Reforming the IRS: Is the Taxpayer Really First?
by Jay Starkman, CPA
In this report, Starkman analyzes the IRS restructuring bills pending in Congress and recommends improvements.
Copyright 2018 - 2019 by Jay Starkman.
Table of Contents
Congress is again proposing to modernize and reform the IRS. This is timely, but it fails to address the root problem facing the IRS: inadequate funding. Two related major problems are poor taxpayer service and outdated technology. The IRS generally has good management, but it is hamstrung by massive underfunding.
As Congress drew to a close in 2018, the House had passed a bill and the Senate was considering two bills that address taxpayer service and outdated technology, but these fail without a commitment to adequate funding. Similar legislation will likely be re-introduced soon. The 2018 bills were:
Congress keeps reducing the IRS appropriation as the workload increases and complex new tax laws must be implemented. It has been reported that a House-Senate conference committee has completed negotiations on a fiscal 2019 funding package in which the House bill authorizes $11.6 billion for the IRS, while the Senate bill budgets $11.2 billion. It will likely mean another major cut in funding.
IRS employment is less than 80,000, down from almost 117,000 in 1992. Except for IT, the IRS has had a hiring freeze for seven years. Thus, just 3,000 employees are under age 30, making it a challenge to find the next generation of IRS managers and executives. For comparison, in their U.S. offices alone, EY, KPMG, PwC, and Deloitte each have more than 50,000 employees with much higher average salaries. The IRS budget is further strained from implementing new complex tax laws, employing bilingual agents, and translating forms and publications.
E-filing has not brought the efficiency to warrant a reduced IRS budget. Filing and account services that cost $1.6 billion in 2013 consumed $1.8 billion in 2017. It has largely converted variable labor into fixed computer hardware and software, with attendant failures and occasional service outages like the April 2018 filing day outage and others in 2016 and 2014.2 Massive tax ID theft remains off-budget. Those losses, although declining, were still estimated to be at least $1.6 billion in 2016. Protecting data reduces services because only 30 percent of taxpayers can successfully authenticate their identity using e-services.
The December 2018 - January 2019 35-day partial government shutdown stopped most work at IRS during a critical time for staff training and preparation for the 2019 tax filing season. It left IRS with a backlog of 5 million unanswered pieces of mail. The national taxpayer advocate said it likely will take at least a year for IRS to return to normal operations. 2a
I. IRS Independent Office of Appeals 3
The first provision in the House bill would establish an IRS Independent Office of Appeals. As a tax practitioner for over 40 years, Ive never felt that Appeals was not independent-minded, nor has Congress explained why it must be made independent. Certainly, Ive had some dealings with incompetent Appeals officers, followed by district counsel calling and saying, We dont have a case, do we? How would an independent Appeals provide better service?
Under this provision, a notice of deficiency under section 6212 would allow a taxpayer to request a referral to the new Independent Office of Appeals. As a practitioner, I would not use this unless my right to a Tax Court appeal was undiminished, which is unclear from the proposed statute. Otherwise, a taxpayers rights are better protected by filing a Tax Court petition. District counsel refers the docketed case to Appeals. That way, if Appeals fails, theres always a Tax Court judge.
Severe budget and staff cuts at Appeals have resulted in the Appeals Judicial Approach and Culture (AJAC) project, which restricts access in non-docketed cases. So, practitioners docket more cases to gain access to Appeals. It may simply be AJAC that has fueled the push for making Appeals an independent office, and if so, its another example of money problems.4
The IRS uses a hyperactive computer that spews out notices at a furious clip with no human input. Two-thirds of the notices my clients receive are wrong. It takes an hour to respond to each, while the IRS takes about 90 days to respond. Thats one of my biggest issues with the IRS. Like telephone calls with unreasonable wait times, this is a staffing problem resulting from inadequate funding. Raising the status of Appeals wont solve the AJAC restrictions.
Budget shortfalls have resulted in an increase of what is called unreal audits. 5 The IRS interprets arithmetic error too broadly, sending notices allowing taxpayers just 60 days to contest a proposed assessment. The national taxpayer advocate has complained how the IRS uses math error authority to address discrepancies and mismatches that go beyond simple arithmetic mistakes which undermine taxpayer rights.6
II. Free File Program7
I am often asked why the IRS cannot bill taxpayers based on information already in its files. For a long time it was suggested that this was impractical because taxpayers want their overwithholding refunds as soon as possible after receiving their Forms W-2. This was proven untrue in California, which ran a popular pilot project called ReadyReturn for several years, sending taxpayers a bill without the need to prepare a return. The program proved very effective.
A better solution would be the proposal of Sen. Elizabeth Warren, D-Mass., which could dramatically simplify taxes and even eliminate tax return preparation costs. Her Tax Filing Simplification Act of 2017 (S. 912) would require the IRS to establish the following free of charge:
The IRS already has all the information it needs to prepare a large percentage of simple returns. At a minimum, S. 912 would be a great milker bill. Intuit Inc. spent $1.25 million on lobbyists and gave $2.12 million to 120 California politicians from 2005 to 2010 to narrowly prevent Californias ReadyReturn from launching statewide.8
Congress is openly hostile to diminishing software company revenue. Rep. Peter Roskam, R-Ill., rose on the House floor to praise Free File and denounce ReadyReturn:
Roskam was the largest House recipient of campaign contributions from Intuit during 2018, according to OpenSecrets.org.
Instead, these bills propose matching grant programs so that the IRS Volunteer Income Tax Assistance program can provide more taxpayers with free return preparation.10
S. 3246 would go a step further in the opposite direction by repealing a section 6012 note (Internal Revenue Service Restructuring and Reform Act of 1998, section 2004) that proposes the study of a return-free tax system and an annual report to Congress on progress, although it was never implemented.11
The Free File Program enshrined in the House bill would protect software companies, not taxpayers. Free File is the least used of all filing methods, declining annually to less than 1.7 percent of returns in fiscal 2017.12 The IRS assistance program prepares not that many more.
An even better solution would be tax simplification, which could be accomplished by exempting two-thirds of taxpayers from income tax. One hundred ten million tax returns make up less than 10 percent of income tax, and that will be even less under the Tax Cuts and Jobs Act (P.L. 115-97) reductions. That would allow the IRS to devote its resources to the 40 million tax returns that account for 90 percent of tax revenue.
One useful simplification would be that IRS notices that assess penalties be made to indicate the code section under which the penalty is being assessed. In the original 1954 code, there were only six penalties; today, penalties rival in number the uncountable stars of the heavens and grains of sand upon the sea shore. The IRS is finding new uses for deeply buried penalties that are impossible even for a seasoned practitioner (let alone an average taxpayer) to discern. For example, rather than the expected $250-per-return penalty under sections 6721 and 6722, the IRS has started routinely assessing penalties under section 6721(e) 10 percent of 1099 and W-2 income underreported on information returns, with a minimum of $500 that should apply only in cases of intentional disregard. An overhaul and rationalization of tax penalties should be a legislative imperative.
III. Offers in Compromise13
Dealing with IRS Collections can be one of the most difficult and frustrating assignments facing a tax practitioner. I stopped submitting offers in compromise after the 2006 Tax Act required a 20 percent nonrefundable down payment. Besides, an offer in compromise submission extends the statute of limitations. Some practitioners advise clients to hold out for bankruptcy or consider fleeing the country (before their passport expires) to avoid financial purgatory. (Ive had two clients flee the country.)
Practitioners know that IRS troubles are a leading cause of suicide. The advocate service routinely handles cases of distraught taxpayers who threaten suicide if their disputes with the IRS cannot be resolved expeditiously.14 However, the IRS callously regards suicide threats as harassment against IRS personnel rather than a taxpayer in extreme emotional and financial distress.15
The bills provide an exception to the down payment and user fee requirements for low-income taxpayers.16 They would do better to eliminate the section 7122(c) advance payment requirements as a condition for offer in compromise consideration. It would also benefit taxpayers for mass-market advertisers offering help with collection issues to be restricted because they often deprive victims of scarce funds while helping little, if at all. These advertisers market under new names every other year. The IRS is aware of these troublemakers but lacks power to regulate them or warn the public.
IV. Private Debt Collection17
Former assistant secretary for tax policy Mark Mazur testified before Congress in 2017 that underfunding the IRS is like underfunding your accounts receivable department. No rational business would do that.18 So why has Congress authorized private debt collectors (PDC) to collect outstanding tax debts instead of having the IRS collect them in-house? Sen. Chuck Grassley, R-Iowa, has recently been gushing in misguided praise:
Does Grassley not realize the misery caused by extracting $56 million from the most cash-strapped taxpayers to net $1 million?20 Did he not learn any lesson as a primary promoter of the failed 2007 PDC program? PDC has very dubious economics, and all have failed. Its simply a modern form of tax farming.21
According to former commissioner Mark Everson (2002-2007), the IRS could collect the tax for less, but increasing the IRS budget counts against the 10-year revenue projection, while hiring outside contractors does not.22
Federal experience with PDC isnt encouraging. One of the many Grant administration (1869-1877) scandals concerned an experiment with privatizing tax collection. In 1872 Treasury hired private collector John Sanborn, who was allowed to keep 50 percent of the tax he collected. He was supposed to collect from delinquents, beginning with the dangerous task of confronting 39 distillers and liquor retailers, but he padded his list with the names of almost all the nations railroads.
A congressional investigation concluded that most of the $427,000 that Sanborn collected would have wound up at Treasury absent his efforts. The report asserted that any system of farming the collection of any portion of the revenue of the Government is fundamentally wrong, and concluded that only the Internal Revenue Bureau should collect taxes.23
A 1995 congressionally authorized IRS experiment with PDC resulted in a $17 million net loss and was canceled after 12 months. It was again authorized in 2004 and implemented in 2006. That resulted in a net loss of $20.9 million.24
States have also had poor experiences with private collections. New Jerseys 12-year experiment came to a scandalous halt in 2005 after an investigation reported systematic acceptance of gifts, meals, and entertainment by its private collection contractor. The contractor also overbilled the state for its services. For New Jersey graft, this was relatively small about $65,000 in gifts and $1 million in overbilling over five years.25
The City of Richmond thought it could benefit from privatizing, too. The company it hired charged 30 percent and collected just 36 percent of what it tried to collect.26
While Grassley lauds a 2 percent net yield, the Treasury Inspector General for Tax Administration reports issues with PDC, and the national taxpayer advocate also takes issue with it.27 Plainly, a properly funded IRS can collect taxes for less than any private debt collection program with fairer treatment of taxpayers.
The PDC program should be terminated, not reformed. These bills only exclude low-income taxpayers from private collectors, considered their most abused category.
V. IRS Oversight Board28
The second key recommendation of the 1997 National Commission on Restructuring the Internal Revenue Service was the establishment of an IRS Board of Directors accountable to the President and the American people.29 The first recommendation was congressional oversight. The board of directors became a lamely implemented IRS Oversight Board, and improved congressional oversight was not implemented.
The House bill proposes elimination of the IRS Oversight Board. S. 3278 proposes changing the name to Management Board and its membership composition. It is confusing that the IRS has a management board that is called an oversight board; it should be called the IRS Board of Directors or the IRS Management Board to better describe its role.
National Taxpayer Advocate Nina Olson explained the controversy regarding the Oversight Board in recent testimony before the Senate:
Actually, the battle began with the 1997 proposal for an IRS management board. Treasury opposed it; all presidents have treated it with disdain; its an impossibility to recruit tax practitioners to serve. The board is defunct because it lacks a quorum, and neither President Obama nor President Trump has nominated appointees. Even its telephone number has been disconnected.
IRS Oversight Board Chair Paul Cherecwich Jr. published five legislative recommendations for improving the board, highlighting the vacancy problem.31 The law provides for nine members, including the Treasury secretary, IRS commissioner, and a Treasury Workers Union member. That leaves six private member slots, all of which are vacant. Five members are required for a quorum.
Among Cherecwichs legislative proposals resulting from 14 years of board history are:
The appointment process must be improved so that administrations will take it seriously rather than appoint anthropologists, archaeologists, cattle ranchers, and political friends. Initially the board functioned as a glorified replacement for the old Commissioners Advisory Group. Cherecwich turned it into a real management board. The board needs people of his dedication and caliber.
The appointment process involves nomination by the president as well as background and financial checks by the administration, FBI, and Senate. Few quality candidates are willing to subject themselves to an intrusive and lengthy confirmation process for a position requiring real work that pays just $30,000 annually and restricts practice before Treasury.
The board has no enforcement, procurement, or personnel authority and can take no role in developing tax policy. The board should be allowed to recommend legislative and tax policy changes. These restrictions were originally enacted to allay Treasury concerns. There is no such restriction on the national taxpayer advocate, who regularly recommends legislative and policy changes that make up a significant portion of these bills provisions.
To attract people who know and understand the real world of tax compliance and administration, actual reform must allow tax practitioners to serve by granting them limited waivers to represent clients before the IRS. An IRS Management Board lacking members with tax expertise is unable to advise on the proper administration of tax law.
The five-year restriction on practice before Treasury after leaving the board and while serving must also be revisited. No one except a retired, civic-minded former tax practitioner could agree to serve under that condition. Not many practitioners are willing to give up a career for a $30,000 salary that requires travel, either. The pre-1952 abuses involving collectors who had tax consulting practices on the side dont arise when dealing with a part-time board that lacks the ability to influence private client cases because of proscriptions on enforcement, procurement, and personnel.
The IRS Oversight Board must be reconstructed with greater powers, not eliminated. It was a cornerstone feature of the Internal Revenue Service Restructuring and Reform Act of 1998 and was buried by the deliberate inaction of four presidents. Changing the name of the board should be accompanied by expansion of its authority and power. Any changes will be meaningless unless Congress reserves the power to nominate members when the administration fails to do so.
VI. Tax Court32
The House bill includes some nominal changes to the Tax Court, but the legislation is missing two that are sorely needed: fairness to taxpayers in receiving attorney fees, and reducing the number of taxpayers appearing pro se.
Tax Court Rule 231(a) requires that in agreed cases, reasonable litigation and administrative costs shall be included in the stipulated decision submitted by the parties. This puts the taxpayer at a distinct disadvantage because IRS district counsel will usually refuse to settle a case, no matter how egregious, unless there is no mention of costs. It thus requires the taxpayer to appear in court as if he had an unagreed case, under threat that the IRS may oppose conceding the case, so that he might apply for costs.
In unagreed cases, the taxpayer has 30 days following a favorable decision to motion for an award of reasonable litigation or administrative costs. The rule should be the same for cases settled without trial.
The IRS has somewhat eased its opposition to fees, at least requiring some paperwork and documentation.33 Absent a change in Rule 231(a), an IRS decision to deny costs may be final.
Rule 231(a) fails to follow the spirit of section 7430. It should be amended legislatively, if necessary so that taxpayers are not required to concede their rights to costs to settle with district counsel. Ninety percent of docketed cases settle without trial, and the IRS usually requires that there be no mention of litigation costs. Congress should legislate this Tax Court rule change because it is so unfair to taxpayers.
Pro se representation is a constant problem for taxpayers and the Tax Court. About 69 percent of taxpayers in Tax Court regular cases and about 91 percent of taxpayers in small tax cases are self-represented. The court allows clinics run by law schools to bring students to represent low-income taxpayers in court. Some law schools even allow Tax Court exam candidates to participate. Addressing this problem, the American Bar Association Section of Taxation recently argued for the right to limited scope representation of taxpayers.34
Through 1942, taxpayers could be represented by a CPA or an attorney. Then Congress passed the current section 7452, which provides that no qualified person shall be denied admission to practice before the Tax Court because of his failure to be a member of any profession or calling. The Tax Court seized upon this to deny CPAs from practice without passing an onerous exam, while admitting any attorney, including those who know nothing about taxes.35 Few attorneys could pass this unfair exam.
It would be a helpful first step for Congress to order a Government Accountability Office study of the Tax Court exam and provide a justification for why attorneys should be exempted. That would help Congress decide who should be required to take the exam and how it could be improved and made more fair.
For admission to practice before similar tribunals, like the Patent Trial and Appeal Board, one must pass an examination demonstrating proficiency in substantive and procedural patent law and establish that one possesses the requisite scientific and technical training. Attorneys, scientists, and engineers must fulfill the same requirements.
The Tax Court has flouted the intent of section 7452 for over 75 years, and it is time to make the statute more specific to expand taxpayer assistance in Tax Court. When upwards of 90 percent of taxpayers appear pro se, there is a major problem that must be addressed. A CPA or enrolled agent who prepared the tax return can, at reasonable cost, represent the taxpayer before district counsel, but cannot address the Tax Court if settlement fails even when the only unresolved issue is simply requesting attorney fees.
VII. Mandatory Electronic Filing and Refunds36
A. For Tax-Exempt Organizations
It is unreasonable to just mandate electronic filing and place the onus for compliance on all tax-exempt organizations. Many small entities will panic, and they will face additional costs for professional or software expense. The IRS should be required to develop and provide software for complying with this electronic filing mandate, in the spirit that annual foreign bank account reports provide for e-filing.37 The Form 990 series is relatively easy to program and should be a free offering on the IRS website. Congress cant mandate electronic filing and insidiously call such proposals, Taxpayer First because they are actually IRS First.
B. For Tax Preparers
Setting a nominal threshold of 10 returns will impair formation of new tax preparation businesses.38 If it follows the New York standard, every extension and information return would count.39 The threshold should be set much higher. Otherwise, simply legislate the obvious: Preparers must purchase software from an approved e-file vendor and must prepare and submit returns using a current Microsoft Windows operating system.
Other sections of the bill require the development of an internet platform for Form 1099 filings.40
While instructing the IRS to study how to expand electronic tax refunds, S. 3278 requires Treasury to develop regulations regarding misdirected electronic refunds.41 Unlike a misdirected check, which the IRS will make good, there is no requirement that the taxpayer be made whole if the financial institution at which the wrong deposit was made cannot recover the funds.
Its a start on a most serious problem identified by the national taxpayer advocate in 2011, which reported how unscrupulous preparers misappropriate refunds by changing the routing number on a return.42 When this happens, the IRS position is that the refund was paid according to the instructions it received, and the taxpayers sole recourse is to pursue the matter in a civil lawsuit against the return preparer. With a paper check, the IRS will issue a replacement check once it has verified that the original refund check was lost or stolen and therefore uncashed by the taxpayer.
VIII. Tax Return Disclosures
Following Watergate abuses, return privacy was revised because the statutory rules governing the disclosure of tax information have not been reviewed by the Congress for 40 years.43 The IRS seized upon these new laws as an opportunity to pursue unreasonable secrecy in its operations and an excuse for failing to properly archive our nations tax history.
Under the guise of tax ID theft protection, H.R. 5444 would expand section 6103 disclosure of tax returns to any contractor or other agent of a Federal, State, or local agency who meets specific requirements, including a triennial compliance review.44 Information Sharing and Analysis Center participants may also be granted access.45 These provisions are broad and expose taxpayers to hacking attacks against contractors with weak computer security. A once-in-three-year contractor security review is woefully inadequate given the rapid mutation of hacking threats. Sensitive return information may be exposed if there is a vulnerability in the custody chain. Given that Equifax cannot protect sensitive data, its best to restrict distribution as narrowly as possible.
The Senate, through S. 3278, would restrict rather than expand disclosure.46 A better taxpayer-first provision would narrow how Treasury can shield itself from sunshine. The Freedom of Information Act exemptions under 5 U.S.C. section 552(b)(5) are abused by the IRS because it insists that internal advice, recommendations, and subjective evaluations are exempt from disclosure.47 This allows IRS nondisclosure for almost any substantive information.
All non-taxpayer information prepared by the IRS should be available for disclosure under FOIA. Following disclosure of the Lois Lerner scandal, in which many conservative tax-exempt organizations were treated unfairly, Tax Analysts had to sue the IRS for release of materials used to train personnel in the IRS exempt organizations determinations office in Cincinnati.48
It took three years and a lawsuit for the public interest group Judicial Watch to obtain records on the selection of individuals for audit based on section 501(c)(4) information records that were not released to congressional investigators.49
In a Microsoft transfer pricing case, the IRS engaged outside counsel Quinn Emanuel Urquhart & Sullivan LLP, under an initial $2.2 million contract to assist. This was the first time the IRS went outside its own chief counsel office, which is the largest law firm in the country, to prosecute a case. And the IRS had more attorneys available at the Justice Department. Microsoft obtained a FOIA court order for information and for the IRS to preserve information. After the order, the IRS wiped the hard drive belonging to its former director of transfer pricing operations at the Large Business and International Division likely a key employee involved in the controversy.51
The IRS processes about 8,800 FOIA requests annually. TIGTA confirms abuse in its annual reports to Congress, acknowledging that the IRS improperly denies FOIA requests at a rate of 14.3 percent in its most recent sample.52
In 2016 Congress slightly relaxed the deliberative process privilege by removing that excuse for denial of documents over 25 years old.53 There is rarely a valid reason to protect secret deliberations at the IRS. FOIA exemptions under 5 U.S.C. section 552(b)(5) should be extremely narrow as applied to the IRS. Development of tax rules must be subject to sunshine, especially when Chevron deference54 applies to rules, and not after 25 years.
IX. Development of Taxpayer Portals55
A major weakness of all e-service portals (not just the IRSs) is access failure. As a practitioner, I am locked out of e-services because I blocked my Equifax account over nine years ago. Ive never even once temporarily unblocked it, because blocking is the best form of identity theft protection. So, the IRS cannot verify my identity, despite the centralized authorization file and preparer tax identification numbers.
The IRS continues to use Equifax despite the 2017 mother of all data breaches in which attackers accessed personal information of at least 145.5 million individuals. The GAO attributed the breach to Equifaxs failure to use well-known security best practices and a lack of internal controls and routine security reviews.56
Portman inquired about reconciling ease of access to e-services with security and authentication, noting that only 30 percent of taxpayers attempting to set up an online account with the IRS were successful because of tough authentication procedures.
Olson noted that the United Kingdom allows taxpayers to sign in through Amazon or their bank somewhere that one already has an online account which advises HMRC that you are who you say you are through their verification process. Australia is attempting voice recognition. Another problem Olson noted is that sending a document to the IRS requires passing the same level of authentication security as receiving information. Sending information to the IRS should have a lower authentication standard, she has testified.57
In a first, S. 3246 would require the IRS to bombard taxpayers while on hold with recorded warnings about tax scams.58 Has Congress nothing better to do than mandate what callers will hear while on hold with the IRS? With an average 45-minute hold time, this could rival the trauma of info-recordings on lengthy hold with the Immigration and Naturalization Service. It could even reduce the reported 29 percent of callers who are able to reach a human being at the IRS.
X. Audit Selection
S. 3246 requires TIGTA to report on criteria used by the IRS for selecting returns for audit, assessment, criminal investigation, or any heightened scrutiny or review, and whether taxpayers are targeted for political ideology, race, religion, or other improper factors.59
It would be preferable to allow taxpayers to demand an explanation of why their returns were selected for audit and to require that the IRS maintain a paper trail to minimize the possibility of targeted or revenge audits. Practitioners can often discern a reason, and sometimes IRS agents try to help make that determination; purely random audits are probably rare. It would not compromise tax enforcement should the IRS disclose to a taxpayer a reason why he was selected (for example, high noncash charity deduction, unusual amended return, disclosure on Form 8275, informant information, child credit claimed while living abroad, or random selection in high income category or based on zip code).
My own tax return was singled out for a research audit three months after the publication of my article in Tax Notes critical of e-filing.60 A research audit is a line-by-line analysis of random tax returns in which every entry must be fully documented. The agent was at my office for three days poring over my records, resulting in no change. There were only 1,500 business research audits that year, and I might have accepted that it was random, except that one of my clients had been selected for a research audit a few years earlier when the IRS re-introduced them one of 5,000 that year. Very few practitioners have had a client subject to a research audit. That Ive experienced two in my tiny practice, with the second so proximate to the publication of an article critical of the IRS, leaves me convinced I was targeted.
Congress should amend section 6103 to authorize the IRS to disclose to a taxpayer why his return was selected for audit. This would prevent the IRS from claiming privilege. The sunshine should automatically result in some needed reforms by the agency itself.
XI. New IRS Officials
Section 7803 defines the IRSs top officials as the commissioner, chief counsel, taxpayer advocate,61 and inspector general for tax administration. The bills would add two more: an independent office of appeals (discussed above), and a chief information officer.62 Congress has not made clear why it believes these must be added to section 7803. But while we are adding independent offices, consider one more.
Congress should establish an office of IRS historian-archivist. Shelley L. Davis was the one and only IRS staff historian, and she alleged that she was fired for complaining about IRS document destruction. Davis also noted the poor relationship between the IRS and the National Archives, which remains contentious and adversarial63:
Congress enacted section 6103(l)(17) as part of the Internal Revenue Service Restructuring and Reform Act of 1998. This disclosure exception essentially allows the National Archives to work with the IRS to schedule records for destruction or retention.65 TIGTA has never reported on how well this is working, if it is at all. Given that sensitive IRS hard drives fail at a rate not known outside the agency or are prematurely wiped, it probably is not working. An IRS historian-archivist would surely address this problem.
The position of IRS historian-archivist should be staffed by someone designated by and associated with the National Archives and require such individual to submit an annual report to Congress. This position would require a dedicated individual who can navigate the friction generated in an IRS culture opposed to outsiders and oversight. The independence, honesty in the annual report to Congress, dedication, and good nature of Olson are what make her so effective as national taxpayer advocate. It would require such a rare and skilled person to be the IRS historian-archivist.
There are many historian-archivists in government. The House and Senate each have a historian. An IRS historian would need to be a designated official able to protect the operation against the institutional hostility that Davis faced. Davis was probably the wrong person to navigate the politics within the IRS, but without a historian, the problems she disclosed will not be remedied and history will be lost.
The problem with these bills is that they do very little to address the issues that have recently plagued the IRS not the severe budget constraints; not the Lerner scandal; not a good fix for the defunct IRS Oversight Board. Many of the bills provisions are recommendations of the national taxpayer advocate, but many more of her recommendations have been ignored.
The recent confirmation of Charles Rettig as commissioner is a bright spot. He is the first commissioner who is a tax professional since passage of the Internal Revenue Service Restructuring and Reform Act of 1998. The experiment with businessmen of various backgrounds didnt match the hope that was expected of a five-year appointment. The tax community wishes Commissioner Rettig a successful tenure.
Tax professionals have urged Congress to provide adequate funding for the IRS far in excess of a stingy $11 billion-$12 billion so that it can modernize its ancient technology and hire adequate staff. This was listed by the national taxpayer advocate as Most Serious Problem #1 in her 2011 Annual Report to Congress. Since then, the problem has become much worse.
The IRS is Americas favorite Public Enemy No. 1, yet we couldnt exist as a nation without it. Proper funding can make the IRS easier to deal with. Congress might even get fewer complaints from constituents.
1 The author gratefully acknowledges Portman and Cardin, who introduced and shepherded through passage the Internal Revenue Service Restructuring and Reform Act of 1998, when they were House members in 1997. Portman was particularly productive because he also co-chaired the National Commission on Restructuring the IRS in 1996-1997.
2 Treasury Inspector General for Tax Administration, Review of the System Failure That Led to the Tax Day Outage, 2018-20-065 (Sept. 19, 2018); IRS Computer Problems Shut Down E-File System,USA Today, Feb. 3, 2016. There was also the infamous shutdown of the Modernized e-File (MeF) system for maintenance from the afternoon of October 11, 2014, through the morning of October 14, just before the final October 15 filing deadline. It was compared with Macys closing for an inventory count from December 21 to December 24.
2a IRS will need at least a year to recover from government shutdown, watchdog tells Congress, Washington Post, 26 Jan 2019.
3 H.R. 5444, section 11101; S. 3278, section 601, expands only a right to confer with Appeals.
4 Nina Olson, National Taxpayer Advocate 2015 Annual Report to Congress, at 82 (The Appeals Judicial Approach and Culture Project Is Reducing the Quality and Extent of Substantive Administrative Appeals Available to Taxpayers (Most Serious Problem No. 8)).
5 William Hoffman, IRS Use of Unreal Audits May Cover
for Budget Woes, Tax Notes,
Aug. 13, 2018, p. 1040; Real vs. Unreal
Audits and Why This Distinction Matters,
6 National Taxpayer Advocate Purple Book, Compilation
of Legislative Recommendations to Strengthen
Taxpayer Rights and Improve Tax
Administration, at 47 (Dec. 2017).
6 National Taxpayer Advocate Purple Book, Compilation of Legislative Recommendations to Strengthen Taxpayer Rights and Improve Tax Administration, at 47 (Dec. 2017).
7 H.R. 5444, section 11202.
8 Dennis J. Ventry Jr., Intuits End-Run, Los Angeles Times, July 21, 2010; and Alex Mayyasi, The Stanford Professor Who Fought the Tax Lobby, Priceonomics, Mar. 22, 2017. Stanford law professor Joe Bankman spent $30,000 of his own funds for a lobbyist to promote ReadyReturn. Intuit reportedly spends more than Apple or Amazon on federal lobbying. See Liz Day, How the Maker of TurboTax Fought Free, Simple Tax Filing, ProPublica, Mar. 26, 2013.
10 H.R. 5444, section 12001; S. 3246, section 1001; S. 3278, section 502.
11 S. 3246, section 2014.
12 Olson, National Taxpayer Advocate 2017 Annual Report to Congress, Figure 1: Individual Tax Returns Filed in Fiscal Year 2017 (citing IRS 2017 Data Book).
13 H.R. 5444, section 11203; S. 3278, section 504.
14 Hoffman, Headaches Abound for Practitioners, Public as Shutdown Enters Second Day, Tax Notes, Oct. 7, 2013, p. 25.
15 73 F.R. 13347, Employee Protection System Records
(Mar. 12, 2008); TIGTA,
16 H.R. 5444, section 11203; S. 3278, section 504.
16 H.R. 5444, section 11203; S. 3278, section 504.
17 H.R. 5444, section 11305; S. 3278, section 501.
18 Finance Committee, Hearing on Comprehensive Tax Reform: Prospects and Challenges (July 18, 2017).
19 Grassley news release, Grassley-Backed IRS Private Debt Collection Program Working (Aug. 23, 2018). Grassley promoted the failed 2007 private debt collection program: IRS Private Debt Collection Program (May 21, 2007). See TIGTA, Private Debt Collection Was Implemented Despite Resource Challenges; However, Internal Support and Taxpayer Protections Are Limited, 2018-30-052, at 11, Figure 4 (Sept. 5, 2018).
On October 30, 2018, Grassley citing IRS statistics (prior was TIGTA statistics) that the 2018 program suddenly netted IRS $14.5 million by showing much higher gross revenue and much lower expenses than TIGTA, while arguing that IRS terminated the 2009 program following a flawed study, based on IRS Private Debt Collection Program, Quarterly Update to Congress. That flawed study showed IRS collecting 11 percent of balances due at a cost of 7 cents per dollar collected, compared with PDC collecting 4 percent at a cost of 24 cents per dollar, at Government Accountability Office, Tax Debt Collection: IRS Could Improve Future Studies by Establishing Appropriate Guidance, GAO-10-963, at 5 (Sept. 2010).
20 Stacy Cowley and Jessica Silver-Greenberg, Outside Collectors for I.R.S. Are Accused of Illegal Practices, The New York Times, June 23, 2017. See Jeff Stein, IRS Outsources Debt Collection to Private Firms, and the Poor Feel the Sting, Watchdog Charges, The Washington Post, July 23, 2018; TIGTA reports many security weaknesses at PDCs, Annual Assessment of the IRS Information Technology Program for Fiscal Year 2018, 2018-20-083 (Sept. 26, 2018).
21 Tax farming is the ancient practice by which a ruler would sell the right to collect taxes within a district, thus freeing the government from the evils of tax collection. It was usually sold to the highest bidder and compared with a farmer planting seeds. The tax farmer who purchased this right decided how vigorously to extract, extort, or harvest taxes from which he would recover his investment and make a profit. Tax farming is one of the top five practices that precipitated the French Revolution, and the king netted only 40 percent of receipts. Tax farming is always inefficient. Following the revolution, 32 of the 40 members of Ferme Générale, the high-bidder syndicate for tax collection, were sent to the guillotine.
22 House Appropriations Subcommittee on Transportation, Treasury, Housing and Urban Development, and the District of Columbia, Hearing on Fiscal Year 2007 Appropriations for the Internal Revenue Service (Mar. 26, 2006).
23 Joseph J. Thorndike, Historical Perspective: The Unhappy History of Private Tax Collection, Tax Notes, Sept. 20, 2004, p. 1346; John Lewis, Lewis Says Collecting Taxes Is Governments Responsibility (May 23, 2007), citing H.R. Rep. No. 559, at 9 (1874).
24 Tom Herman, IRS Plans to Use Private Firms to Pursue Taxpayers This Year, The Wall Street Journal, June 21, 2006; Details Emerge Over IRS Contract Winner, WebCPA.com (May 5, 2006); P.L. 104-52 (1995).
25 The Gifting of New Jersey Tax Officials, State of New Jersey Commission of Investigation (Dec. 2005); Workers for N.J. Enjoyed Freebies, Bergen Record, Dec. 21, 2005.
26 Citys Debt Collector Gets Hefty Share, Richmond Times-Dispatch, Apr. 23, 2006.
27 TIGTA, Private Debt Collection Was Implemented Despite Resource Challenges; However, Internal Support and Taxpayer Protections Are Limited, 2018-30-052 (Sept. 5, 2018); Private Debt Collection Program, National Taxpayer Advocate Blog (July 5, 2017).
28 H.R. 5444, section 11403 (eliminate); S. 3278, section 101 (modify).
30 Finance Committee, Hearing on Comprehensive Tax Reform: Prospects and Challenges (July 18, 2017).
31 Cherecwich, An IRS Oversight Board Call for Stability in Tax Administration, Tax Notes, Jan. 27, 2014, p. 423.
32 H.R. 5444, sections 11501-11504.
33 Internal Revenue Manual section 18.104.22.168 and 8.7.15.
36 H.R. 5444, section 17001; S. 3246, sections 1031, 2001-2105.
37 Unfortunately, FBAR reports work off Adobe LiveCycle, which masquerades as a PDF file, but it is not readable by any non-Adobe Acrobat clone or on Linux operating systems.
38 H.R. 5444, section 18401; S. 3246, section 2102.
39 New York exempts preparers from e-filing when the return is not supported by the preparers software or cant be filed on the New York website. Software companies are aware that practitioners have filed extensions, then requested the free software offered after April 15 so they could prepare returns on paper without incurring software purchase expenses. To protect sales, the vendors now mark all returns printed with unregistered software with DEMO. This demonstrates that the cost of purchasing tax software is a burden on small preparers and therefore that the threshold should be much higher than 10.
40 H.R. 5444, section 18203; S. 3246, section 2103.
41 S. 3278, section 203.
42 Olson, National Taxpayer Advocate 2011 Annual Report to Congress at 420-426 (Dec. 31, 2011) (Most Serious Problem #22: The IRS Procedures for Replacing Stolen Direct Deposit Refunds Are Not Adequate).
43 S.Rep. No. 94-938, at 315 (1976).
44 H.R. 5444, section 18104.
45 H.R. 5444, section 18103.
46 S. 3278, section 704.
48 Chuck OToole, IRS Releases EO Training Documents Following TA Lawsuit, Tax Notes, Nov. 18, 2013, p. 702.
49 News release, Judicial Watch Obtains 695 Pages of Obama IRS Scandal Documents Records Not Produced in Initial Congressional Investigation (Apr. 4, 2017) (complaint; documents).
51 Finance Committee news release, Hatch, Wyden Press IRS on Record Keeping Practices (Jan. 20, 2016).
52 TIGTA, Fiscal Year 2017 Statutory Review of Compliance With the Freedom of Information Act, 2017-30-075 (Sept. 7, 2017).
53 FOIA Improvement Act of 2016, P.L. 114-185, section 2, modifying 5 U.S.C. section 552(b)(5).
55 H.R. 5444, section 18202.
56 GAO, Actions Taken by Equifax and Federal Agencies in Response to the 2017 Breach, GAO-18-559 (Aug. 2018); Glenn Fleishman, Equifax Data Breach, One Year Later: Obvious Errors and No Real Changes, New Report Says, Fortune, Sept. 8, 2018.
57 Finance Subcommittee on Taxation and IRS Oversight hearing, Improving Tax Administration Today (July 26, 2018). The GAO just published two reports on strengthening authentication to protect against fraudsters: GAO, Identity Theft: IRS Needs to Strengthen Taxpayer Authentication Efforts, GAO-18-418 (June 2018); GAO, Identity Theft: Strengthening Taxpayer Authentication Efforts Could Help Protect IRS Against Fraudsters, GAO-18-702T (Sept. 26, 2018).
58 S.3246, section 1102.
59 S.3246, section 1041.
61 H.R. 5444, section 11402, reduces the number of most serious taxpayer problems required to be reported by the national taxpayer advocate to 10 down from at least 20. The need for this change is unexplained.
62 H.R. 5444, section 18201.
63 Davis, Unbridled Power: Inside the Secret Culture of the IRS (1997).
65 Heidi Glenn, House IRS Reform Bill Would End Stalemate on Records Preservation, Tax Notes, Dec. 8, 1997, p. 1088.
Jay Starkman, CPA is a sole practitioner in Atlanta. A version of this article was originally published in Tax Notes on November 19, 2018.