The Honorable Orrin Hatch, Chairman
The Honorable Ron Wyden, Ranking Member
United States Senate Committee on Finance
Washington, DC 20510
Dear Chairman Hatch, Ranking Member Wyden, and Members of the Committee:
On behalf of the millions of taxpayers who support our organizations, we urge the Finance Committee to work toward a robust, comprehensive taxpayer rights and Internal Revenue Service reform package as you meet to markup an original bill to prevent tax identity theft and additional bipartisan legislation to protect taxpayers.
With the passage last year of H.R. 2029, Congress took the vital step of codifying the IRS National Taxpayer Advocate’s Taxpayer Bill of Rights. Now the Finance Committee has the opportunity to build upon this tremendous success and enact additional safeguards whose development has been shaped by more than 15 years of experience since the implementation of the landmark IRS Restructuring and Reform Act. You also have the opportunity to make desperately needed improvements to the efficiency of the tax agency.
We understand that the nature of this hearing may permit members to move separately the two pieces of legislation currently under markup, or to combine them in another fashion. Accordingly, National Taxpayers Union (NTU) and the Council for Citizens Against Government Waste (CCAGW) offer the following guidance on existing amendments and legislation of which we are aware, and some additional proposals for the committee’s deliberation. All are adaptable to either markup approach.
National Taxpayers Union
Note: As this communication was being issued, we were made aware of a new Chairman’s modification to the Chairman’s mark for the Taxpayer Protection Act of 2016. Our quick review of this modification suggests that it contains several desirable new proposals, including a prohibition on arbitrarily higher fees for installment agreements and a review of audit criteria by the Treasury Inspector General for Tax Administration. However, the recommendations below remain relevant and applicable during the markup of the Chairman’s modification as well as other proposals before the committee.
Proposals to Avoid
Marketplace Fairness Act. It would be tragically ironic if, in marking up a bill concerned with taxpayer rights, the committee were to adopt an amendment containing the so-called “Marketplace Fairness Act” (Enzi #1 to the identity theft bill). Widely opposed by limited-government organizations, this deeply flawed legislation, which opens the door for destructive extraterritorial state tax collection schemes, would inflict a great deal of harm upon taxpayers as well as small businesses. This controversial policy would subject businesses conducting remote sales to the tax collection and auditing regimes of other state governments. Although Senate leadership has apparently committed to a vote on this ill-advised plan, it has never been the direct subject of hearings or regular-order debate. The committee should reject its inclusion in the legislation it is considering now.
Heavy-Handed Preparer Regulations. Furthermore, the committee should reject a similarly controversial proposal in the identity theft legislation for regulation and certification of tax preparers, another ill-fitting regulatory plan that does not belong in taxpayer rights legislation. As an open letter from 12 citizen groups (including NTU) to your House colleagues on similar legislation (H.R. 4141) recently noted, “granting the IRS this power will kill jobs and increase costs to consumers. Furthermore, the IRS already has the tools it needs to identify, track, and penalize unscrupulous tax preparers without unnecessarily burdening the vast majority of law-abiding preparers with a costly licensing scheme.”
“Return-Free” Schemes. Discussions over legislation regarding tax filing procedures sometimes lead to discredited plans that would allow the IRS to complete returns and send them to taxpayers for their “consent.” The committee should steer clear of this course. As groups like NTU and CCAGW have noted in the past, one overarching goal of fundamental tax reform should be a system that allows all Americans to understand how their individual tax liabilities are calculated and allows them to hold their elected officials accountable for such liabilities. Return-free subverts the concept of transparency by further placing the machinery of the tax laws away from public view – in the process condemning informed debate over the proper size of government to an obscure periphery of the public square.
Instead, Congress (including members of the committee) should support the Free File Program Act, introduced in the House as H.R. 4938. This bill would make permanent the Free File Alliance, a public-private consortium that has offered no-cost tax filing services to millions of moderate- and low-income households. Since its founding in 2003, this highly successful arrangement has provided services worth some $1.4 billion, saving the federal government considerable outlays.
Identity Theft Legislation: Proposals to Support
Despite recent improvements in detecting tax identity theft and refund fraud, the remedial process remains inadequate. The Government Accountability Office reported in April 2016 that according to IRS estimates, $25.6 billion in tax-related identity theft refund fraud was attempted in the 2014 filing year, involving 4.9 million returns. Approximately 88 percent of that total – $22.54 billion – was detected, prevented, and recovered. Yet last year’s Taxpayer Advocate report to Congress noted that the IRS takes an average of 312 days to resolve an identity theft case, even though cases referred to the advocate directly can be straightened out in an average of 87 days.
With the exception of the amendments and provisions mentioned earlier, NTU and CCAGW support the anti-theft and anti-fraud measures that could be taken in the legislation, especially the following:
- Requiring the IRS to work with the Taxpayer Advocate in developing “publicly available casework guidelines” for assisting tax identity theft and refund fraud victims, as well procedures and metrics to evaluate their effectiveness. As indicated above, clearly the Taxpayer Advocate has crafted a viable set of procedures for the expeditious and satisfactory resolution of these problems, and the rest of the Service could benefit from collaboration on an agency-wide basis.
- A safe harbor for de minimis errors on information returns, payee statements, and withholding. Even though preparation software and other technologies help to reduce mistakes in tax reporting, honest human oversights will continue to occur. It is neither efficient nor effective from a tax administration standpoint to slap heavy penalties on taxpayers who are otherwise compliant with the filing procedures but have made minor reporting errors on the document. This carefully drafted provision, applying to errors of $100 generally or $25 in the case of withholding or backup withholding, is eminently fair.
- Creation of an Internet platform for 1099 filings. Although paper filing options will continue to be the choice of some individuals and businesses, it is important for the IRS to provide electronic options, which save time and money both for citizens and the government. The IRS’s severe IT problems notwithstanding, this provision to direct the agency to provide full 1099 filing capacity online by 2020 is practical and reasonable.
- Many of the amendments offered by Senators Coats, Heller, and others to strengthen identity theft education and coordination efforts are commendable. One particular amendment that should not escape the committee’s attention is Senator Warner’s proposal (Warner Amendment #1) to require GAO to study the language in applicable ID theft notices to citizens. One persistent problem the Taxpayer Advocate has noted is that the content of IRS correspondence is often indecipherable to significant percentages of recipients – a basic shortcoming that can have serious consequences in successive interactions.
IRS Technology Management Reforms: Part of the Solution
It bears mentioning here that much work remains to be done in improving the overall technology architecture at the IRS. In one major incident last year, criminals gained access to the tax information of more than 700,000 people. Ironically, the thieves hacked into an IRS service designed to help the victims of identity theft. In SecurityScorecard’s 2016 U.S. Government Cybersecurity Report benchmark study of corporate and government cybersecurity released on April 14, 2016, the IRS was given a grade of “F” for its network security due to expired certificates, weak ciphers, and open ports that could be vulnerable to hackers. We implore the committee to continue monitoring and crafting appropriate legislative responses to these flaws.
The IRS also has problems in regard to software licenses. On June 25, 2013, the Treasury Inspector General for Tax Administration (TIGTA) released a report entitled “Desktop and Laptop Software License Management Is Not Being Adequately Performed.” According to the report, the IRS spent $235 million on software licenses in 2011 and has been quite sloppy with its accounting of software assets. TIGTA found that 21 of the 27 software products reviewed did not have unlimited software licenses and six had more than one license deployment record.
The confusing mishmash of software inventory records led to some licenses being either overused or underused, including eight software products that were not used in a cost-effective manner because the agency deployed significantly fewer licenses than it had purchased. For three software products, the IRS deployed more licenses than it had purchased.
TIGTA recommended that the IRS implement a specialized software license tool designed to discover, track, and manage software license deployment and usage, and develop an inventory of software licensing data and maintain inventory with a special software license tool designed to discover, track, and manage software license deployment and usage. Despite the availability of existing software asset management tools from a number of different companies on the market, the IRS claimed that no such system existed; therefore the IRS would have to create its own software inventory tool to manage software license deployment and usage.
Finally, taxpayers’ personal identifying information continues to be placed at risk of disclosure by the lack of information security controls at the IRS. On April 14, 2016, GAO issued a report that found the IRS had instituted numerous controls over key financial and tax processing system but failed to implemented safeguards to restrict access to these systems and the contained information. GAO recommended that in addition to its 49 previous recommendations, the IRS should implement another 45 recommendations to improve its information security controls.
Rather than continue to try to compete against private sector companies to develop software programs and various information technology initiatives, the IRS should put its efforts into securing existing information technology systems, and improve data security.
Taxpayer Protection Legislation: Proposals to Support
The Taxpayer Protection Act of 2016 would make many worthy changes on behalf of consistent and fair tax administration. Among those proposals of interest to NTU and CCAGW are the extension of the period for contesting wrongful levies and the expansion of court review capabilities in granting equitable relief from joint liability.
However, several amendments offered to the identity theft legislation could equally apply to the Taxpayer Protection Act, and could greatly strengthen those safeguards. Among them, Grassley-Thune-Cardin Amendment #1 offers by far the largest number and range of improvements to current taxpayer protections.
Although it was authored prior to the extenders legislation’s codification of the Taxpayer Bill of Rights, the remainder of this amendment could still answer to the committee’s current purposes. Highly desirable elements include clarified lien notice filing procedures, expedited “hardship” relief for businesses subjected to levies, and a new consultation requirement that will ensure that the IRS bureaucracy seeks early, systematic input from the Taxpayer Advocate before new regulations are published.
As the committee holds its markup, your colleagues in the House are scheduled to hold floor votes on a number of bills that will improve IRS operations to the benefit of taxpayers. Some of these have parallels to the legislation and amendments you are considering, among them the No Hires for the Delinquent IRS Act (H.R. 1206). We would encourage Members of the Committee to review these House bills and determine whether their inclusion in your final legislative package is feasible.
Senator Portman’s Taxpayer Audit Reforms: An Imperative for the Committee
The single most important new recommendation NTU and CCAGW can make in this communication is that members adopt Senator Portman’s legislation, introduced Monday, to dramatically improve taxpayer safeguards in the examination process. S. 2809 would clarify that the IRS cannot interfere with any taxpayer’s right to an impartial hearing before the IRS appeals division. Bullying tactics, such as the use of designated summonses or employing costly outside law firms to participate in audits against taxpayers, would be ended or curtailed.
Some members of the committee might not be convinced that this legislation is such an urgent matter. We can affirm that it is. Last year, CCAGW and NTU joined the Coalition for Effective and Efficient Tax Administration, a consortium of 14 trade associations and taxpayer groups, because we recognize that these proposals are of vital concern to all taxpayers. The right to an appeal should be an inviolate principle in our tax system. Furthermore, the IRS has been organized and reorganized in a number of ways over the past several decades, but one constant at the tax agency has been its tendency to wield tools of enforcement in unintended, often dangerous ways.
The designated summons, which began as a hammer to use against a few tax protesters, is now being used to bludgeon large businesses. Taxpayer advocates are concerned that the tactic will come full circle to hit small businesses – not that businesses of any size should be subjected to such abuse. Tax litigation experts with small business and individual clients such as Dan Pilla have for many years documented how procedures developed for large businesses can be turned against other types of taxpayers. In his book How to Win Your Tax Audit, Pilla discusses what he calls this phenomenon of “migration,” and mentioned summonses as part of the problem.
The best solution to address this palpable threat is to move Senator Portman’s legislation to the floor now (either as a standalone bill or as part of a package).
Other Opportunities for Progress on Taxpayer Rights
More than 15 years have passed since Congress adopted the IRS Restructuring and Reform Act, and Congress has amassed a considerable body of experience on potential improvements from sources such as the Taxpayer Advocate, professional practitioners, and individual tax filers. Aside from the Taxpayer Bill of Rights Enhancement Act, which is part of Grassley-Thune-Cardin Amendment #1, a thoughtful piece of legislation worthy of the committee’s examination is S. 949, Senator Cornyn’s Small Business Taxpayer Bill of Rights Act.
Members will see some familiar items in S. 949 pertaining to misbehavior of IRS officials and innocent spouse relief. In addition, they will see some provisions that could very ably complement some of the other pro-taxpayer safeguards under deliberation today, among them:
- Creating an Alternative Dispute Resolution program for audits that will permit neutral third-party mediation in a cost-effective manner;
- Expanding small case procedures and access to installment agreements without fees;
- Instituting a ban on ex parte communications between IRS case employees and appeals officers, and a prohibition on new issues being raised during a taxpayer’s appeal process; and,
- Providing more avenues for redress when the IRS recklessly or intentionally disregards the law, including increases in the cap on damages and more options to recover attorney fees. This merits the committee’s constant attention, as the law has rarely kept up with the financial realities taxpayers face when retaining legal representation.
Finally, we must remind the committee that there are still more longstanding areas to explore in the quest to improve taxpayer rights. Although the 1988 and 1998 taxpayer rights laws provided for certain exceptions, taxpayers still generally cannot enforce their rights in court until after they have been violated. Under Section 7421 of the Internal Revenue Code, no lawsuit can be brought by any person in any court for the purpose of restraining the assessment or collection of a tax, except under limited circumstances. The case law around the Anti-Injunction Act further impedes the ability to restrain the collection of the tax. Moreover, the Declaratory Relief Act, which allows citizens to file a suit that can persuade a court to declare their rights, indicates that the law applies “except with respect to federal taxes.” The Federal Tort Claims Act presents additional barriers to tax-related controversies.
Taken together, these provisions serve as a “Berlin Wall” that denies taxpayers simple justice. Congress should give serious consideration to providing citizens with the ability under certain circumstances to stop the IRS from violating their rights through litigation.
The goal of voluntary compliance in our current tax system is best served by three principles:
1) Simplifying the laws so that citizens can understand them;
2) Employing technology and sound management to curb wasteful administration; and
3) Providing a strong framework of rights to assure taxpayers that they will be treated fairly, as well as remedies to enforce those rights.
The current markup proceedings cannot directly touch upon the first principle, but they can certainly have a salutary impact on the other two. We stand ready to assist the members of the Finance Committee in all of these tasks, and we salute your willingness to fashion such critical legislation in a bipartisan manner.