, Kansas, Maine, Montana, North Dakota, Rhode Island, South Dakota, 

Vermont, West Virginia, and Wyoming. Appeals Officers handle appeals involving assessment 

issues, such as audit assessments and refund claims. Settlement Officers handle appeals 

involving tax collection issues. See IRS, Human Resources Reporting Center, Organizational 

Location Reports (Apr. 7, 2012). 

2 National Taxpayer Advocate 2009 Annual Report to Congress 346-350. 
44 


80396.022

Thursdays. Wednesday is the only day of the week that the T AC office in the 

state capital is open all day. 

In addition, the TAC office in Helena does not prepare tax returns for taxpayers, 

unless they meet certain income and complexity criteria. The office used to 

prepare returns with less stringent restrictions, but no longer does so. Many of 

the taxpayers who call my office have been affected by the reduction in hours 

and service at the T AC, especially by the lack of help preparing returns during 

filing season. 

II. The introduction of Virtual Service Oelivery (VSO) with two-way video 

conferencing between T AS and Montana citizens could make it easier for 

taxpayers in states like Montana to voluntarily comply with the tax law. 

a. VSD makes sense for Montana taxpayers. 

Virtual Service Delivery provides a two-way videoconferencing environment in 

which taxpayers and the IRS can interact face-to-face. Having a VSD site, or 

sites, available for taxpayers to request T AS assistance and provide 

documentation to help us work their cases would be a big asset for a 

geographically vast state like Montana. This system would give TAS and the IRS 

a cost-effective method of resolving the time-sensitive taxpayer issues that come 

in daily to the Helena TAS office from all over the state. Taxpayers in remote 

areas such as the towns of Havre, Miles City, Glendive, and the Fort Peck Indian 

Reservation would benefit from the use of two-way videoconferencing 

technology. The IRS and TAS are piloting virtual services in a limited number of 

offices nationwide and hope to expand the program soon. My employees and I 

look forward to being able to offer these services to taxpayers throughout 

Montana. 

b. VSD makes sense for the IRS, especially when it conducts 

correspondence audits. 

The virtual service concept could be especially valuable in helping resolve 

problems with the IRS's correspondence audits. The IRS conducts these audits 

by mail, fax, and telephone, with the taxpayer and auditor never meeting in 

person. Using two-way videoconferencing, a taxpayer could easily supply 

documentation for items questioned on a tax return and the auditor could 

complete the audit quickly. This would reduce the expensive downstream costs 

associated with unsuccessful repeat contacts, audit reconsideration, and appeal 

requests. It would also reduce the need for taxpayers to contact my office for 

help because they were unable to communicate directly with IRS auditors. 

In a recent blog post, National Taxpayer Advocate Nina Olson sums this up by 

saying 
45 


80396.023

And wouldn't we want to be sure that our exam processes are designed to 

elicit the correct result, and are at least flexible enough to consider 

different ways of proving a taxpayer's tax return position? After all, 

taxpayers are a very diverse group. Shouldn't a tax agency be able to 

accommodate its taxpayers' diverse abilities to read, communicate orally, 

obtain documentation, and explain themselves?3 

How better to do that than by using technology to communicate in person with 

taxpayers who don't happen to live near an IRS office? 

III. The dramatic increase in tax-related identity theft cases in the last 

few years is harming Montana taxpayers, whether or not they are victims of 

tax-related identity theft themselves. 

During the 2012 filing season, Montana TAS cases have reflected trends that 

exist in TAS nationwide, as well as in the IRS as a whole. In particular, Montana 

has experienced an increase in refund-related identity theft cases. As the chart 

below illustrates, the upward trend in identity theft receipts in Montana is 

following the national trend upwards, simply on a smaller scale. 

Chart 3: Identity Theft Cases Received in the First Six Months of FY10, 

FY11, and FY12 (October 1 through March 31 for each fiscal year)* 

20 

Montana 15 

Receipts 

10 

I 

I /-

I //1 

I /* I 

.,,/ //'r/ I I 

18,000 

16,000 

14,000 

12,000 

10,000 

8,000 

6,000 I I _ I' 1 4~OO 

5 ' 

o _I- J------.1 :,000 

~- Mar FY10 I Mar FY111~ar FY12 I .. ------- -----1---'-""- ""--"'''-''-,-''''''-' I ill! !40ntana 10 Theft 7 ,4 27 I ~eipts ~ 1 

I". National 10 Theft - 6,427- I 10,272 -"15.921"-1 ~(:_",i!'!S __ ,, __ L _______ ~___ __J 

Source: Business Performance Management System. 

National 

Receipts 

3 Virtual Face-to-Face Audits: A Prescription for Curing the IRS's Ailing Correspondence 

Examination Process, NTA Blog, April 4, 2012, available at www.TaxpayerAdvocate.irs.gov/blog. 
46 


80396.024

In my office alone, we have six Montana taxpayers whose identities we believe 

were involved in a single scheme that resulted in returns being filed in the 

eastern part of the country under their stolen Social Security numbers. These 

taxpayers experienced financial hardships as a result. We have been working 

with the IRS to issue their legitimate refunds to them and correct the damage 

from the scheme. 

Some taxpayers filing legitimate returns are also caught up in the IRS's system of 

detecting identity theft. The IRS uses electronic filters that are intended to 

screen out fraudulent refund returns, but also sometimes stop legitimate refunds 

from being issued. When that happens, these taxpayers often come to my office 

with financial emergencies because they were depending on the refund to make 

ends meet. We act immediately in such cases to help them prove their returns 

are legitimate, so the IRS can issue their refund. 

From my viewpoint, I would suggest the following: 

• The IRS needs to put more resources into assisting taxpayers 

experiencing significant tax problems caused by identity theft; and 

• At the same time, the IRS needs to continue improving its fraud detection 

filters for identity theft, to avoid harming innocent taxpayers. This is a tall 

order for an agency experiencing staffing cutbacks. 

IV. IRS correspondence audits are frustrating, time-consuming, and 

ineffective for many Montana taxpayers. 

a. The outcome of correspondence audits is biased in favor of the IRS 

because the IRS communicates with taxpayers impersonally. 

In recent years, the IRS has expanded the use of correspondence audits. In 

these audits, the IRS communicates with the taxpayer by mail. The taxpayer 

never sees the auditor in person. The taxpayer can attempt to call the audit unit 

assigned his case, but will often reach different people every time he calls and 

frequently receive a different answer with each call. 

The Montana T AS office continues to receive correspondence audit cases that 

exhibit taxpayer frustration and lack of communication by the IRS throughout the 

audit process. When a taxpayer or taxpayer representative tries to contact the 

IRS during a correspondence audit, they are unlikely to reach a "live" body and 

often must leave a message that may not be returned. If taxpayers do reach an 

IRS employee on a call and can discuss their case, they will probably not reach 

the same person the next time they call. 

The case advocates in my office regularly hear from taxpayers who want "one 

IRS auditor" to work with on their case, which is how we handle casework in 

TAS. The IRS should begin assigning cases to audit employees who will work 
47 


80396.025

the case from beginning to end, contact the taxpayer by telephone if necessary, 

and receive any mailed documentation needed to resolve the case. 

b. The IRS misplaces or loses taxpayer correspondence during 

correspondence audits. 

Taxpayers undergoing a correspondence audit have come to the Montana TAS 

office advising us they have sent information to the IRS multiple times and have 

never received any acknowledgment. What happens to this mail? Taxpayers 

and their representatives are frustrated by having to send large amounts of 

records to IRS campuses, sometimes more than once and at significant cost, 

with no acknowledgement or acceptance by the IRS. If one person were 

assigned to a case, that person would be more likely to receive the mail and 

associate it with the case. Taxpayers subjected to other types of IRS audits, 

such as office or field audits, are each given one auditor who handles their case. 

I do not believe that this is too much to ask in a correspondence audit. 

c. The IRS is expanding correspondence audits to inappropriate tax 

returns. 

The IRS is expanding its use of correspondence audits to returns that do not 

have specific, clear-cut issues. One such issue that the Montana TAS office has 

increasingly seen is correspondence audits of employee business expenses. 

The volume of documentation required to verify employee business expenses is 

often immense and can include mileage logs, motel receipts, automobile 

expenses, employer reimbursement statements, and much more. Further, the 

interpretation of the documentation in these audits frequently requires the auditor 

to make subtle distinctions between what is allowable and what is not. The type 

and volume of documentation, plus the nuanced interpretations required, do not 

lend themselves to a correspondence audit, in which the taxpayer never has an 

opportunity to clarify disputed items in person. These types of audits require 

trained auditors capable of discussing issues and the basis for determinations 

with taxpayers and representatives .. 

Based on the TAS cases in Montana, I would suggest the following remedies: 

• The IRS should conduct additional training in areas such as employee 

business expenses; and 

• The IRS should encourage its correspondence auditors to be reasonable 

and employ sound judgment. 

V. Congress should always consider the unique status of Indian Tribal 

Governments when drafting new federal tax legislation. 

Indian Tribal Governments have a unique status in federal tax law. They "are 

'semi-sovereign' entities, or 'distinct, independent political communities' within the 
48 


80396.026

borders of the state in which they reside."4 This fact is sometimes overlooked 

when legislation for credits and deductions is written. 

A recent case in the Montana TAS office provides an example of this situation. 

The adoption credit found in Internal Revenue Code (IRC) § 36C allows for an 

adoption of a "special needs" child as defined in IRC § 36C(d)(3). A "special 

needs child" is a child who is difficult to place for adoption because of a certain 

factor or condition, such as the child's ethnic background, age, membership in a 

minority or sibling group, or medical condition. Under the Code, only States are 

allowed to certify that the special needs requirements in the Code have been met 

for a specific child. Another part of the Code, Section 7871, explains when an 

Indian Tribal Government may be treated as a State for tax purposes. 

Unfortunately, Section 7871 of the Code does not provide that an Indian Tribal 

Government is a State for the purposes of certifying a special needs child. 

This means that taxpayers adopting special needs children directly from tribal 

reservations, without any involvement by a State, can be denied the adoption 

credit because they do not have a certification from a State. In some instances, 

the adopting parents need the adoption credit urgently. Our office had just one of 

these cases this past filing season. 

Native American family structure, which can consist of multiple generations living 

together in one household, affects eligibility for credits and deductions, such as 

the EITC, Child Tax Credit, and dependency exemptions. This is another issue 

we find in our casework in Montana. Tribal governments are unique, require 

guidance separate and apart from other entities, and should always be 

considered when federal tax legislation is written. 

VI. The Low Income Taxpayer Clinic in Montana helps disadvantaged 

taxpayers meet their federal tax obligations and protect their rights. 

T AS provides an additional safety net for some taxpayers through its 

administration of the Low Income Taxpayer Clinic (L1TC) matching grant 

program. L1TCs provide representation on behalf of low-income taxpayers in 

disputes with the IRS and educate taxpayers for whom English is a second 

language about their rights and responsibilities as U.S. taxpayers. The IRS 

awards matching grants to these organizations on the condition that they provide 

services to taxpayers for free or for a nominal fee. 

In Montana, the L1TC at Montana Legal Services Association (MLS) uses pro 

bono attorneys located across the state to assist low-income taxpayers. MLS 

conducts outreach on tax issues to Native Americans, migrant farm workers, 

veterans, senior citizens, and other low-income individuals and families. The 

clinic conducts outreach on reservations and through churches, senior centers, 

community groups, government agencies, and other social service providers. 

4 IRM 4.86.1.5(3), Tribal Sovereignty Overview (Jan. 1, 2003). 
49 


80396.027

MLS and other LlTCs located in rural areas face their own challenges in assisting 

taxpayers. First, it is difficult to reach and serve taxpayers across a wide 

geographic area. Many low income taxpayers in rural areas are isolated -

geographically, culturally, and technologically. They may have limited education, 

literacy, or job skills. They may lack access to reliable transportation, telephone, 

or internet services. Yet, these taxpayers still need help with a variety of tax 

problems, such as proving eligibility for the Earned Income Tax Credit, obtaining 

Innocent Spouse relief, or successfully negotiating an offer in compromise. In 

addition, it is often difficult to find attorneys in remote areas who are willing and 

able to represent low income taxpayers on a pro bono basis. Consequently, 

LlTC staff members provide mentorship, supervision, and training to participating 

attorneys about the unique tax issues that confront low income individuals. 

VII. Conclusion 

My office faces many of the same challenges as other small offices in T AS 

nationwide. However, we also face the unique challenge of serving the public in 

a state the size of Montana. 

We must have adequate staffing to deliver vital services to Montana taxpayers in 

TAS, but my staffing concerns extend beyond TAS, to the IRS personnel in TAC 

offices and the Appeals officers who are not located in Montana. The services 

these offices provide are essential in promoting voluntary compliance. T AS may 

not be the first call taxpayers make if there are appropriate alternatives. 

Publicizing our services throughout the state can be difficult. Providing easy and 

fast access to TAS and the IRS by VSD two-way videoconferencing, especially in 

correspondence audits, would help us overcome this geographic barrier. The 

increasing use of correspondence audits by the IRS, especially in inappropriate 

situations such as employee business expense audits, will continue to generate 

T AS cases that reflect confusion and frustration by taxpayers and inaccurate 

decisions by the IRS. The IRS must take steps to improve its communication 

and assistance to taxpayers in the correspondence audit process. 

With the continued rise in identity theft throughout our nation, I expect my office 

will continue to receive more identity theft cases. Finally, as an advocate for all 

of the taxpayers in Montana, I ask you to consider Indian Tribal Governments 

and Native Americans whenever new tax legislation is considered. 

Thank you for giving me this opportunity to testify. 
50 


80396.028

Senate Finance Committee Hearing 

"Tax Filing Season: Improving the Taxpayer Experience" 

April 26, 2012 

Responses to Questions for Ms. Teresa Thompson 

Questions from Senator Orrin Hatch 

1. Levels of taxpayer service have already decreased at the IRS. If the health spending law 

is implemented, the IRS would be forced to deal with administering tax credits that are 

given to 23 million people who are newly enrolled in the health exchanges by 2019. 

In addition, 3.9 million people will be subject to the individual mandate penalty 

according to CBO's April 22, 2010 analysis, and the IRS is the agency responsible for 

administering that penalty. 

Therefore, won't levels of taxpayer service decline even further as IRS resources for 

taxpayer service are diverted to deal with the health spending law? 

The IRS does its best to implement new laws and programs that Congress directs it to administer. 

Implementation of the health insurance law would undoubtedly mean more work for the IRS. Its 

ability to implement the law with accuracy and minimal taxpayer burden will depend 

significantly on resources. If the IRS is given sufficient resources, it should be able to do the 

job. If the IRS is not given sufficient resources, it will struggle both in performing its traditional 

tax-collection responsibilities and in administering the new law. Either way, the IRS will 

continue to do its best to fulfill the tasks Congress assigns it with the resources provided. 

2. The IRS has certainly seen benefits from technological advances. However, I want to 

know what technology would be helpful for the IRS to use, but is either not being used or 

is being underutilized? And why isn't that technology being utilized, or fully utilized? 

Virtual Service Delivery (VSD) through the use of two-way videoconferencing is a technological 

advance that has the potential to significantly henefit taxpayers and tax administration. This 

technology could be made available for all types ofIRS contacts and would be a cost-effective 

method for resolving time-sensitive issues that come in daily to the IRS. VSD is currently being 

used by the IRS in limited locations throughout the country. VSD is underutilized because of 

funding limitations. To chronicle the benefits of this technology will require expansion to 

additional sites, like Montana, which will require additional funding. As the Local Taxpayer 

Advocate for a rural state where travel time to an IRS office is often measured in hours and 

hundreds of miles, I believe developing and deploying technology that allows taxpayers to 

communicate directly with IRS personnel would greatly improve taxpayer service and has the 

potential to enhance tax compliance as well. 
51 


80396.029

WRITTEN TESTIMONY 

OF 

BETH TUCKER 

DEPUTY COMMISSIONER 

OPERATIONS SUPPORT 

INTERNAL REVENUE SERVICE 

BEFORE 

SENATE FINANCE COMMITTEE 

"TAX FILING SEASON: IMPROVING THE TAXPAYER EXPERIENCE" 

APRIL 26, 2012 

INTRODUCTION AND SUMMARY 

Chairman Baucus, Ranking Member Hatch, and Members of the Senate Finance 

Committee, thank you for this opportunity to testifY on the 2012 tax filing season and the 

IRS's progress on some key programs. 

The 2012 filing season is winding down and is going smoothly. As of March 31, 2012, 

the IRS received over 91 million individual returns. We have issued more than 75 million 

refunds for a total of $213 billion, as compared to 75 million refunds for a total of $220 

billion over the same time period in 2011. The average dollar refund was approximately 

$3,000, about the same as last year. During the same time period, the IRS directly 

deposited 62 million refunds to taxpayers, as compared to 61 million last year - a nearly 

two percentage point increase. The number of savings bonds being requested by 

taxpayers owed a refund is up by 16 percent and the dollar value of those bonds requested 

is up by 57 percent, to more than $11 million. 

Of note, the IRS e-file program continues to grow. This year the individual e-file rate 

continues to trend upward - a very positive development - while returns filed on paper 

continue to fall. Later in my testimony, I provide more statistics and information on the 

filing season. 

Mr. Chairman, the IRS is vital both to the functioning of government and keeping our 

nation and economy strong. In FY 2011, the IRS collected $2.415 trillion in taxes, 

representing 92 percent of Federal Government receipts. The IRS processed more than 

144.7 million individual returns during the 2011 filing season and issued almost 110 

million refunds totaling $345 billion that traditionally help boost consumer spending and 

savings. 

The IRS is also proud of its record over the past few years as we have made tangible 

progress on a number of strategic initiatives while carrying out our core duties, such as 

delivering a smooth filing season in 2011 - in spite of the late passage oflegislation. The 

following are some of the more prominent programs and initiatives, including certain 

core programs that demonstrate how targeted investments can deliver real value to 

taxpayers and our nation. Gains in customer service can be found in the Filing Season 

section of my testimony. 
52 


80396.030

CADE2 Launch 

I want to highlight first a major milestone for the IRS and our tax system that occurred 

earlier this year the successful stand-up ofCADE2 (Customer Account Data Engine). 

Since the I 960s, the IRS has performed its core account processing, which includes basic 

taxpayer information such as current account balance, outstanding amounts due, and any 

recent payments, on a weekly basis. 

I am pleased to report that in January 2012, the IRS successfully migrated from a weekly 

processing cycle to daily processing. CADE2 was a multi-year, incredibly complex 

undertaking, which went to the heart of systems that process trillions of dollars in tax 

revenue. Again, this is a major milestone for the IRS. 

Our state-of-the-art database will become the sole authority source of individual taxpayer 

account data and will replace the legacy master file tapes. And of note, when we 

converted master file data from the legacy tapes to the new database, the financial 

information going back to the 1960s balanced to the penny. 

CADE 2 addresses a multitude of issues that have historically created challenges and 

problems in the tax system. It will provide more up-to-date information at the fingertips 

of our customer service representatives that will enable faster resolution of taxpayer 

account issues and account adjustments both of which will greatly help taxpayers and 

the IRS. 

And CADE2 will correct one of the biggest problems we have when a taxpayer calls 

about a payment he or she made, but our representative cannot tell whether it has been 

posted or not. It will also eliminate structural technology problems that could lead to timelag problems, such as when notices are sent to taxpayers. 

Practitioners will see quicker updates to web-based applications, and faster taxpayer 

notices. The CADE2 database will also allow IRS to consider offering a wider range of 

web-based, self-initiated service solutions that could fundamentally change the way 

taxpayers interact with the IRS and potentially provide greater operational efficiencies. 

In addition, CADE2 supports sophisticated, next-generation service and compliance 

systems, which will improve overall compliance through better taxpayer information, 

enhanced workload selection and advanced decision analytics. 

Return Pre parer Program 

The Return Preparer Program is one of the most important initiatives the IRS has 

undertaken in recent memory. Our goal is to leverage preparers' expertise and 

commitment to quality service to improve the integrity of the tax system. 

Boiled down to its essence, the program will ensure a basic level of competency for 

return preparers while enabling us to focus on addressing those who produce low-quality 
53 


80396031.eps

returns or who are downright unscrupulous. First, we had to identifY all preparers and 

have them register. 

Since September 2010, almost 840,000 individuals have registered and obtained a 

Preparer Tax Identification Number, or PTIN, and are now in our tax professional 

database. And we are learning some interesting facts about not only the size, but the 

nature ofthe tax preparer community. For example, over 60 percent ofPTIN holders are 

not attorneys, CP As, or enrolled agents and, prior to this effort, were not required to 

demonstrate competency or meet any set of consistent standards. 

Once PTIN registration was in place, we began the next phase of the program aimed at 

ensuring a minimal level of competency for all return preparers. In November 2011, we 

launched a new competency test for certain tax return preparers who prepare Form 1040 

returns but who are not attorneys, CPAs, or enrolled agents, or supervised by one of them 

in a firm. These individuals also have a new requirement to complete 15 hours of 

continuing education each year from IRS-approved providers. 

Let me add also that from the beginning we planned to exempt CP As, attorneys, and 

enrolled agents from the testing and continuing education requirements as they already 

have more stringent testing and education requirements. 

As we've set up the registration, testing and continuing education components of our 

return preparer initiative, it is also important that we focus on finding unscrupulous 

preparers who damage the good name of honest return preparers and undermine the 

overall tax system; therefore, we are developing a comprehensive strategy to focus on 

preparer enforcement and compliance. 

Our compliance efforts will be focused on places of highest risk - where the vast 

majority of pre parers who play by the rules should want us to focus. 

We will also continue to conduct undercover shopping visits to return preparers suspected 

of engaging in fraud, and we will continue to work closely with the Department of Justice 

to pursue civil or criminal action against unscrupulous return preparers. 

Budget Trends 

Over the last several years, the IRS budget requests have reflected strategic investments 

in the IRS that serve to reduce the deficit, along with substantial efficiency and other 

targeted reductions that reflect our commitment to effective stewardship of the resources 

that we are given. 

These savings and efficiencies reflect an across-the-board commitment to finding better 

and more efficient ways to administer the tax system. They come from a variety of 

sources, including reductions in outside contracts, training and all but case-related travel. 
54 


80396.032

However, even with these efficiencies, the IRS would not have been able to meet the 

level of budget reduction enacted for FY 2012 without substantially reducing our 

workforce. The IRS had already instituted an agency-wide hiring freeze and has only 

been replacing attrition on an exception basis. Attrition savings were not sufficient to 

meet the 2012 levels, though, so the IRS resorted to voluntary incentives designed to 

accelerate retirements of those who were retirement-eligible, or close to eligible. As of 

March 5, 2012, these incentives - known as Voluntary Separation Incentive Payments 

(V SIPs) were given to approximately 1,000 workers. As a result of these measures, the 

IRS has approximately 5,000 fewer staff on the payroll this filing season compared to last 

year. Of the 5,000, approximately 3,000 were associated with enforcement activities, with 

the balance of the reduction principally coming from taxpayer service functions. 

Enforcement 

Turning to enforcement, the IRS continues to run robust compliance programs. We 

continue to have appropriate and balanced audit coverage rates across taxpayers and to 

innovate in our collection programs. Through our Offshore Voluntary Disclosure 

Programs, we have collected more than $4.4 billion to date from those hiding money 

overseas, and that number will grow as the IRS processes the 20 II cases. 

In FY 20 II, IRS compliance activities returned $55.2 billion to the Treasury as a result of 

our examination and collection programs. While the direct revenues brought in by IRS 

activities are important, the indirect effects are far more substantial and important. A 

strong and fair enforcement program serves to support over $2 trillion that is paid on a 

timely basis every year without the need for direct enforcement measures. 

It should be underscored that IRS enforcement revenues do not include billions of dollars 

in attempted refund fraud that is stopped by IRS up-front fraud detection programs. 

Overall, IRS identified and prevented the issuance of over $14 billion in fraudulent 

refunds in 2011. Identity theft is a subset of this overall refund fraud. Moreover, this filing 

season, we have expanded our work on several fraud filters which catch not only identity 

theft but other fraud. In this area we have stopped roughly as much so far this filing season as 

we stopped last calendar year. 

In short, despite a quickly evolving taxpayer base and unprecedented demands on IRS 

resources, the IRS continues to deliver for the American people. 

People 

The IRS' workforce is our greatest asset. Three years ago, Commissioner Shulman 

embarked on a campaign to make the IRS the best place to work in the Federal 

Government. This past November, the" Partnership for Public Service released the results 

of the 2011 Best Places to Work in Federal Government survey. The IRS ranking 

improved yet again, moving over a two-year period from a ranking of 127 to a ranking of 

65 out of the 240 participating agencies. And, we are now ranked third out of 15 large 

agencies (those with over 20,000 employees) in the employee engagement index from the 

survey. 
55 


80396.033

In addition, our own employee engagement index - which measures the degree of 

employees' motivation, commitment and involvement in the mission of the organization 

- and the job satisfaction index both remained stable compared with last year. In other 

words, we saw no erosion of the substantial gains we had made over the past few years. 

The fact that our survey results showed that our employees remain engaged, motivated 

and committed, regardless of the external environment, is a testament to the 

professionalism and deep commitment to service woven into the culture of the IRS. 

THE 2012 FILING SEASON & TAXPAYER SERVICE 

Mr. Chairman, although the budget reduction for FY 2012 has had an impact, there is 

much of which to be proud this filing season. Let me stress that providing quality 

taxpayer service throughout the year, but especially during the filing season, is important 

if we are to help taxpayers get it right from the start and avoid making unintentional 

errors. 

Assisting taxpayers with their questions before they file their returns prevents inadvertent 

noncompliance and reduces burdensome post-filing notices and other interactions with 

the IRS. 

The IRS continues to provide taxpayers with quality customer service and different 

service channels and products. We recognize that we must never stop innovating to meet 

the service needs of an increasingly diverse taxpayer base and must serve taxpayers when 

and where they need it. 

Our broad portfolio of customer service channels run the gamut from traditional walk-in 

sites for those who need to see an IRS representative face-to-face, to toll-free automated 

and assistor telephone service, and web-based applications and social media. All make it 

easier for taxpayers to file and pay their taxes. 

Providing high-quality customer service also means assisting taxpayers who are facing 

tough economic times. For example, in March we announced a major expansion of our 

"Fresh Start" initiative to help struggling taxpayers by taking steps to provide new 

penalty relief to the unemployed and making Installment Agreements available to more 

people. Under the new Fresh Start provisions, part of a broader effort started at the IRS in 

2008, certain taxpayers who have been unemployed for 30 days or longer will be able to 

avoid failure-to-pay penalties. In addition, the IRS is doubling the dollar threshold for 

taxpayers eligible for Installment Agreements to help more people qualify for the 

program. 

We received an important sign of the progress the IRS is making on customer service: 

every year, the American Customer Satisfaction Index survey is conducted and for 2011, 

the survey of taxpayers showed satisfaction with our services reaching 73 on a scale of 

100 among all individual tax filers. That score is a three-point jump from a year earlier 
56 


80396.034

and our highest score since we began participating in the survey that began in 1994. 

Satisfaction among people who filed electronically came in even higher at 78. This is a 

tremendous step in the right direction and one that we will build upon in the future. 

Submission Processing, Refunds and E-flling 

Mr. Chairman, let me turn to the 2012 filing season. As of March 31,2012, the IRS 

received over 91 million individual returns. Overall individual filing is up two percent 

compared to the same time period last year. 

The IRS e-file program continues to grow. This year the individual e-file rate is trending 

higher than last year - a very positive development. On the other hand, paper returns are 

dropping. 

For FY 2011, it cost only 15 cents to process an e-filed return a fraction of the $3.55 it 

takes to process a paper return. And with e-file, taxpayers get their refund faster, with 

fewer data processing errors that can lead to problems later in the process. 

Indeed, taxpayers filing electronically can get their refunds as soon as 10 to 21 days upon 

acknowledgement of receipt by the IRS. This compares favorably with the six week 

average time frame for processing a paper tax return. 

I would be remiss if! did not acknowledge that in the first few weeks of the tax filing 

season, we experienced some delays in processing a subset of e-filed returns. These were 

temporary issues that affected a subset of taxpayers who filed in late January and early 

February, and the issues were resolved by mid-February. And, even with the delays, the 

IRS was generally delivering refunds in our nonnal 10 to 21 day time frame. I recognize 

that this group of taxpayers encountered delays this filing season and we regret any 

inconveniences. 

It bears mentioning that the overall average refund timeline remained steady in FY 2012 

when compared to FY 2011. In other words, the delays were isolated to early issues in 

the filing season, and after that IRS was processing tax returns according to normal 

refund timelines. 

At the same time, combating refund fraud, including identity theft, can also affect the 

time frame of delivering a refund. As previously noted, we are continually improving our 

screens and filters to help us identify and block fraudulent returns. For most taxpayers, 

these measures do not impact refund time lines. However, it can add time to processing 

for some. There is clearly a delicate balance here. 

We cannot manually inspect 100 million refunds to ensure all are correct - nor is there 

any justification for doing so. The IRS has a dual mission when it comes to refunds, 

particularly when they are generated in whole or in part by tax credits. Refundable and 

other tax credits are provided to achieve important policy goals, such as relieving poverty 

or boosting the economy. 
57 


80396.035

The IRS must deliver refunds in the intended timeframe, while ensuring that appropriate 

controls are in place to minimize errors and fraud. We must balance the need to make 

payments in a timely manner with the need to ensure that claims are proper and taxpayer 

rights are protected. 

Toll-Free Telephone Performance 

High quality toll-free telephone service - both assistor and automated - is an extremely 

important tool in answering taxpayer questions, helping them navigate an extremely 

complex tax code and making voluntary compliance easier. 

For the current filing season through March 31, 2012, IRS telephone assistors answered 

11 million calls as compared to 13 million calls over the same period last year. Due to 

budget constraints, fewer resources are available to staff our toll-free operations. As of 

March 31, 2012, Assistor Level of Service stood at 68 percent versus 75 percent in 2011. 

This is largely a result of reduced budget resources provided in the FY 2012 budget as 

enacted, which means fewer assistors available to answer taxpayer phone calls. 

Taxpayers also completed 36 million automated calls - a one-third increase over last 

year's 27 million calls, reflecting in part a growing taxpayer appetite for quality selfserve options and the time savings of not having to wait for a live assistor. 

Accuracy rates for both customer tax law and account questions remain in the 90-plus 

percentile with minimal change over last filing season's levels. 

Website Usage and New Media 

IRS.gov continues to be the favorite source of information for millions of taxpayers. As 

of March 31, 2012, there were over 200 million visits to IRS.gov - a 26 percent increase 

over the same time period last year. Use of the "Where's My Refund" electronic tracking 

tool continued to post double-digit yearly gains. IRS.gov/Espanol offers many of the 

same services and information in Spanish. 

Taxpayers can also use electronic tools, such as the Earned Income Tax Credit (EITC) 

Assistant, to determine if they qualifY for the refundable tax credit and a withholding 

calculator to help them determine the right amount of tax to withhold from their 

paychecks. 

The Interactive Tax Assistant (ITA) is an expanded resource this filing season that 

provides consistent answers to a limited number of tax law questions using a probe and 

response process. The ITA will guide taxpayers to accurate answers that are not readily 

addressed through simple Frequently Asked Questions. 
58 


80396.036

In FY 2011, the IRS received a Compuware Gomez "Best of the Web" award, which 

recognized IRS.gov as one of the best websites in government for performance and 

quality and first in consistency. 

The IRS is also increasingly communicating with taxpayers who may not get their 

information from traditional sources, such as newspapers and broadcast and cable news. 

By employing social and new media, such as You Tube, Twitter and even iTunes, we are 

able to reach these taxpayers with important service and compliance messages. Last year, 

the IRS also unveiled IRS2Go, its first smartphone application that lets taxpayers check 

on the status of their tax refund and obtain helpful tax information. This new smartphone 

application reflects our ongoing commitment to modernizing the agency and engaging 

taxpayers where and when they want. 

For example, during the week of February 10-17,2012, our YouTube Video "When Will 

I Get My Refund?" had more than 254,000 views. Our "tweet" and subsequent "retweets" on the "Dirty Dozen" tax schemes reached almost 28,000 people. The IRS Video 

in English is currently the 4th most viewed Federal Government YouTube channel with 

nearly three million total views. 

Virtual Service Delivery 

In October 2011, the IRS began testing the use of video communication technology to 

deliver services to taxpayers. This technology is located in 10 of the 400 Taxpayer 

Assistance Centers, two IRS partner sites in Prescott, Arizona and Bellefonte, 

Pennsylvania, and one in Tampa, Florida serving taxpayers seeking assistance from the 

National Taxpayer Advocate. Taxpayers will find many ofthe typical services available 

at an IRS office, such as assistance with letters and notices, tax law and procedural 

questions, and case advocate appointments. Services are limited to those that do not 

involve the exchange of paper, such as accepting payments or tax returns. In May, two 

additional sites will give taxpayers using the services of the Low Income Tax Clinics 

access to Appeals Officers. 

These pilots provide the IRS an opportunity to (l) seek service delivery alternatives 

outside IRS facilities; (2) improve the utilization of resources (3) optimize staffing and 

balance workload, and (4) increase access to face-to-face service where currently not 

available. 

Taxpayers participating in the pilot will visit an IRS office, and walk up to a high 

definition videoconference monitor that is connected to an employee in another location. 

The taxpayer and IRS employee will be able to see and talk to one another live, face-toface while the employee provides assistance. The high resolution equipment facilitates 

document (driver's license, passport or IRS notice) viewing by holding in front of the 

camera. 

As of mid-March, the IRS has served over 8,000 taxpayers using video conferencing. So 

far, taxpayers that have used the technology are satisfied with an 87 percent overall 
59 


80396.037

satisfaction rate and 92 percent of taxpayers indicating they would use the technology in 

a future visit. 

Taxpayer Assistance Centers (TACs) 

As of March 24, 2012, approximately two million taxpayers were served at TACs. In 

addition to IRS help, community organizations partner with the IRS on services such as 

tax preparation and counseling. For example, Volunteer Income Tax Assistance (VITA) 

programs assist people who earned $50,000 or less, and Tax Counseling for the Elderly 

programs assist individuals age 60 and over with their 2012 income tax return preparation 

and electronic filing. Many of these sites have Saturday hours while others offer 

assistance at various times during the week. Over two and a half million taxpayers have 

been served by volunteer return preparation through April I, 2012. 

On January 28, 2012, the IRS launched on IRS.gov a locater tool called "Get Free Tax 

Help." The easy-to-use locater tool helps taxpayers find VITA sites, where free tax return 

preparation assistance is available. The locater tool provides the opportunity to enter a 

Zip Code and a range (in miles) from that zip code, and then allows the taxpayer to select 

a list of the closest available VITA sites. Taxpayers will be able to browse further details 

about the VITA site, including address, contact information, hours of operations, and 

languages supported. In addition, taxpayers can easily get directions to the VITA site by 

using the integrated Google Maps feature. To date, more than 115,000 visitors have 

accessed the tool from IRS.gov. This tool replaces 52 pages of content on the website. 

Limited English Proficiency (LEP) 

Today, the IRS offers language services to LEP taxpayers, thereby affording them the 

same access to Federal benefits and services as English speakers. We now have more 

than 2,300 bilingual employees who provide services to LEP taxpayers; a Spanish 

language web site; and a Multilingual Gateway that provides information in Chinese, 

Vietnamese, Korean and Russian. A telephone interpreter service is also available in 

more than 170 languages, and more than 600 tax products have been translated into 

languages such as Spanish, Chinese, Vietnamese, Russian and Korean. 

CONCLUSION 

In conclusion, let me thank you again, Mr. Chairman and the Committee for this 

opportunity to discuss the 2012 filing season and the progress on some of our strategic 

initiatives. The IRS continues to make improvements, innovate and better serve taxpayers 

- even in a difficult budget environment. This is a great tribute to our employees and 

management. I would be happy to answer any questions. 
60 


80396.038

Senate Finance Committee Hearing 

"Tax Filing Season: Improving the Taxpayer Experience" 

April 26, 2012 

Questions for Ms. Beth Tucker 

Questions from Senator Orrin Hatch 

Levels of taxpayer service have already decreased at the IRS. If the health spending 

law is implemented, the IRS would be forced to deal with administering tax credits 

that are given to 23 million people that are newly enrolled in the health exchanges 

by 2019. 

In addition, 3.9 million people will be subject to the individual mandate penalty 

according to CBO's April 22, 2010 analysis, and the IRS is the agency responsible 

for administering that penalty. 

Therefore, won't levels of taxpayer service decline even further as IRS resources for 

taxpayer service are diverted to deal with the health spending law? 

Answer: The IRS is constantly balancing the need to implement the laws on the books, 

provide services to taxpayers, follow up on potential non-compliance, and invest for the 

future in information technology and workforce development. To answer your specific 

question, the Administration's budget request includes the funding needed for the IRS to 

administer the nation's tax laws. 

2. The IRS has certainly seen benefits from technological advances. However, I 

want to know what technology would be helpful for the IRS to use, but is either not 

being used or is being underutilized? And why isn't that technology being utilized, 

or fully utilized? 

Answer: Over the long run, the IRS will benefit from using technologies to enable 

electronic interactions with taxpayers. While we continue to develop our technology 

capabilities to support these interactions, we also must be careful to ensure that we are 

able to properly authenticate the identity of the taxpayers with whom we interact. The 

IRS has initiatives underway to explore these issues and potential solutions. The 

Administration's 2013 budget request includes funding to strategically invest in state-ofthe-art technologies, such as online taxpayer services, that will enhance the taxpayer 

experience while helping the IRS to cope with increasing service demands in a costeffective manner. 

Additionally, the IRS continues to develop the CADE 2 program to build capabilities for 

other systems to use data for enhanced queries and data analytics resulting in more timely 

decision making for compliance activities. Finally, a new technology referred to as 
61 


80396.039

Massively Parallel Processing may offer new opportunities to speed processing and 

matching oflarge volumes of data to improve the IRS's ability to detect, resolve, and 

prevent non-compliance. 

Question from Senator John Kerry 

Ms. Tucker, you may be familiar with the recent D.C. district court decision 

invalidating the long-distance telephone tax refund program and remanding the 

issue back to the IRS to develop a better remedy. I am troubled by the small 

percentage of poor individuals, senior citizens and small businesses who never filed 

for tax refunds. Could you tell us how the IRS plans to proceed on this to ensure 

more people and businesses receive refunds? 

Answer: To date, the IRS has made more than 100 million refunds of overcollected 

telephone excise tax, totaling more than $5.8 billion. Nonetheless, there are many 

individuals and businesses who never requested a refund of the telephone excise tax. But 

the Service's ability to ensure that more people and businesses receive refunds is limited 

because it is dependent on taxpayers coming forward to identify themselves and the 

amounts of tax that they had paid to the telecommunication companies. The IRS has no 

information regarding either the identity of the telephone customers who originally paid 

the tax to telecommunication companies or of the amount paid by each customer. The 

telecommunication companies were unable to assist the IRS by providing this 

information. 

From the outset of the program, the IRS recognized one impediment to taxpayers 

obtaining refunds was the difficulty in determining the amount of tax they had paid and 

provided safe harbor amounts that individual taxpayers could receive without making any 

attempt to document their actual taxes paid. For businesses, the IRS provided an 

estimation procedure based on the last month of telecommunication bills for which the 

tax had been collected. The IRS engaged in an extensive communication strategy to 

encourage taxpayers to come forward and request their refunds. 

At our request, TIGT A studied why small business taxpayers had not come forward to 

request refunds of the telephone excise tax. The study concluded that the primary reason 

was that small businesses believed that the likely refund amounts did not justify the work 

and expense involved in preparing the refund requests. TIGTA Audit Report 2008-30-

175 The Telephone Excise Tax Refund Was Not Claimed on Business Tax Returns 

Primarily Because of the Perceived Work and Expense Involved to Do So. No similar 

study was prepared with respect to individuals, but we believe that many chose not to file 

requests simply because the amount of the refund ($30-$60 safe harbor amounts) did not 

justify the effort of completing a tax return for those without any other filing obligation. 

The recent district court opinion does not directly bear on the reasons for taxpayer lack of 

participation in the refund program. The appellate court held that the IRS' decision, 

announced in Notice 2006-50, that it would not process telephone excise tax refunds 
62 


80396.040

claims that were submitted on Forms 843, the form specified in Treasury Regulations, 

affected a taxpayer right. (The IRS required taxpayers to request excise tax refunds using 

their 2006 income tax returns.) As such, the court held the Notice was substantive within 

the meaning of the Administrative Procedure Act and should only have been promulgated 

after notice and comment. The district court implemented the appellate mandate by 

invalidating Notice 2006-50 prospectively. 

The IRS will now process claims for refund submitted on Forms 843, but we do not 

believe this will result in an appreciably greater number of refund requests being 

submitted. Whether an income tax retum or a Form 843 is used, a taxpayer must still 

either use one of the permitted estimation methods or establish the actual amount of taxes 

paid. Nearly six years have now passed since the last amount of excise tax on long 

distance service was collected. Records of taxes paid are undoubtedly even less available 

now than in 2006, so the difficulty in substantiating a refund amount must be greater. 

The IRS recently issued Announcement 2012-16 to remind taxpayers to submit requests 

for refunds of telephone excise taxes by July 27, 2012. 
63 


80396.041

GAO 

For Release on Delivexy 

E,,:pected at 10:00 a.m. EDT Thursday, April 26, 2012 

GAO-12-652T 

United States Government Accountability Office 

Testimony 

Before the Committee on Finance, 

U.S. Senate 

INTERNAL REVENUE 

SERVICE 

Opportunities to Improve 

the Taxpayer Experience 

and Voluntary Compliance 

Statement of James R. White, Director 

Strategic Issues 

GAO 

Accountabmty * Integrity * Reliability 
64 


80396.042

Highligh!!; Of GAQ.12-6S2J •• testimOny beforelhaComrnllieeoo Finance, U$, 

Senate 

Wl!y G,AO Did This Study 

TWU.S, tax system depends on 

taxpayers calculating thekta. liabiltiy, 

filing their tax return, and payin~ what 

theY"iNe on.time-,-what (so(ten 

;;~~~~;~°C!~1:!:~~~=:~~e~ numbElto(J~f$, includi!19lhe quality 

of I"S's aSl;istanoe to taxpayers, 

knowledge l!jal./ts enforcement 

pr09rams are elf'l"tlve, and a belief 

that the )aX.sYstem is fair aQd other 

!",ople all> paying their shar!> of taxes. 

\foluntary compliance is also 

irifiuetlGeif by:other parties, )neluding 

paid tax. re'turn preparers; lax software 

oof!1p~t:tie$,)~~ it1fpr:ma~lon return 

f~et1' (elT)ploy!:>(s, flnancialinstliutions, 

ahi! "t!\ers Who "'Pt\I1inCOI)1i> or expense i.nformatldn about taxpayerS 

to IRS), Fllrtihis ti>slirrQny, GAO was 

ailked.fo (f) evaluate the current state 

of IRS's' perforl11!,nceand its effect on 

the lax!"'yer experi,moe, and(2) 

Idenb1jt opporWnltles to Improve the 

taxpayer ~~Per,ienCe aJ?'d votuntarycompliance. Tnislestimony is based 

on prior GAO reports and 

reCommendations. Additlonally, GAO 

anal)'Zed IRS dataindelivennll 

selee!ect taxPayer services in r~cent 

years. 

What GAO Recommends 

GAO ha~ mad~ numerous prlqr 

recommenllafiQhs thaI could help 

improve tihe taxpayer experience. 

Congress anl:lIRS have acted on 

som!Hecon:miendalions"while others 

are refl(:!¢~ed in thEtstrategies 

presented in 1his testimony. 

View GAO~12-652i: For more information, 

CO!1tact James ft While at (202) $12-9110 or wtliteJ@gao.gov. 

_'i.4Ih 

INTERNAL REVENUE SERVICE 

Opportunities to Improve the Taxpayer Experience 

and Voluntary Compliance 

What GAO Found 

The Intemal Revenue Service (IRS) has made improvements in processing tax 

retums, and electronic filing (e-filing), which provides benefits to taxpayers 

including faster refunds, continues to increase. However, as the following table 

shows, IRS's performance in providing service over the phone and responding to 

paper correspondence has declined in recent years. For 2012, as with previous 

years, IRS officials attribute the lower performance to other funding priorities. 

IRS's Performance for Telephone Service and Paper Correspondence, Fiscal Years 2007 

::,th~ro:::U.'09h~2:::0..:.13=-___________________ ·2inOC<-12'- 2013 

n:===== __ -,2",O",07c_-",20",O""8-,2",O,,,09,--~2~01=O 2011 planned planned Percentage of callers 

seeking and receiving live 

assistance 82.1 52.8 70 74 70.1 61.0 63.0 

Average walt time for 

callers (in minutes) 4.4 10.4 8.8 10.8 13.0 18.8 1R8 

Percentage of paper 

correspondence not 

resolved within 45 da~ 17 23 25 27 35 nla nla 

legend: n/a = not applicable. 

Sources: IRS Oversight Board, IRS's CongreSSIonal Budget JlIStiflcation, ami GAO Reports, 

Following are among the opportunities to Improve the taxpayer experience and 

increase voluntary compliance that GAO identifies in this testimony: 

IRS can provide more self-service tools to give taxpayers better access 

to information. IRS can create an automated telephone line for amended 

returns (a source of high call volume) and complete an online services 

strategy that provides justification for adding new self-service tools online. 

Better leveraging of third parties could provide taxpayers with other 

avenues to receive service. Paid preparers and tax software providers 

combine to prepare about 90 percent of tax returns. IRS is making progress 

implementing new regulation of paid preparers. As it develops better data, 

IRS should be able to test strategies for improving the quality of tax return 

preparation by paid preparers. Similarly. IRS may also be able to leverage 

tax software companies. 

Expanded information reporting could reduce taxpayer burden and 

improve accuracy. Expanded information reporting, such as the recent 

requirements for banks and others to report businesses' credit card receipts 

to IRS, can reduce taxpayers' record keeping and give IRS another tool. 

Implementing modernized systems should provide faster refunds and 

account updates. Modernized systems should allow IRS to conduct more 

accurate and faster compliance checks, which benefits taxpayers by 

detecting errors before interest and penalties accrue. 

Expanding pre-refund compliance checks could result in more efficient 

error correction. Expanding such checks could reduce the burden of audits 

on taxpayers and their costs to IRS. 

Reducing tax complexity could ease taxpayer burden and make it 

easier to comply. Simplifying the tax code could reduce unintentional errors 

and make intentional tax evasion easier to detect. 

_____________ Unlted States Government Accountability Office 
65 


80396.043

Chairman Baucus, Ranking Member Hatch, and Members of the 

Committee: 

Thank you for the invitation to be here today to discuss how to improve 

the taxpayer experience. 

The U.S. tax system depends on taxpayers calculating their tax liability, 

filing their tax return, and paying what they owe on time. The taxpayer 

experience is at its best when taxpayers are able to fulfill these 

responsibilities independently without intervention from the Internal 

Revenue Service (IRS). This is often referred to as voluntary compliance. 

Some of the obvious influences on taxpayers' willingness and ability to 

voluntarily comply include the quality of IRS's service to taxpayers, 

knowledge that IRS's compliance checks and collection programs are 

effective, and the belief that the tax system is fair and that others are 

paying their share of taxes. Perhaps less obvious is the role of third 

parties, including paid tax return preparers, tax software companies, and 

information return filers (employers, financial institutions, and others who 

report income or expense information about taxpayers to IRS) in 

influencing voluntary compliance. 

The taxpayer experience also depends on how IRS deals with taxpayers 

who fail to voluntarily comply by helping taxpayers correct unintentional 

errors, and identifying and pursuing taxpayers who intentionally try to 

evade taxes. 

Maximizing voluntary compliance is especially important today given the 

nation's large structural budget deficits and the size of the tax gap. Earlier 

this year, IRS estimated the gross tax gap-the difference between taxes 

owed and taxes paid on time-at $450 billion for tax year 2006. IRS 

estimated that it would eventually collect $65 billion of this through 

enforcement actions and late payments, leaving a net tax gap of $385 

billion. 

My statement today focuses on two areas: (1) evaluating the current state 

of IRS's performance and its effect on the taxpayer experience, and (2) 

identifying opportunities to improve the taxpayer experience and voluntary 

compliance. To address these objectives, we reviewed and summarized 

prior GAO reports and recommendations. Additionally, we obtained and 

analyzed IRS data in delivering selected taxpayer services in recent 

years. We discussed newly reported information in this statement with 

IRS officials. Additional information on the scope and methodology of 

underlying work is available in published products, referenced throughout 

Page 1 GAO-12-652T 
66 


80396.044

Taxpayers Have 

Benefitted from 

Improved Processing, 

but IRS's Service to 

Taxpayers Has 

Declined 

Increased Electronic Filing 

Contributes to Greater 

Return Accuracy and 

Faster Processing 

this statement. We conducted our work in April 2012 in accordance with 

generally accepted government auditing standards, Those standards 

require that we plan and perform the audit to obtain sufficient, appropriate 

evidence to provide a reasonable basis for our findings and conclusions 

based on our audit objectives, We believe that the evidence obtained 

provides a reasonable basis for our findings and conclusions based on 

our audit objectives, 

Taxpayers' experience depends heavily on IRS's performance during the 

tax filing season, roughly mid-January through mid-April. 1 During this 

period, millions of taxpayers who are trying to fulfill their tax obligations 

contact IRS over the phone, face-to-face, and via the Internet to obtain 

answers to tax law questions and information about their tax accounts, 

This period is also when IRS processes the bulk of the approximate 140 

million returns it will receive, runs initial compliance screens, and issues 

over 100 million refunds, In recent years, IRS has improved its returns 

processing but has seen its taxpayer service performance deteriorate, 

For years we have reported that electronic filing (e-filing) has many 

benefits for taxpayers, such as higher accuracy rates and faster refunds 

compared to filing on paper. So far in 2012, the percentage of e-filed 

returns has increased by 1,9 percentage pOints to 88,8 percent since 

about the same time last year (a 2.2 percent increase), as table 1 shows, 

Since the same time in 2007, the percentage of e-filed returns has 

increased from 72,3 percent to 88,8 percent. This year, IRS may meet its 

long-held goal of having 80 percent of individual tax returns e-filed, 

However, the overall e-file percentage is likely to decline as the tax filing 

season ends since IRS typically receives more returns filed on paper later 

in the filing season, In addition, IRS is in the midst of a multi-phase 

modernization project, known to as the Customer Account Data Engine 

(CADE) 2, which will fundamentally change how it processes returns, 

With CADE 2, IRS also expects to be able to issue refunds in 4 business 

days for direct deposit and 6 business days for paper checks after IRS 

processes the return and posts the return data to the taxpayer's account. 

1The filing season year is the year in which the taxpayer files the tax return, usually the 

year after a taxpayer has earned income on which tax is due (which is referred to as the 

tax year). 

Page 2 GAO-12-652T 
67 


80396.045

Table 1: Processing Data for January 1 through Mid-April, 2007 through 2012 

Number of individual tax returns processed 

(in thousands) 

Electronic (in thousands) 

Paper (in thousands) 

Percentage electronically filede 

Number of refunds issued (in thousands) 

Amount of refunds (dollars in millions) 

Average refund amount 

Taxpayer Service Has 

Declined 

Percentage 

change from 

2007 2008 2009 2010 2011 2012 2011 to 2012 

105.159 114.737 112.612 107,158 107.401 105,668 -1.6 

76.034 84,935 89,268 88.330 93.306 93.846 0.6 

29.125 29.801 23.344 18.828 14.094 11.822 -16.1 

72.3 74.0 79.3 82.4 86.9 88.8 2.2 

88,168 89.898 93,438 88,676 88.157 86,078 -2.4 

$203,022 $214,264 $250,635 $257,324 $252.596 $237,750 -5.9 

$2,303 $2,383 $2,682 $2,902 $2,865 $2,762 -3.6 

8oorce: GAO analysis of IRS relurn proc~6lfig data. 

Notes: Data are from January 1 of each year through April 20, 2007; April 18, 2008; April 17, 2009; 

April 16, 2010; April 15, 2011; and April 13,2012. Some figures and totals may vary slightly due to 

rounding. 

flThe percentage of returns filed electronically early in the filing season is likely to decline before the 

filing season is over. Taxpayers filed about 78 percent of all individual returns electronically in 2011. 

Early in the 2012 filing season, IRS experienced two processing problems 

that delayed refunds to millions of taxpayers, and reported the problems 

had been resolved by mid-February. We summarized these problems in 

an interim report on the 2012 filing season.' 

Providing good taxpayer service is important because, without it, 

taxpayers may not be able to obtain necessary and accurate information 

they need to comply with tax laws. In addition, more and more, taxpayers 

are relying on IRS's website to obtain information and execute 

transactions, making it important that IRS have a modern website. 

However, as we have reported, IRS has experienced declines in 

performance in selected taxpayer service areas, most notably with 

respect to providing live telephone assistance and timely responses to 

2GAO, Internal Revenue Service: Interim Results of 2012 Tax Filing Season and Summary 

of the Fiscal Year 2013 Budget Request, GAO-12-566 (Washington, D.C.: Mar. 20 2012). 

Page 3 
68 


80396.046

taxpayers' correspondence. 3 When taxpayers do not get timely responses 

from IRS to paper correspondence or have access to information online, 

they call IRS, correspond again, or seek face-to-face assistance-all of 

which are costly to IRS and burdensome to the taxpayer. Table 2 shows 

the declines in telephone service and paper correspondence and the 

goals for 2012 and 2013. Additional performance data is shown in 

appendix I. 

Table 2: IRS's Performance for Telephone Service and Overage Paper Correspondence, Fiscal Years 2007 through 2013 

Performance measure (in percent) 2007 2008 2009 2010 2011 2012 planned 2013 planned 

Assistor calls 

Percentage of caners seeking live assistance 82.1 52.8 70 74 70.1 61.0 63.0 who receive it 

Average wait time (in minutes) 4,4 10,4 8.8 10.8 13.0 18.8 18.8 

Overage paper correspondence (in percent)li 17 23 25 27 35 n/a nfa 

Legend: nla = not applicable. 

Sources. 2009 and 2010 IRS Ovws'llht Board Annua! Reports to Congress, the fiscal year 2013 COt\gress.ional Justmcatlon for IRS and 

GAO reports 

aiRS generally considers paper correspondence that is not resolved within 45 days to be overage. 

IRS does not have a performance measure for taxpayer correspondence that includes providing 

timely service to taxpayers, which we recommended in 2010. See, GAO, 2010 Tax Filing: IRS's 

Performance Improved in Some Key Areas, but Efficiency Gains Are Possible in Others, GAO-11-111 

(Washington, D.C.: Dec. 16, 2010). 

So far in the 2012 filing season, as the following examples illustrate, 

declines in taxpayer service have continued (further information on 

telephone service trends is in appendix II). 

The level of telephone service (taxpayers seeking and receiving live 

telephone assistance) is about 68 percent so far during the 2012 tax 

filing season, down about 7 percentage pOints from 2011. This 

represents a significant decline from fiscal year 2007 level, when the 

level of service was 82 percent. 

The average wait time to talk with an assistor increased to about 16 

minutes (from 9.5 minutes in 2011). In fiscal year 2007, the average 

wait time was just under 5 minutes. 

3See GAO-12-566; and 2011 Tax Filing: Processing Gains, but Taxpayer Assistance 

Could Be Enhanced by More Seft-Service Too/s, GAO-12-176 (Washington, D.C.: Dec. 

15.2011). 

Page 4 GAO-12-6S2T 
69 


80396.047

Opportunities Exist to 

Improve the Taxpayer 

Experience and 

Voluntary Compliance 

More SelfService Tools to Give 

Taxpayers Better Access to 

Information 

IRS has also lowered its telephone service and average wait time goals 

(meaning it expects wait times to be longer) for fiscal year 2012. IRS's 

goal for the 

level of telephone service is 61 percent, down from 71 percent in 

fiscal year 2011 and 82 percent in fiscal year 2007; and 

average wait time to speak to an assistor is 18.8 minutes, an increase 

from 11.6 minutes in fiscal year 2011 and 4.3 minutes in fiscal year 

2007. 

For 2012, as with previous filing seasons, IRS attributes the lower 

performance and goals to other funding priorities. For information on how 

IRS sets goals, see our recent report. 4 

To improve the taxpayer experience and voluntary compliance, IRS has a 

range of options. Some of its options could provide taxpayers with better 

information to accurately fulfill their tax obligations. Other options would 

allow IRS to take enforcement actions sooner and with less burden on 

taxpayers. Simplifying the tax code could reduce unintentional errors and 

make intentional tax evasion harder. 

The recent declines in telephone service and increases in overage paper 

correspondence highlight the need to offer more self-service tools to 

taxpayers, particularly through IRS's automated telephone lines and 

website. Better self-service has the potential to reduce the demand to 

speak to live assistors, a relatively high-cost service, and reduce wait time 

for taxpayers. To improve the taxpayer experience and help taxpayers 

meet their obligations voluntarily, we recently recommended and IRS 

agreed to: 

create an automated telephone line for taxpayers seeking information 

on the status of an amended return, a source of high call volume;' 

'GAO-12-176. 

SGAO-12-176. 

Page 5 GAO-12-6S2T 
70 


80396.048

Better Leveraging of Third 

Parties Could Provide 

Taxpayers With Other 

Avenues to Receive 

Service 

Paid Preparer Regulations 

develop an online locator tool listing volunteer tax preparation sitesIRS introduced an enhanced volunteer site locator tool in 2012;6 and 

complete an Internet strategy that provides a justification for online 

self-service tools as IRS expands its capacity to introduce such tools.7 

In addition to actions we recommended, IRS is also studying ways to 

better communicate with taxpayers and determine which self-service tools 

would be the most beneficial to taxpayers. According to IRS officials, the 

study should be completed later this year. Identifying more efficient ways 

to provide service also benefits IRS because it is able to make better use 

of scarce resources. 

As intermediaries between taxpayers and IRS, paid preparers prepare 

about 60 percent of all tax returns filed and they playa critical role in 

answering taxpayers' questions and filing tax returns. Based in part on 

our reports and recommendations, IRS is implementing new regulations 

for paid preparers, such as registration, competency testing and 

continuing education requirements." IRS's goals for the preparer 

regulation program include leveraging relationships with paid preparers 

and improving the accuracy of the returns they prepare. We recently 

reported that IRS plans to develop a comprehensive database containing 

information on paid preparers and the tax returns they prepare. 9 IRS 

plans to use information from this database to test which strategies are 

~GAO, Tax Administration: Opportunities Exist for IRS to Enhance Taxpayer Service and 

Enforcement for the 2010 Filing Season, GAO-09-1026 (Washington, D.C,; 

Sept. 23, 2009). 

'GAO-12-176. 

BGAO, Tax Preparer Regulation: IRS Needs a Documented Framework to Achieve Goal of 

Improving Taxpayer Compliance, GAQ..11-336 (Washington, D.C.: Mar. 31, 2011). 

'GAO-11-336. 

Page 6 GAO·12-652T 
71 


80396.049

Tax Preparation Software 

Volunteer Sites 

most effective for improving the quality of tax returns prepared by different 

types of paid preparers. Likewise, IRS has discussed how to measure the 

effect of the requirements such as requiring continuing education and 

testing on tax return accuracy. It will take years to implement the 

approach as it will likely evolve over time and become more detailed. 

Tax preparation software is another critical part of tax administration. 

Almost 30 percent of taxpayers use such software to prepare their returns 

and, in the process, understand their tax obligations, learn about tax law 

changes, and get questions answered. Many also electronically file 

through their software provider. Consequently, tax software companies 

are another important intermediary between taxpayers and IRS. We have 

reported that IRS has made considerable progress in working with tax 

software companies to provide, for example, clearer information about 

why an e-filed return was not accepted, require additional information on 

returns to allow for IRS to better identify the software used, and enhance 

security requirements for e-filing.'° To illustrate the potential for 

leveraging tax software companies to improve taxpayer compliance, 4 

years ago we recommended and IRS agreed to expand outreach efforts 

to external stakeholders and include software companies as part of an 

effort to reduce common types of misreporting related to rental real 

estate." In another report, we discussed the value of research to better 

understand how tax software influences compliance. 12 

IRS has volunteer partners, often nonprofit organizations or universities, 

that staff over 12,000 volunteer sites. Volunteers at these sites prepare 

several million tax returns for traditionally underserved taxpayers, 

including the elderly, low-income, disabled, and those with limited English 

proficiency. In recent reports we have made recommendations about 

estimating of the effectiveness of targeting underserved populations at 

such sites and making it easier for taxpayers to find the locations of 

l()See GAO-12-176; GAO-11-111; GAO, Tax Administration: Many Taxpayers Rely on Tax 

Software and IRS Needs to Assess Associated Risks, GAO-09-297 (Washington, D.C.: 

Feb. 25, 2009). 

l1GAO, Tax Gap: Actions That Could Improve Rental Real Estate Reporting Compliance, 

GAO-08-956 (Washington, D.C.: Aug. 28, 2008). 

12GAO-09-297, 

Page 7 GAO-12-652T 
72 


80396.050

Expanded Infonnation 

Reporting Could Reduce 

Taxpayer Burden and 

Improve Accuracy 

nearby sites, 13 As is the case with paid preparers, IRS has an opportunity 

to work with these volunteer partners to help improve assistance to 

taxpayers with the goal of improving compliance, 

Information reporting is a proven tool that reduces tax evasion, reduces 

taxpayer burden, and helps taxpayers voluntarily comply, This is, in part, 

because taxpayers have more accurate information to complete their 

returns and do not have to keep records themselves, In addition, IRS 

research shows that when taxpayers know that IRS is receiving data from 

third parties, they are more likely to correctly report the income or 

expenses to IRS, As part of its recent update of its tax gap estimates, IRS 

estimated that income subject to substantial information reporting, such 

as pension, dividend, interest, unemployment, and Social Security 

income, was misreported at an 8 percent rate compared to a 56 percent 

misreporting rate for income with little or no information reporting, such as 

sole proprietor, rent, and royalty income, 

Several major new information requirements have recently taken effect, 

based at least, in part, on our work and recommendations, 

Brokers are required to report their clients' basis for securities sales, 

starting in 2012,14 

Banks and other third parties are required to report businesses' credit 

card and similar receipts, starting in 2011,15 

Under the Foreign Account Tax Compliance Act, starting in 2014, U,S, 

financial institutions and other entities are required to WIThhold a 

portion of certain payments made to foreign financial institutions that 

13See GAO-12-176; and GAO, Tax Administration: 2007 Filing Season Continues Trend of 

Improvement, but Opportunities to Reduce Costs and Increase Compliance Should Be 

Evaluated, GAO-08-3S (Washington, D,C,: Nov, 15, 2007), 

14GAO, Capital Gains Tax Gap: Requiring Brokers to Report Securities Cost Basis Would 

Improve Compliance if Related Challenges Are Addressed, GAO-06-B03 (Washington, 

D,C,: June 13,2006), 

15GAO, Tax Administration: Costs and Uses of Third-Party Information Returns, 

GAO-OS-266 (Washington, D,C,: Nov, 20, 2007), 

PageS GAO~12-652T 
73 


80396.051

have not entered into an agreement with IRS to report details on U.S. 

account holders to IRS.16 

As these three sets of information reporting requirements have only 

recently taken effect, it is too soon to tell the impact they are having on 

taxpayer compliance. 

We have made recommendations or suggested possible legislative 

changes in several other areas in which IRS could benefit from additional 

information reporting. They include the following: 

Service payments made by landlords. Taxpayers who rent out real 

estate are required to report to IRS expense payments for certain 

services, such as payments for property repairs, only if their rental 

activity is considered a trade or business. However, the law does not 

clearly spell out how to determine when rental real estate activity is 

considered a trade or business. '? 

Service payments to corporations. Currently, businesses must report 

to IRS payments for services they make to unincorporated persons or 

businesses, but payments to corporations generally do not have to be 

reported. 's 

Broader requirements for these two forms of information reporting, 

covering goods in addition to services, were enacted into law in 2010, but 

later repealed. We believe the more narrow ex1ensions of information 

reporting to include services, but not goods, remain important options for 

improving compliance. 

Additionally, we have identified existing information reporting 

requirements that could be enhanced. Examples include the following: 

16GAO, Reporting Foreign Accounts to IRS: Extent of Duplication Not Currently Known, 

but Requirements Can Be Clarified, GAO-12-403 (Washington, D.C.: Feb 28, 2012). 

"GAO-08-956. 

18.GAO, Tax Gap: IRS Could Do More to Promote Compliance by Third Parties with 

Miscellaneous Income Reporting Requirements, GAO-09~238 (Washington, D.C.: 

Jan. 28, 2009). 

Page 9 GAO-12-652T 
74 


80396.052

Implementing Modernized 

Systems Should Provide 

for Faster Refunds and 

Account Updates 

Mortgage interest and rental real estate. We recommended requiring 

information return providers to report the address of a property 

securing a mortgage, mortgage balances, and an indicator of whether 

the mortgage is for a current year refinancing when filing mortgage 

interest statements (Form 1098) could help taxpayers comply with 

and IRS enforce rules associated with the mortgage interest 

deduction. 19 We have reported that collecting the address of the 

secured property on Form 1098 would help taxpayers better 

understand and IRS better enforce requirements for reporting income 

from rental real estate"O 

Higher education expenses. Eligible educational institutions are 

currently required to report information on qualified tuition and related 

expenses for higher education so that taxpayers can determine the 

amount of educational tax benefits they can claim.21 However, the 

reporting does not always separate eligible from ineligible expenses. 

We recommended revising the information reporting form could 

improve the usefulness of reported information.22 

Identifying additional third-party reporting opportunities is challenging. 

Considerations include whether third parties exist that have accurate 

information available in a timely manner, the burden of reporting, and 

whether IRS can enforce the reporting requirement. We have noted, for 

example, that the reason there is little third-party reporting on sale 

proprietor expenses is because of the difficulty of identifying third parties 

that could report on expense like the business use of cars. 

Modernized systems should better position IRS to conduct more accurate 

and faster compliance checks, which benefits taxpayers by detecting 

errors before interest and penalties accrue. In addition, modernized 

systems should result in more up-to-date account information, faster 

refunds, and other benefits, such as clearer notices so that taxpayers can 

19GAO, Home Mortgage Interest Deduction: Despite Challenges Presented by Complex 

Tax Rules, IRS Could Enhance Enforcement and Guidance, GAO-09-769 (Washington, 

D.C.: July, 29. 2009). 

'"GAO-OS-956. 

"26 U.S.C. § 60508. 

"GAO-10-22S. 

Page 10 GAO·12-<;52T 
75 


80396.053

Expanding Pre-Refund 

Compliance Checks Could 

Result in More Efficient 

Error Correction 

better understand why a return was not accepted by IRS. Two new, 

modernized systems IRS is implementing include the following: 

Customer Account Data Engine (CADE) 2. For the 2012 filing 

season, IRS implemented the first of three phases to introduce 

modernized tax return processing systems. Specifically, IRS 

introduced a modernized taxpayer account database, called CADE 2, 

and moved the processing of individual taxpayer accounts from a 

weekly to a daily processing cycle. IRS expects that completing this 

first phase will provide taxpayers with benefits such as faster refunds 

and notices and updated account information. IRS initially expected to 

implement phase two of CADE 2 implementation by 2014. However, 

IRS reported that it did not receive funding in fiscal year 2011 that 

would have allowed it to meet the 2014 time frame. 

Modernized e-File (Me F). IRS is in the final stages of retiring its 

legacy e-file system, which preparers and others use to transmit efiled returns to IRS, and replacing it with MeF. Early in the 2012 filing 

season, I RS experienced problems transferring data from MeF to 

other IRS systems. IRS officials said that they solved the problem in 

early February. IRS officials recently reiterated their intention to turn 

off the legacy e-file in October 2012 as planned. However, more 

recently, IRS processing officials told us they would reevaluate the 

situation after the 2012 filing season.23 MeF's benefits include 

allowing taxpayers to provide additional documentation via portable 

document files (PDF), as opposed to filing on paper. In addition, MeF 

should generate clearer notices to taxpayers when a return is rejected 

by IRS compared to the legacy e-file system. 

The Commissioner of Internal Revenue has talked about a long-term 

vision to increase pre-refund compliance checks before refunds are sent 

to taxpayers.24 As previously noted, early error correction can benefit 

taxpayers by preventing interest and penalties from accumulating. In one 

example, IRS is exploring a process where third parties would send 

information returns to IRS earlier so they could be matched against 

taxpayers' returns when the taxpayer files the return as opposed to the 

Z3GAO-12~566. 

24GAO-12-176. 

Page 11 GAO·12·652T 
76 


80396.054

current requirement that some information returns go to taxpayers before 

being sent to IRS. The intent is to allow IRS to match those information 

returns to tax returns during the filing season rather than after refunds 

have been issued. 

Another option for expanding pre-refund compliance checks is additional 

math error authority (MEA) that Congress would need to grant IRS 

through statute. MEA allows IRS to correct calculation errors and check 

for obvious noncompliance, such as claims above income and credit 

limits. Despite its name, MEA encompasses much more than simple 

arithmetic errors. It also includes, for instance, identifying incorrect Social 

Security numbers or missing forms. The errors being corrected can either 

be in the taxpayers' favor or result in additional tax being owed. 

MEA is less intrusive and burdensome to taxpayers than audits and 

reduces costs to IRS. It also generally allows taxpayers who make errors 

on their returns to receive refunds faster than if they are audited. This is 

due, in part, to the fact that IRS does not have to follow its standard 

deficiency procedures when using MEA-it must only notify the taxpayer 

that the assessment has been made and provide an explanation of the 

error. Taxpayers have 60 days after the notice is sent to request an 

abatement. 

Although IRS has MEA to correct certain errors on a case-by-case basis, 

it does not have broad authority to do so. In 2010, we suggested that 

Congress consider broadening IRS's MEA with appropriate safeguards 

against the misuse of that authority.25 In the absence of broader MEA, we 

have identified specific cases where IRS could benefit from additional 

MEA that have yet to be enacted. These include authority to: 

use prior years' tax return information to ensure that taxpayers do not 

improperly claim credits or deductions in excess of applicable lifetime 

Iimits,26 

25GAO, Recovery Act: IRS Quickly Implemented Tax Provisions, but Reporting and 

Enforcement Improvements Are Needed, GAO-10-349 (Washington, D.C.: Feb. 10, 2010). 

26GAO, 2011 Tax Filing: IRS Dealt with Challenges to Date but Needs Additional Authority 

to Verify Compliance, GAO-11-481 (Washington, D.C.: Mar. 28, 2011). 

Page 12 
77 


80396.055

Reducing Tax Code 

Complexity Could Ease 

Taxpayer Burden and 

Make It Easier to Comply 

use prior years' tax return information to automatically verifY 

taxpayers' compliance with the number of years the Hope credit can 

be claimed,27 and 

identifY and correct returns with ineligible (1) individual retirement 

account (IRA) "catch-up" contributions and (2) contributions to 

traditionallRAs from taxpayers over age 70)1,.28 

In 2009, Congress enacted our suggestion that IRS use MEA to ensure 

that taxpayers do not improperly claim the First-Time Homebuyer Credit in 

multiple years, which we estimate resulted in savings of about $95 

million.'9 

Tax code complexity can make it difficult for taxpayers to voluntarily 

comply. Efforts to simplifY or reform the tax code may help reduce 

burdensome record keeping requirements for taxpayers and make it 

easier for individuals and businesses to understand and voluntarily 

comply with their tax obligations. For example, eliminating or combining 

tax expenditures, such as exemptions, deductions, and credits, could help 

taxpayers reduce unintentional errors and limit opportunities for tax 

evasion. 

Frequent changes in the tax code also reduce its stability, making tax 

planning more difficult and increasing uncertainty about future tax liabilities. 

Limiting the frequency of changes to the tax code could also help reduce 

calls to IRS with questions about the changes. We have reported that IRS 

annually receives millions of calls about tax law changes. 3o 

Reducing complexity in the tax code could take a variety of forms, ranging 

from comprehensive tax reform to a more incremental approach focusing 

on specific tax provisions. Policymakers may find it useful to compare any 

27GAO-10-22S. The American Opportunity Tax Credit modified the Hope Tax Credit from 

tax year 2009 through 2012.The Hope Tax Credit is scheduled to be reinstated in 2013. 

2S(3AO, Tax Administration: IRS's 2008 Filing Season Generally Successful Despite 

Challenges, although IRS Could Expand Enforcement during Returns Processing, 

GAO-09-146 (Washington, D.C.: Dec. 12, 2009). 

'"GAO-11-481 and GAO-09-1026. 

30GAO-11-111. 

Page 13 GAO-12-652T 
78 


80396.056

Contacts and 

Acknowledgments 

proposed changes to the tax code based on a set of widely accepted 

criteria for assessing alternative tax proposals. These criteria include the 

equity, or fairness, of the tax system; the economic efficiency, or 

neutrality, of the system; and the simplicity, transparency, and 

administrability of the system. These criteria can sometimes conflict, and 

the weight one places on each criterion will vary among individuals. Our 

publication Understanding the Tax Reform Debate: Background, Criteria, 

& Questions may be useful in guiding policymakers as they consider tax 

reform proposals. 31 

In closing, improving the taxpayer experience and increasing voluntary 

compliance will not be achieved through a single solution. Because 

voluntary compliance is influenced by so many factors, multiple 

approaches, such as those listed here, will be needed. 

Chairman Baucus, Ranking Member Hatch, and Members of the 

Committee, this completes my prepared statement. I would be happy to 

respond to any questions you and Members of the Committee may have 

at this time. 

For further information regarding this testimony, please contact James R. 

White, Director, Strategic Issues, at (202) 512-9110 orwhitej@gao.gov. 

Contact points for our Offices of Congressional Relations and Public 

Affairs may be found on the last page of this statement. Individuals 

making key contributions to this statement include Joanna Stamatiades, 

Assistant Director; LaKeshia Allen; David Fox; Tom Gilbert; Kirsten 

Lauber; Sabrina Streagle, and Weifei Zheng. 

31GAO, Understanding the Tax Reform Debate: Background, Criteria, & Questions, 

GAO-05-1009SP (Washington, D.C.: September 2005). 

Page 14 GAQ-12-652T 
79 


80396.057

Appendix I: Selected Internal Revenue 

Service (IRS) Taxpayer Service Performance 

Data, Fiscal Years 2007 through 2013 

As shown in table 3, in recent years, the level of access to telephone 

assistors has declined and average wait time has increased, In addition, 

the volume of overage correspondence has steadily increased, On a 

positive note, tax law and account accuracy remains high, 

Table 3: Selected IRS Taxpayer Service Performance Data, Fiscal Years 2007 Through 2013 

2012 2013 

Performance measure (in percent) 2007 2008 2009 2010 2011 planned planned 

Assistor calls 

Percentage of callers seeking and receiving live 82.1 52.8 70 74 70.1 61,0 63.0 

assistance 

Average wait time (in minutes) 4.4 10.4 8.8 10,8 13,0 18,8 18,8 

Tax law accurac/ 91.2 91.2 92.9 92.7 93.4 92.7 92.7 

Account accuracl 93.4 93.7 94.9 95,7 96.0 95.0 95,0 

Overage paper Correspondenceb (in percent) 17 23 25 27 35 nia nfa 

Legend: nJa = not applicable. 

Sources. 2009 and 2010 IRS OverSight Board Annual Reports 10 Congress and the fis('.aI year 2013 Congressional Jusllficat10n for IRS, 

and prev.ous GAO reports 

"Customer accuracy measures how often customers receive correct answers or solutions to their 

inquiry from a live IRS assistor. Tax law accuracy refers to callers asking questions about specific tax 

laws while account accuracy refers to caUers asking questions about their individual accounts. 

~IRS generally considers paper correspondence that is not resolved within 45 days to be overage. 

IRS does not have a performance measure for taxpayer correspondence that includes providing 

timely service to taxpayers, which we recommended in 2010. See, GAO, 2010 Tax Filing: IRS's 

Performance Improved in Some Key Areas, but Efficiency Gains Are Possible in Others, GAO~ 11-111 

(Washington, D.C.: Dec. 16,2010). 

Page 15 GAO-12-652T 
80 


80396.058

Appendix II: Internal Revenue Service (IRS) 

Telephone Perfonnance Data, January 1 

through Early April, 2008 through 2012 

As shown in table 4, access to IRS assistors has declined over the last 

few years. IRS officials attribute the higher-than-planned level of service 

so far this year to a slight decline in the demand for live assistance. At the 

same time, the number of automated calls has significantly increased 

which IRS officials attributed in part to taxpayers calling about refunds, 

and requesting transcripts (i.e., a copy of their tax return information). 

Table 4: IRS Telephone Performance Data, January 1 through Early April, 2008 through 2012 

Call volume (in millions) 

Total calls to IRS 

Automated calls answered 

Assistor answered calls 

Abandoned, busies, and 

disconnects 

Performance 

Level of service- Fiscal year 

percentage of callers goala 

seeking live assistance 

who receive it 

Actual to 

date 

(45<1914) 

2007 2008 2009 2010 2011 2012 

36.5 40.6 52.4 51.9 56.8 68.2 

16.0 17.1 19.6 24.3 28.3 37.7 33.2 

12.3 13.4 14.9 13.8 13.9 11.4 -18.0 

8.2 10.1 17.9 13.8 14.6 19.0 30.1 

82.0 82.06 77.0' 71.0 71.0 61.0 _d 

84.1 79.9 84.3 75.7 75.1 68.1 -' 

Note: Data are cumulative for IRS from January 1 of each year to April 7, 2007, April 5, 2008; April 4, 2009; April 10, 2010; April 9, 2011; and April 7, 2012. 

8The goal listed is fOftha entire fiscal year, not just the period from January 1 through early April. 

~IRS revised its Original fiscal year goa! of 82.0 percent down to 74.0 percent because of high cat! 

volume caused by economic stfmutus~related calls. 

"IRS revised its original fiscal year goal of 77.0 percent down to 70.0 percent because of high can 

volume from taxpayers requesting electronic filing authentication informatjon and asking stlmulus~ 

related questions. 

dThe difference is 10 percentage points between fiscal year 2011 and 2012 for the goal and 7.0 

percentage points for actual performance between 2011 and 2012. 

Page 16 GAO~12·652T 
81 


80396.059

Senate Finance Committee Hearing 

"Tax Filing Season: Improving the Taxpayer Experience" 

April 26, 2012 

Questions for Mr. James White 

Ouestions from Senator Orrin Hatch 

1. Levels of taxpayer service have already decreased at the IRS. If the health spending 

law is implemented, the IRS would be forced to deal with administering tax credits 

that are given to 23 million people that are newly enrolled in the health exchanges 

by 2019. 

In addition, 3.9 million people will be subject to the individual mandate penalty 

according to CBO's April 22, 2010 analysis, and the IRS is the agency responsible 

for administering that penalty. 

Therefore, won't levels of taxpayer service decline even further as IRS resources for 

taxpayer service are diverted to deal with the health spending law? 

The Affordable Care Act and other recent tax law changes, including the Foreign 

Account Tax Compliance Act and requirements for information reporting on (I) basis for 

securities and (2) credit card payments, are contributing to an increase in IRS's workload. 

IRS's ability to provide high quality service to taxpayers depends on a variety of factors, 

including effectively managing these workload increases and its success in offering 

service through a variety of channels. For example, by providing more self-service 

options on its website or over the phone, IRS may be able to reduce the demand to speak 

to live assistors over the phones (a high cost service) and the amonnt of time taxpayers 

must wait to talk to an assistor (taxpayers are waiting an average of about 16.5 minutes to 

talk to an assistor so far this fiscal year). In addition, effectively leveraging paid preparers 

and tax software providers can help ensure taxpayers have access to needed services. 

Other actions, such as conducting automated pre-refund compliance checks and further 

expanding information reporting, could also reduce the need for audits and make 

additional resources available for other purposes.' 

2. The IRS has certainly seen benefits from technological advances. However, I want 

to know what technology would be helpful for the IRS to use, but is either not being 

used or is being underutilized? And why isn't that technology being utilized, or 

fully utilized? 

'See GAO-06-603, GAO-08-266, GAO-12-176, GAO-12-403, and GAO-12-566. 
82 


80396.060

In recent years, IRS has made use of new technology to provide better service to 

taxpayers and is currently upgrading several key return processing systems. However, 

opportunities exist for IRS to make better use oftechnology. For example, we have 

reported on the following areas in which IRS can better leverage technology: 

• Online Services. IRS is investing hundreds of millions of dollars in providing new 

online services. However, taxpayers currently lack access to basic online services, 

such as accessing their individual accounts. In 2011, we recommended that IRS 

develop an online services strategy and use its capabilities to redirect taxpayers 

who would otherwise call IRS to use the web. IRS agreed with our 

recommendation and has since begun taking steps expand its strategy for 

providing online services. Doing so could provide more efficient service, decrease 

costs to IRS, and speed transactions for taxpayers in comparison to IRS's current 

capabilities.2 

• Return Processing. We reported earlier that IRS may meet its goal of 80% 

electronic filing of individual returns for the first time in 2012. Leveraging 

technology to improve returns processing reduces costs and allows IRS to deliver 

refunds more accurately and faster. For example, IRS is implementing its 

Customer Account Data Engine (CADE) 2 database, but still must finish the final 

two implementation phases in the corning years. In addition, IRS is replacing its 

legacy electronic filing system with the Modernized e-File system? 

• Prerefund Compliance Checks. Prerefund checks allow IRS to prevent erroneous 

payments, which results in savings to IRS and can benefit taxpayers who 

underestimate their refund amounts. IRS plans to replace its legacy Electronic 

Fraud Detection System (EFDS) with a new system called the Return Review 

Program (RRP) in the corning years. IRS reports that RRP will speed up 

compliance reviews resulting in faster detection of errors and quicker processing 

of returns without errors.4 

• Matching to private databases. Technology improvements at IRS should allow it 

to make better use of third party data to improve taxpayer compliance. These data 

can be combined with existing IRS data to improve taxpayer compliance and the 

accuracy ofIRS data.5 

Question from Senator John Kerry 

1. Mr. White, I understaud that you were involved several years ago in evaluating the 

success of the IRS's long distance telephone tax refund program during the 2006 

filing season. The GAO report, as I recall, found that less than 2 percent ofthe 10 

2 See GAO-12-176. 

3 See GAO-1l-168 and GAO-12-176. 

4 See GAO-12-176. 

5 See GAO-J 0-950. 
83 


80396.061

30 million people who do not file income tax forms requested tax refunds. Similarly, 

GAO found that less than 2 percent of businesses filed for refunds. 

As evidenced by this hearing, we are all interested in simplifying the tax filing 

process and ensuring that taxpayers understand their rights and responsibilities. It 

looks like the IRS did not accomplish that goal when it implemented the telephone 

excise tax refund program, since only about 2/3 of tax filers requested a refund, and 

more troubling, less than 2 percent of non-filers requested a refund. 

You are probably aware that litigation over this failure has continued since then. I 

have a constituent who is a lead plaintiff in this case. Just a couple of weeks ago, the 

plaintiffs succeeded in having the old notice invalidated and the issue was remanded 

back to the IRS for a better remedy. What suggestions would you make to the IRS 

to guide them in structuring a better refund program that will reach non-filers, 

small businesses and tax-exempt organizations, few of whom received their refunds? 

The federal district court for the District of Columbia has prospectively vacated Notice 

2006-50, the notice which provided for how IRS would administer the refunds for the 

telephone excise taxes improperly collected between February 2003 and August 2006. 

Under the court order, IRS will have to issue a new notice, either using notice and 

comment or claiming good cause not to do so under the Administrative Procedure Act. 

However, more generally, in our written statement for the April 26, 2012 hearing GAO 

identified opportunities for IRS that would potentially improve the taxpayer experience 

and help ensure taxpayers eligible to claim certain provisions do so. For example, IRS 

can 

• develop self-service tools to help taxpayers identifY whether they are eligible for 

certain provisions; 

• leverage paid tax return preparers to ensure that eligible taxpayers claim benefits 

to which they are entitled; 

• provide necessary and accurate information on its website for taxpayers to 

comply with tax laws; and 

• use third party data to identifY taxpayers that are both eligible or ineligible for tax 

benefits. 

In addition, Congress could take steps to simplifY the tax code so that taxpayers have a 

better understanding of the tax benefits they are eligible to claim on their tax returns. 
(85) 

COMMUNICATIONS


80396062.eps
86 


80396.063

Block is concerned the fmal transition to these new technologies may be impeded by 

last-minute updates to the IRS' systems. 

H&R Block believes the taxpayer experience will be improved through the 

implementation ofthe registered tax return preparer program. Through proper 

enforcement, this program should raise professionalism and ensure tax return 

preparers meet competency standards. While this program is still in its early stages, 

we are optimistic it will help increase compliance in the 2013 tax season and beyond. 

However, it is important to note compliance may be hindered and the taxpayer 

experience may suffer if the uncertainty surrounding the AMT patch, expired tax 

incentives, and the Bush tax cuts is not resolved in sufficient time to allow those in 

the tax preparation industry, the IRS, and taxpayers to respond accordingly. Ifthis 

uncertainty is not resolved, H&R Block anticipates tax season 2013 to be rife with 

confusion for taxpayers and burdensome to those in the industry. 

H&R Block strongly urges Congress to make resolving the uncertainty around the 

AMT patch, expired tax incentives, and the Bush tax cuts a priority. Given the 

uncertainty surrounding legislative and technology changes, we recommend the IRS 

maintain suitable contingency plans for tax season 2013. 

Thank you for your consideration. 
87 


80396.064

Statement for the record of 

Mr. David J. Kautter 

Managing Director of Kogod Tax Center 

American University Kogod School of Business 

Washington, District of Columbia 

Committee on Finance 

United States Senate 

Hearing on 

Tax Filing Season: Improving the Taxpayer Experience 

April 26, 2012 

Chairman Baucus, Ranking Member Hatch and Members of the Committee, thank you for the 

opportunity to submit written comments on the need to improve the taxpayer experience during 

tax filing season. 

I have been a tax professional for over 35 years. For most of that time, I advised clients on tax 

matters as a partner with a Big Four accounting firm. I also served as tax counsel to former 

Senate Finance Committee member John Danforth (R - MO), and I have remained closely 

involved in the tax policy process over the entire course of my career. 

I am writing to you today to encourage and support the need to improve the taxpayer experience 

during tax filing season. Ever expanding income tax reporting requirements coupled with ever 

changing federal tax laws are making the tax compliance process an increasing burden for all 

taxpayers, especially small businesses. 

Recently, Kogod Tax Center and Bloomberg BNA jointly conducted a survey1 of professional tax 

return preparers that provided valuable insights about the increasing pressures facing tax return 

preparers and their clients. 

In our survey, we asked tax professionals to answer the following nine questions: 

1 BNA Insights: "Complexity, Expanding Filings, and the Economy Big Concerns for Return Preparers, n March 30, 

2012. 
88 


80396.065

What types of Federal/State and local income tax returns to you prepare at your firm or 

tax department? 

In comparison to last year, how much time do you anticipate spending in 2012 on tax 

return preparation? 

If you are spending moderately or significantly more time in 2012, what is the cause? 

What types of concerns are most frequent from your clients or Chief Financial Officer? 

Which form(s) are the most difficult to complete? 

In your experience, what type of information is most difficult to accurately collect from 

your client or organization? 

Compared to last year, will your tax return preparation fees increase, decrease, or stay 

about the same? 

Compared to last year, what changes are expected to increase your efficiency this filing 

season? 

Compared to last year, what changes are expected to decrease your efficiency this filing 

season? 

What emerged from the survey was a picture of a compliance system under significant stress as 

a result of three primary factors: (1) the steadily increasing complexity of the tax law, (2) 

increasing requirements at both the federal and state level to provide more information as part 

of the compliance process, and (3) significant economic pressures. 

Currently, taxpayers and tax return preparers feel increasingly burdened by constantly 

expanding recordkeeping and reporting requirements. In 2012,54 percent of tax return 

pre parers said they expect to spend moderately more of significantly more time on tax return 

preparation. One of the main reasons for the increase is the IRS is requiring more information 

on federal tax forms. Specifically, the basis of assets and foreign accounts (Forms 8949 and 

8939) are two key areas preparers cited as complex areas increasing preparation time. In 

addition to new forms, the IRS keeps adding more schedules and questions to existing forms 

such as Schedule C, Profit or Loss From Business, and Schedule E, Supplemental Income and 

Loss. In 2012 alone, the IRS revised over 100 forms for which taxpayers must now gather new 

information and for which tax return preparers must now ensure that the newly required 
89 


80396.066

information is accurate before filing2. This means more taxpayer time expended to gather the 

required information and more time for tax return preparers to complete returns, and both of 

these mean more expense for taxpayers of all types, especially small businesses. 

Taxpayers, as well as preparers, are becoming increasingly frustrated with the expanded 

amount of time they have to spend gathering and maintaining tax records. The complexity of the 

forms and the lack of any meaningful level of knowledge by most citizens of a constantly 

changing and increasingly undecipherable federal tax code is leading to frustration and diverting 

the focus of business owners from their business to tax compliance. This is an especially 

significant problem for small businesses and entrepreneurs. Preparers, on the other hand, are 

frustrated with the quality of information they are receiving from their clients and the effort it 

takes to gather complete and accurate information to prepare a return. While it is hard to 

decipher whether the taxpayer is intentionally or unintentionally withholding pertinent 

information, tax return preparers need to be diligent in their return preparation and that is taking 

an ever increasing amount of time and effort. 

From the survey, it was discovered that Form 1065, U.S. Return of Partnership Income is the 

most difficult to complete. In response to the question "Which forms are the most difficult to 

complete" nearly 60 percent of respondents fingered Form 1065, whereas only about 20 percent 

pOinted to Form 1040, U.S. Individual Income Tax Return, about 27 percent to Form 1120, U.S. 

Corporation Income Tax Return, and only 5 percent cited Form 1120S, U.S. Income Tax Return 

for an S Corporation. In 2008, IRS Statistics of Income data shows approximately 10 percent of 

all returns filed are attributable to partnerships and constitute about 14.30 percent of all 

business receipts3

. Complex law combined with complex partnership agreements seems to be 

the main problem. According to a nurnber of respondents, the greatest difficulty is attributable to 

"complex partnership allocations governed by §704(c) of the Internal Revenue Code." The 

simple fact of the matter is that most business owners think about the implications of a 

transaction for the business as a whole, not the tax implications specifically. Simplifying the tax 

law in the area of partnership taxation would go a long way toward alleviating the adverse 

experience of taxpayers when it comes to meeting their compliance obligations when 

"All returns" is defined as Partnerships is defined as general, limited and LLC. 
90 


80396.067

conducting business as a partnership. For example, when there are complicated rules for 

transactions such as determining the basis of contributed property and determining built-in gains 

or losses, energy and resources that could be used to focus on growing a business are now 

being spent on figuring out and then complying with the tax law. 

In addition to the complexity at the federal level, tax law continues to change within the states. 

As states try to close budgetary gaps, new tax laws are introduced at the state level that 

increases complexity to an already overburdened system. Often those new laws, parallel the 

complicated federal rules, but just as often they establish different and complicated rules that 

vary state by state. Congress needs to take into account the entire tax compliance burden of 

taxpayers when considering changes to the federal tax law, not just the effect on taxpayers of 

the federal changes. The overall compliance burden on taxpayers is increasing at an 

accelerating rate. 

A difficult economic environment in addition to changes in the underlying tax law, increased 

complexity and expansion in reporting requirements increase taxpayers' frustrations with the 

current tax system. As long as the taxpayer continues to feel overwhelmed by the tax system, 

taxpayers who prepare their own retums and tax preparers who prepare returns for others will 

have a hard time fulfilling their obligations in a reasonable amount of time .. This never ending 

cycle of complexity will continue to get worse as uncertainty continues to loom around the tax 

community. To reduce stress on the system, taxpayers need to feel confident and find trust in 

the income tax system once again. A simplified, stable federal tax code would go a long way 

toward achieving that goal. 

I have attached a complete copy of the article and survey results mentioned above in this 

testimony. 

Background on the Kogod Tax Center 

The Kogod Tax Center is a tax research institute located at American University's Kogod School 

of Business. The Center promotes balanced, nonpartisan research on tax law, the challenges of 

tax compliance and planning, and the implications of tax reform. 
91 


80396.068

Our efforts focus principally on tax issues affecting small businesses, entrepreneurs, and 

middle-income taxpayers. We develop and analyze potential solutions to selected tax-related 

problems faced by these three sectors of the economy promote public dialogue to inform 

taxpayers, policymakers, academics, the press, and tax practitioners about critical tax issues. 

We appreCiate your taking our concerns on behalf of small businesses into account. 

Please do not hesitate to contact me if you have any questions. 
92 


80396.069

Daily 

Reproduced with permission from Daily Tax Report, 61 DTR J-1, 03/30/2012. Copyright 2012 by The Bureau of 

National Affairs, Inc. (800-372-1033) http://www.bna.com 

_ •• "44 

With the filing season well under way, professional tax return preparers are feeling pressure from a number of different sources, according to a survey conducted by American University's Kogod Tax Center, The center's managing director, David Kautter, examines the 

results. 

Complexity, Expanded Filings, and the Economy Big Concerns for Return Preparers 

By DAVID J. KAU'ITER 

A recent survey of professional tax return preparers 

conducted by the Kogod Tax Center at American University between Feb. 17 and March 14 focused 

on how the current filing season is progressing. 

What emerged was a picture of a compliance system under significant stress as a result of three primary factors: 

• the steadily increasing complexity of the tax law, both federal and state; 

• increasing requirements at both the federal and 

state level to provide more information as part of the 

compliance process; and 

• significant economic pressures. 

Practitioners report that clients feel increasingly bur~ 

dened by expanding recordkeeping and reporting re~ 

David Kautter is managing director of the Kogod Tax Center at the Kogod School of Business at American University in Wash~ 

ington, D.c., and executive in residence in the school's Department of Accounting and Taxation. He joined the Tax Center after more than 30 years at Ernst & Young LLP, most 

recently as director of national tax. 

The Kogod Tax Center promotes independent research and expands knowledge with respect 

to tax policy. tax planning, and tax compli~ 

ance for small and midsize bUSinesses, entre- preneurs, and middle-income taxpayers. 

COPYRIGHT ,- 2012 BY THE BUREAU OF NATIONAL AFFAiRS, INC. 

quirements and that businesses are keenly focused trying to better control both internal and external tax compliance costs. 

Here are the major findings of the survey. 

TIme Spent on Return Preparation 

Expected to Increase 

Almost 54 percent of the tax return preparcrs surveyed said they expected to spend moderately more or 

significantly more time on tax return preparation in 

2012 and another 43 percent said they expect to spend 

about the same as in 2011. The primary reasons for the 

increase are a mix of business and technical issues with 

three issues vittuaUy tied for the top spot: 

• increased information required on federal and state tax forms. 

• more clients, and 

• fewer staff. All three factors were within 2 percentage points of 

each other. The Internal Revenue Service has expanded the information required on the tax return in two key areas, the basis of assets and foreign accounts (Forms 8949, 

Sales and Other DispOSitions of Capital Assets, and 

8938, Statement of Specified Foreign Financial Assets). 

These were the two reporting areas most frequently cited by preparcl's as requiring an increase in time. 

In addition to new forms, preparers noted that IRS 

keeps adding more schedules and questions to existing 

forms, for example on Schedules C, Profit or Loss From Business, and E, Supplemental Income and Loss. This 

means more taxpayer time to gather the required inforI SSN 0092-6884 
93 


80396.070

mation and more time for preparers to complete reM 

turns. 

It is not just federal returns that are expected to take 

more time this year either-state returns are expected 

to take more time as well but for a different reason. Practitioners cited constantly changing state tax laws as 

the primary culprit with respect to state returns. 

The other two factors cited for an increase in time 

represent a continuation of the trend of fewer and fewer 

taxpayers feeling comfortable preparing their own returns and preparers' efforts to control their costs in an uncertain economic environment. 

Preparation Fees Expected to Increase 

Consistent with spending more time on tax return 

preparation, nearly every respondent to the sUIVey said fees for 2012 will either stay about the same or increase 

slightly. Just under 56 percent of respondents said that 

they expected fees this year to increase slightly and 44 

percent said they expected fees to stay about the same. 

No respondent said fees would increase significantly. 

Time to Gather Info, Compliance Costs 

Biggest Areas of Concern for Most Taxpayers 

One theme that came through clearly in the sUlVey 

was increasing frustration on the part of both preparers 

and their clients with the expanding amount of time 

they have to spend gathering and maintaining tax 

records. 

Clients feel it is diverting them from focusing on their business. Preparers, on the other hand, are frustrated 

with the quality of information they are receiving from their clients and the effort it takes to gather complete 

and accurate information to prepare a return. 

Fee complaints seem to reflect clients' lack of 

perceived value with respect to complying with the 

ever increasing reporting requirements of both 

federal and state governments. 

More than one-half of respondents (56 percent) said 

that the biggest sources of concern for their clients are: 

• the time and complexity required to compile data 

for return preparation; and 

• the cost of compliance, including professional 

fees. 

While fee complaints are not uncommon in all types 

of profeSSional services, here they seem to reflect clients' lack of perceived value with respect to complying 

with the ever increasing reporting requirements of both 

federal and state governments. The desire to control internal compliance costs may be a factor contributing to the quality of information return preparers believe they 

are receiving. 

Partnership Returns Most DifficuH to Prepare 

By a wide margin, the tax fonn cited as the most difficult to complete this year is Form 1065, U.S. Return of 

Partnership Income. Nearly 60 percent of respondents 

fingered Fonn 1065, whereas only about 20 percent 

pointed to Form 1040, U.S. Individual Income Tax Return, about 27 percent to Form 1120, U.S. Corporation 

Income Tax Return, and only 5 percent cited Form 

1120S, U.s. Income Tax Return for an S Corporation. 

Complex law combined with complex partnership 

agreements seems to be the main problem. According 

to a number of respondents, the greatest difficulty is at· 

tributable to '''complex partnership allocations gov· emed by [Internal Revenue Code] Section 704(c)." One 

respondent said the "partnership rules are getting more 

complex by the day," and another said "partnership returns are not only tricky but risky." With so many businesses operating in unincorpo· 

rated form today, preparing partnership returns seems 

to be viewed as not only an area of significant complexity but an area where there is significant practice management risk. 

Basis Information Most DifficuH to Obtain 

By an overwhelming margin, respondents cited one piece of information as the most difficult to obtain from 

their clients. Nearly 70 percent said "basis of assets." A 

distant second was expense receipts. 

Factors Hindering Efficiency 

More than 40 percent of respondents cited new IRS 

or state reporting requirements as the biggest factor ex· 

pected to decrease their efficiency this filing season. In the words of one respondent, "Efficiency will take a hit 

because of new reporting complexities. Clients don't 

want to pay for the additional work that goes into the 

tax return," 

Second on the list was staff turnover (36 percent) and third was changes in the underlying tax law (25 percent). 

Factors Enhancing Efficiency 

In the area of encouraging news, tax return prepar- ers cited three factors as enhancing their efficiency in 

2012. Nearly 50 percent of respondents cited increasingly efficient tax preparation software as the top reason 

their efficiency would increase this year. Additional ex- perienced staff was second cited by nearly 30 percent of 

the respondents and improved internal processes such as the networking of computers, greater use of scanning technology, and implementation of better input 

and review processes were cited by 23 percent of the re· 

spondents . 

The importance of retaining experienced staff clearly 

comes through in the sUIVey with staff turnover ranking 

as the second most significant reason for a decrease in efficiency and staff retention as the second most signifi· 

cant reason for an increase in efficiency. 

A System Under Stress 

Overall, the survey indicates a system under signifiw 

cant stress. \\'hile preparers are finding ways to inCOPYRIGHT 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC, DTR ISSN 0092,6884 
94 


80396.071

crease their productivity. there is clearly a feeling among preparers that they are swimming against the tide. 

Despite the absence of significant new tax legislation at the federal level affecting this year's returns, that has been more than offset by tax law changes by the states as they try to close budget gaps. Expanded requests for information in the form of new tax forms, schedules, and questions by both federal and state governments is clearly increasing stress on an 

already overburdened system. Ever expanding reporting requirements, changes in the underlying tax law, increasing complexity, and a difficult economic environment are making most pre- parers feel that this filing season is the most chaneng~ 

ing ever. 

1. What types of Fe<temUState andlocal.inoome tall re&tlUulo you prepare at your firm or 

tal! department? 

76.1% 

58.2"10 

76.1% 

50.7'1\, 

49.3% 

2.ln compal'isonto last year, how much time dO .you. antleipatespendlngln lQ·12 on 1ft 

return preparation? 

4.6% 

43.1'1\, 

~y_tlme 47.7% 

6.2% 

DAilY TAX REPORT ISSN 0092·6884 BNA 3·3(}12 
95 


80396.072

37.2",(, 

34.9% 

34Jl"k 

14Jl% 

20.9% 

23.3% 

27.9% 

50.3% 

4119% 

14.1% 

14.1% 

COPYRIGHT" 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. OTR ISSN 0092·6884 
96 


80396.073

19.6% 

26.6% 

5.4% 

StUl% 

6. In your experience, What type oflnl'on..,atfon Is m~t dIfflcuJt to accuratel)' (IOllect from 

your client or organlatlon(e~g., client Is unrllSpo!'I$iVe, client provide$! incorrect data, etc:)? 

25.9% 

14.6% 

13.0% 

44.4% 

55.6% 

0.0% 

111% 

DAILY TAX REPORT ISSN 0092·6884 
97 


80396.074

8. ~mpared to last year, wtlai cha.~ are expected to Increase your efficiency tltls filing 

season? 

Added, staff 28.6% 

46.9% 

22.4% 

20.4% 

9. Compared to ~t year, what. cI'Ianges are expected to ~rease your effiCIency ttlis filing 

season? 

11.3% 

35.8% 

41.5% 

245% 

3-30-12 COPYRIGHT <);: 2012 BY THE BUREAU OF NATIONAL AFFAIRS, INC. OTR ISSN 0092-6884 
98 


80396.075

NATIONAL COMMUNITY TAX COALITION 

one cause. one voice. one community. 

Improving the Taxpayer Experience 

Comments on the 2012 Tox Return Filing Season for the Senate Committee an Finance 

By Jackie Lynn Coleman, Executive Director, National Community Tax Coalition 

May 9,2012 

Chainnan Baucus, Ranking Member Hatch and Members of the Senate Committee on Finance: Thank you 

for the opportunity to share our thoughts on improving the taxpayer experience, in conjunction with 

your April 26 hearing on these subjects. 

The National Community Tax Coalition (NCTC) is the nation's largest, most comprehensive network of 

community-based providers offering free tax preparation and finandal services to low- and moderateincome working families through Volunteer Income Tax Assistance (VITA). In the 2011 filing season, our 

member organizations operated more than 6,200 Community VITA sites that leveraged the help if more 

than 53,000 trained and certified volunteers throughout the country. These efforts helped households 

meet their tax obligations by filing about 1.5 million federal returns, obtaining more than $2 billion in tax 

refunds. 

In our comments we'd like to briefly address three main points: 

Taxpayer services are most effective when the Internal Revenue Service is as accessible as possible to 

taxpayers. 

An overcomplicated tax code will continue to drive taxpayers to seek third-party assistance with 

preparing and filing returns. 

VITA provides free, high-quality taxpayer services that relieve complication for taxpayers by offering 

them an affordable alternative to often-costly commercial options. Butis under increasing strain to 

meet demand under current levels of support. 

Taxpayer services are most effective when the IRS is as accessible as possible to taxpayers. 

As filing began in mid-January, some taxpayers seeking basic infonnation abo,lt free tax preparation and 

other tax issues via IRS hotlines reported delaysof up to 50 minutes to have their calls answered. Others 

could not find the information they needed on the IRS web pages designed to answer their questions. 

These problems, coupled with increasingly limited accessibility to in-persGn IRS help at Taxpayer 

Assistance Centers, particularly in rural areas, are straining the often tenuous relationship many lowincome taxpayers have with the IRS. 

While we appreciate efforts taken during the filing season to alleviate some of the barriers faced by 

taxpayers, the IRS must continue to pursue simpler and more accessible options for low-income 

taxpayers to communicate with the agency and. obtain answers and assistance. Such options include 

further improvements to the VITA hotline, as well as upgrading the "IRS2Go" mobile-device application 

with VITA location functionality to provide low- and moderate-income taxpayers with another avenue 

for finding free tax-filing assistance. 

National Community Tax Coalition 

29 E. Madison Street. Suite 900 

Chicago, IL 60602 

www.tax-coaHtlon.org 
99 


80396.076

An overcomplicated tax code will continue to drive taxpayers to seek third-party assistance with 

preparing and filing returns. 

A basic fact of the tax code is that its complexity drives many taxpayers to seek advice from the IRS as 

well as tax preparers. In light of this need for reliance upon tax preparers, it is necessary to ensure that 

taxpayers receive the best advice for their individual situations without overburdening their wallets. In 

the particular case of low-income taxpayers, access to free or low-cost tax services is essential to 

guarantee these households' much-needed tax refunds go as far as possible. Until such a time that the tax 

code is reformed to a point that a decreasing number of taxpayers need to seek-out these services, the 

IRS should continue to promote avenues to free and low-cost assistance, including VITA. 

VITA provides free. high-quality taxpayer services that relieve complication for taxpayers by 

offering them an affordable alternative to often-costly commercial options. But is under 

increasing strain to meet demand under current levels of support. 

The most effective means for ensuring full refunds and high-quality preparation of tax returns for lowand moderate-income families is through VITA. Unfortunately, stagnant federal support for the VITA 

grant program and decreasing state and local funding support are stifling VITA's ability to meet taxpayer 

demand for these services. Thus, many potential VITA clients are being driven to higher-cost paid 

preparers or are forced to pursue self-preparation options that might remain very confusing to them. The 

result is that much-needed refunds are chiseled-away by pre parer fees and potentially valuable credits 

are not claimed by self-filers unaware of tax benefits due to them. 

We strongly recommend Congress recognize the full taxpayer demand for high-quality VITA programs 

by increasing support for the VITA grant program. We certainly appreciate that such funding at the 

federal level has remained steady at $12 million the past couple of years. despite the current fiscal 

climate. However, pressure to expand our field's reach and scope has grown. Further, evidence from a 

recent survey conducted by NCTC highlights the increasing strain VITA programs feel, being asked to do 

more with less. Of 12 VITA programs that reported receiving state funding, eight have seen that support 

decrease while only one realized an increase. In several of the decreasing states, their funding resources 

have been zeroed-out entirely. This is a serious challenge for our ability to reach low- and moderateincome taxpayers fully and effectively. 

The VITA field's ability to serve taxpayers is inherently tied to the stability and capacity of a wellfunctioning IRS. Therefore, we additionally urge Congress to avoid further budget cuts in the IRS, and 

instead invest more wisely in the agency and its taxpayer-services programs that help low-income 

families fully comply with their tax obligations. A strong IRS, enhanced by well-funded volunteer 

programs, supports the collection of a strong revenue stream, which is more necessary than ever to 

sustain a strong economy - which, in turn, is truly essential to the improvement of taxpayers' experience. 
100 


80396.077

Statement of Colleen M. Kelley 

National President 

National Treasury Employees Union 

On 

"Internal Revenue Service Budget for FY 2013 and the 2012 

Tax Filing Season" 

Submitted to 

Senate Committee on Finance 

April 26, 2012 

1750 H Street, N.W .• Washington, D.C. 20006' (202) 572·5500 
101 


80396.078

Chairman Baucus, Ranking Member Hatch and distinguished members of the Committee, I 

would like to thank you for allowing me to provide comments on the Administration's FY 2013 

budget request for the Internal Revenue Service (IRS) and the 2012 tax filing season. 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 2013 BUDGET REQUEST 

Mr. Chairman, NTEU strongly supports the Administration's FY 2013 budget request for the 

IRS. We believe that the President's request will allow the IRS to continue helping taxpayers 

meet their tax obligations while also improving enforcement of the tax law. 

We are particularly pleased the Administration's budget request would provide critical increases 

for Service enforcement and taxpayer service activities that have been reduced in recent years, 

and would allow the IRS to rebuild its workforce which is down by almost 25,000 since 1995. 

I would also note that in previous years, NTEU has supported the budget recommendations 

proposed by the IRS Oversight Board which have generally called for additional resources above 

that requested by the Administration. For FY 2013, the Oversight Board has recommended 

$13.764 billion in funding for the IRS. While we have not seen the specific details of the 

Board's proposal, we would be inclined to support providing additional funding for the IRS 

above the Administration's request and look forward to reviewing the Board's recommendation. 

IMPACT QF UNDER FUNDING THE IRS 

Mr. Chairman, as you know, despite the critical role that the IRS plays in helping taxpayers meet 

their tax obligations and generating revenue to fund the federal govemment, the IRS' ability to 

continue doing so has been severely challenged due to the lack of adequate funding in FY '11 

and FY '12. 

For FY '11, the full year CR provided IRS with $12.121 billion in funding, roughly its FY '10 

level of$12.146 billion, less a 0.2% rescission, which strained IRS' capacity to carry out its 

important enforcement and taxpayer service missions and led to a general freeze on hiring. 

In FY '12, funding for the IRS was again reduced by almost $330 million below its 

FY '10 level. In addition to hampering IRS' ability to collect revenue and assist taxpayers in a 

timely manner, the FY '12 funding reductions resulted in the loss of more than 3,800 FTE's 

below the FY '11 enacted level at a time when the workload is dramatically increasing and 

staffing levels are more than 20% below what they were 15 years ago. In 1995, the IRS had a 

staff of 114,064 to administer the tax law and process 205 million returns. Today, they have just 

90,711, yet must administer a much more complicated tax code and process approximately 236 

million, much more complicated, tax returns. 

The dangers associated with underfunding the IRS cannot be overstated and have been 

highlighted in recent reports by the IRS Oversight Board, IRS Advisory Council, and most 
102 


80396.079

recently, by the National Taxpayer Advocate. In her most recent Annual Report to Congress, the 

National Taxpayer Advocate identified inadequate funding for the IRS as the most serious 

problem facing taxpayers. The report noted that a lack of sufficient resources, coupled with a 

rising workload and increasingly complex tax code, was negatively impacting IRS' ability to 

carry out its taxpayer service mission and assist efforts to reduce the federal deficit. 

In particular, Olson noted that IRS' capacity to respond to taxpayer inquiries has been severely 

diminished, to the extent that now the IRS is unable to answer three out of every ten calls it 

receives, and nearly half of all taxpayers who write to the IRS must wait more than 6 112 weeks 

for a reply. In addition, recent funding cuts resulted in a drop in the telephone level of service 

from 74 to 70 percent between FY '10 to FY 'II. Because of expected higher call demand and 

new legislation requiring more training for telephone assistors, the Administration's FY '13 

target level of service is 63 percent. 

In addition to delays in correspondence and reduced telephone levels of service, NTEU has also 

received reports from our members about abnormally long wait times this filing season for 

taxpayers seeking assistance at many of the walk-in Taxpayer Assistance Centers (TACs) around 

the country due to insufficient staffing. According to the IRS, 107 out of the 398 TACs located 

around the country are currently being staffed by just one or two employees, while overall 

staffing at many TACs is half of what it was just 8 years ago. The lack of sufficient staffing has 

greatly increased wait times at the TACs and has hampered the ability ofTAC employees to 

provide taxpayers with the personal one-on-one assistance that they need. Inadequate staffing 

and availability of service at TACs has long been a problem at the IRS and has previously been 

highlighted by the National Taxpayer Advocate as a serious problem disproportionately 

impacting the most vulnerable populations who use T ACs most often, including low income 

taxpayers, those with language barriers, the elderly and the less educated. 

In addition to the adverse impact on taxpayer services, the Taxpayer Advocate's Report also 

noted that the lack of adequate resources was also undermining IRS' ability to effectively 

implement its enforcement and compliance initiatives, hampering its ability to maximize revenue 

collection and close the tax gap. Because of the IRS' unique role in generating revenue that 

funds the federal goverrunent, Olson urged Congress to view providing sufficient resources for 

the IRS as an investment rather than an expense. 

We are pleased the President's budget proposal acknowledges the importance of providing IRS 

with the necessary resources to generate critical revenue for the federal goverrunent and devotes 

a significant portion of the increase from FY , 12 to restoring lost revenue resulting from 

reductions in funding over the past two years. 

TAXPAYER SERVICES 

NTEU strongly believes that helping taxpayers understand their tax reporting and payment 

obligations is the foundation of taxpayer compliance. Through a variety of channels, the IRS is 

able to provide year-round assistance to millions of taxpayers, including outreach and education 

programs, issuance of tax forms and publications, rulings and regulations, toll-free call centers, 

the IRS.gov web site and Taxpayer Assistance Centers (TACs). These efforts have enabled the 
103 


80396.080

IRS to continue raising the standard of service to America's taxpayers and assisted in efforts to 

improve voluntary compliance even during this challenging budget environment. 

The IRS' comprehensive approach to taxpayer service played a critical role in allowing it to 

deliver a successful 20 II filing season, despite the challenges presented by reduced funding and 

enactment of tax legislation in late December 2010. During this time, IRS employees processed 

more than I 44. 7 million individual returns and issued 109 million refunds, totaling $345 billion; 

answered more than 42 million automated calls and 34.2 million assistor calls; responded 

accurately to 93.4 percent of tax law questions and 96 percent of account questions; and helped 

millions of taxpayers at the 398 Taxpayer Assistance Centers located around the country. 

But, without the additional funding proposed in the Administration's budget request, NTEU 

believes taxpayers will continue experiencing a degradation of services including difficulty 

seeking telephone assistance, delays in responses to letters, including those seeking to resolve 

issues with taxes due, delayed responses to small business owners or individual taxpayers 

looking to set up payment plans, and difficulties for those seeking answers on tax deductions and 

credits due under the tax codes. As noted previously, IRS' ability to respond to taxpayer 

inquiries has already been diminished due to the FY '12 funding cuts which are resulting in a 

very challenging filing season. 

NTEU strongly believes providing quality services to taxpayers is an important part of any 

overall strategy to improve compliance, and that the President's request for additional funding 

for taxpayer services will help prevent further degradation of services and enable the IRS to 

deliver a successful filing season next year. 

ENFORCEMENT 

Mr. Chairman, NTEU believes that in the current budgetary environment, it is critical that the 

IRS has the resources it needs to maximize taxpayer compliance, reduce the tax gap and generate 

critical revenue for the federal government. 

IRS' ability to generate critical revenue necessary to reduce the federal deficit is clear. In FY '11, 

on a budget of$12.1 billion, the IRS collected $2.42 trillion, 92 percent of federal government 

receipts. This means that, for every $1 that Congress appropriated for the IRS, the IRS collected 

about $200 in return. 

However, reductions in enforcement funding in FY , II and FY '12 have undermined IRS' 

ability to maximize taxpayer compliance and bring in much needed federal revenue. In FY , II, 

the IRS generated $55 billion in enforcement revenue, down from $57.6 billion in FY , 10. The 

reduction in revenue can be partly attributed to a reduction in the total nurnber of revenue 

officers (ROs) and revenue agents (RAs). Despite the critical role they play in maximizing 

taxpayer compliance and generating revenue, the total number ofROs and RAs were reduced by 

almost 450 between FY '10 and FY 'II, and are down almost 20 percent since 1995. 

The need for sufficient enforcement staffing is more important than ever. In January the IRS 

released a new set of tax gap estimates for tax year 2006. The tax gap is defined as the amount of 
104 


80396.081

tax owes by taxpayers that is not paid on time and is the most comprehensive and up to date data 

that IRS has on noncompliance. According to the IRS, the amount of tax not timely paid is $450 

billion, translating to a noncompliance rate of almost 17 percent. 

While the tax gap can never be completely eliminated, even an incremental reduction in the 

amount of unpaid taxes would provide critical resources for the federal govermnent. 

That is why NTEU was happy to see the Administration's budget request would provide a $402 

million increase in funding for IRS tax enforcement above the FY 2012 level, including 

additional resources made available through a program integrity cap adjustment. 

The increased funding will be invested in Service enforcement programs designed to increase 

compliance by addressing offshore tax evasion, reduce the underreporting tax gap, and restore 

revenue lost from FY , 12 reductions to examination audit and collection programs. According to 

the IRS, these investments are expected to generate $1.48 billion in additional annual 

enforcement revenue, resulting in a return on investment (ROI) of more than 4 to 1, once new 

hires reach full potential in FY 2015. This estimate does not account for the deterrent effect of 

IRS enforcement programs, estimated to be at least three times larger than the direct revenue 

impact. 

At a time when Congress is debating painful choices of program cuts and tax increases to address 

the federal budget deficit, we believe it makes sense to invest in one of the most effective deficit 

reduction tools: collecting revenue that is owed, but hasn't yet been paid. 

NTEU urges support for the Administration's request for an additional $691 million in 

enforcement funding for FY '13 through a program integrity cap adjustment for high revenue 

generating enforcement activities. This $691 million in funding, coupled with additional 

investments through 2022, will support a variety of compliance activities, including new 

initiatives that deepen and broaden IRS' focus on international tax compliance of high net worth 

individuals and entities. These investments are expected to generate an additional $44 billion in 

additional tax revenue over ten years. 

In recent years, both Democratic and Republican Administrations have requested and Congress 

has approved, integrity cap adjustments for IRS enforcement activities. President Bush's FY 

2006 budget proposal included a program integrity cap adjustment for IRS enforcement of $446 

million. Congress approved that amount and in 2007 the IRS stated in Congressional testimony, 

"much of the enforcement success in FY 2006 was the direct result of this increased funding 

provided by the program integrity cap adjustment." Congress also approved an $890 million 

cap adjustment in FY 2010. 

The Budget Control Act of2011 specifically allows for other program integrity cap adjustments 

for Social Security disability claim reviews and health care fraud and abuse programs. The 

Senate version of the Budget Control Act also included an IRS enforcement program integrity 

cap adjustment, but it was not included in the final legislation. Clearly, Congress recognized the 

wisdom of small spending increases when they will be more than offset by large returns on 

investment. NTEU strongly supports the President's request for additional enforcement funding 
105 


80396.082

for FY '13 above the current level, including additional funding made available via a program 

integrity cap allocation adjustment. 

CONCLUSION 

Mr. Chairman, thank you for the opportunity to provide NTEU's views on the Administration's 

FY 2013 budget request for the IRS and the 2012 tax filing season. We believe that by restoring 

critical funding for demonstrably effective enforcement and taxpayer service programs, the 

Administration's request will allow the IRS to continue providing America's taxpayers with 

quality service while maximizing revenue collection that is critical to reducing the federal deficit. 
106 


80396.083

~ .. -... Texas Society of 

~ Certified Public Accountants 

April 12, 2012 

U.S. Senate Committee on Finance 

Attn. Editorial and Document Section 

Rm. SD-219 

Dirksen Senate Office Bldg 

Washington, DC 20510-6200 

The Texas Society of Certified Public Accountants respectfully submits this letter as a written statement 

into the hearing record on: 

"Tax Filing Season: Improving the Taxpayer Experience" 

Thursday, April 26, 2012, 10:00 AM 

On behalf of the 29,000 members of the Texas Society of Certified Public Accountants (TSCPA), we 

are writing to encourage your support for full funding of the Internal Revenue Service to help improve 

fiscal responsibility and fairness to taxpayers. 

Supporting the full budget for the IRS is a matter of fiscal responsibility. While we understand the 

interest in cutting expenses to help balance the federal budget, we believe cuts to the IRS budget and 

the failure to adequately fund the IRS for a number of years has had, and will continue to have, the 

opposite effect. The result will be decreased revenue and failure to adequately service the taxpaying 

public. The IRS serves as the nation's tax collector. That service has historically been performed in a 

cost-effective manner as evidenced by the fact that the IRS collected about $2.42 trillion in 2011 with a 

budget of $12.1 billion.' The proposed IRS budget for fiscal 2013 (which includes an increase of $944.5 

million over the previous funding authorized) includes $403 million in new enforcement initiatives, which 

are projected to raise nearly $1.5 billion in additional revenues for a 4.3-to-1 return on investment.2 

We have experienced a significant "tax gap" estimated to be $385 billion in 20063 If the tax gap could 

be closed to a meaningful extent, revenues would increase dramatically, without the need for an 

increase in tax rates, elimination of deductions or credits, or cuts in important government programs. 

For example, if the 2006 gap figure referenced above had been closed, it would have paid for the 

recent $100 billion payroll tax cut extension almost four times. That gap cannot be closed if we don't 

provide the IRS with the financial resources to do so. Indeed, the current level of underfunding will 

exacerbate the tax gap. 

1 fR~2012~6_ National Taxpayer Advocate Delivers Annual Report to Congress: Focuses on IRS Funding and Taxpayer Rights (January 1 L 

2012}, Internet 

2 FS~2012~!O, IRS FY 2013 Budget ProposaJ Summary (February 2012). Internet. 

) FS-2012-6, IRS Relea"cs 2006 Tax Gap Estimatt::s (January 2012), Internet. 

14651 Dallas Parkway, Suite 700 • Dallas, TX 75254-7408·9721687-8500·800/428-0272· Fax 972/687-8646 
107 


80396.084

An additional loss in revenue is likely to result from the reduction in the IRS' ability to provide taxpayer 

services. Less than half of the IRS budget is for investigations, examinations, collections, and 

regulatory activities' Since our system is one of self-assessment, equally important is the support the 

IRS renders to all taxpayers (and their representatives). In this context, the IRS develops forms and 

instructions, and responds to taxpayer inquiries. The vast majority of Americans are honest and willing 

to pay taxes that they correctly owe. However, due to the complex and constant changes of the tax law, 

the average taxpayer, and even those of us who are professionals, frequently need IRS guidance. The 

necessarily complex system generates much interaction between the IRS and taxpayers. 

Unfortunately, taxpayers (and our TSCPA members) have seen this service decline in recent years, 

making it ever more time consuming, difficult and costly to file accurate returns and to resolve even 

those issues that should not generate conflict between the IRS and the taxpayerS To quote Colleen 

Kelley, National Treasury Employees Union president, "IRS employees know taxpayers need 

assistance and want to help, but long hold times result in dropped calls when taxpayers give up in 

frustration,',6 She also added, "As the IRS workload continues to rise and the tax code becomes 

increasingly complex, staffing levels at the agency are 20 percent below what they were 15 years ago." 

Between 2004 and 2011, the portion of unanswered taxpayer telephone inquiries rose from 13 percent 

to 30 percent? hardly a level of service that Congress should want in applying its tax laws. Nina Olson, 

National Taxpayer Advocate has said, "The overriding challenge facing the IRS is that its workload has 

grown significantly in recent years, while its funding is being cut. This is causing the IRS to resort to 

shortcuts that undermine fundamental taxpayer rights and harm taxpayers-and at the same time 

reduces the IRS ability to deliver on its core mission of raising revenue."a 

We're confident that our members endure this difficulty and get the right answer. But doing so under 

these circumstances raises the cost to our clients, and we expect many individuals who self-prepare 

merely give up out of frustration. Cutting the IRS budget will greatly intensify this issue and reduce the 

effectiveness of our self-assessment system. Taxpayers and practitioners expect competent and 

responsive IRS personnel. Long waits and dropped calls for telephone information, antiquated 

technology, delays in processing claims, and overworked personnel frustrate taxpayers (and 

professionals) and undermine respect for the tax law. These factors also inevitably cause greater work 

to stressed IRS employees and are counterproductive to efficient tax collection. However, we 

understand that no increase is allocated in the Administration 2013 budget for taxpayer service, an 

omission that we regard as a significant problem. 

4Tax Analysts. "Obama Budget Proposes Almost $1 Billion More for IRS" (Fehmary 14.2012). Internet. 

5 FOXBusiness. "The IRS Budget: What it Means for Taxpayers" (March 1. 2012tlntcrnet. 

6 1bid, Tax Analysts, 

7 National Taxpayer Advocate's 2011 Annual Report to Congress Executive Summary: Preface & Highlights (December 3 L 201l). 2, from 

FY 2004 to FY 2011. the percentage of calls the IRS answered from taxpayers seeking to speak with a telephone assistordropped from 87 

percent to 70 percent Internet. 

'Ibid.IR-20I2-6. 
108 

Æ 


80396085.eps