THE IRS FOR NON-TAX PURPOSES
2. BALANCING COSTS AND BENEFITS TO DO THE JOB
3. OTHER MEANS TO DO THE JOB
I am pleased to address the Commission on the subject of using the Internal Revenue Service (IRS) for the administration of functions that I will refer to as "non-tax functions." For this discussion, I am defining non-tax functions as functions that are not directly defined as tax matters or core to the IRS mission, but Congress has asked the IRS to administer.
I speak from the perspective of somebody who has worked for the IRS for 30 years, the majority spent in the returns processing and service center areas. My career with the IRS started as a Tax Examiner in Ogden, Utah. In my last position before retiring in October of 1995, I was in charge of service center operations. That assignment involved managing the ten processing centers and responsibility for an annual operating budget of $1.3 billion and approximately 60,000 employees. In addition, I was the IRS representative on the President’s Welfare Reform Commission in 1995. Part of my duties involved the IRS Debtor Offset System, which redirects income tax refunds to 30 plus government agencies to satisfy child support, student loan and other government debts of taxpayer.
USING THE IRS FOR NON-TAX PURPOSES
As more and more social programs are being created and expanded, such as the earned income tax credit, the low-income housing credit, IRAs for college and medical needs, et cetera, the line between tax and non-tax matters is being blurred. In fact, the definition of the collection of money and information is getting more difficult to define. Given these realities and the fact that the country is trying to reduce the cost of government, it is tempting to propose that one agency do it all, that is, be the collection agency and information gathering and matching tool for all governmental purposes.
The use of one government agency to take care of all the "business of a citizen" has appeal to many. The IRS has a good reputation for collecting information and dollars, and using whatever legal means are necessary to carry out the task. The idea of using the IRS as the debt collector for non-tax government debts is becoming increasingly popular. As one Administration official told me: we are looking to the IRS because "its trains run on time." But, is this the right answer - or just the easy answer? It is my opinion that, under the current structure, traveling down this road is very bumpy and other alternatives may be more attractive.
BALANCING COSTS AND BENEFITS TO DO THE JOB
The IRS is a powerful and intrusive part of our life.
The IRS is a powerful and intrusive part of our life. Yet, it really has only two powers. One is the power to collect information and the second is the power to seize assets. The IRS was created to do a job. That job, or function, is to accept information and money from taxpayers who "voluntarily" comply with the tax laws, and to forcibly go after those who don’t. Congress and the courts have entrusted the IRS with these powerful tools, but only for its specific and narrow mission.
Information - Data Capture and Manipulation
The IRS collects enormous amounts of data. Unquestionably, the IRS has the biggest ongoing data files in the U.S. The IRS tracks individuals over time (that is, the IRS exchanges data with almost every U.S. citizen and resident every year). We each, as individuals, check in with the IRS annually. Our employers notify IRS monthly or quarterly about our earnings for tax and social security purposes. Each business, each exempt organization, each partnership and each corporation also check in with the IRS annually. Thus, the IRS has more information than any agency regarding the citizens of this country. This information is complex and often very private to the individuals who provide it. But many government agencies deal with the same citizens in different aspects of their lives, and these agencies could benefit from the information captured by the IRS.
The IRS mission of collecting information is based mostly on accounting. The reporting of income and payments of taxes is a lot cleaner and more impersonal than establishing a parental relationship or resolving family issues, such as child support and earned income tax credit entitlement. The tasks are significantly different. One involves training in accounting and the other requires social, interpersonal and community skills.
One of the things I learned during my appointment to the Welfare Review Commission was the difficulty that states have in pursuing delinquent child support cases or student loans where individuals move out of the state. Most of these programs are administered by the states, and their "reach" usually ends at their state border. And, not to be forgotten is that state tax agencies also are increasingly asked to be involved in the administration of social programs. It is natural, therefore, that they would look to the federal government, since the IRS deals with citizens regardless of where they live in the U.S. The IRS not only knows where people live, but also how much money they earn.
Seizing businesses, bank accounts and personal assets is a power to be used carefully and watched closely. Use of this specific and narrowly defined tool for other than tax collection purposes should not be done without careful consideration. To illustrate, a parallel exists between a local police force and the armed forces. Both carry guns, both have dedicated employees, but the basic mission, the training their people receive and the way they use their tools are very different. "To Protect and Serve" is significantly different than "To Suppress the Enemies of Our Country." By using the same comparison, it is difficult to imagine using the same tools to stop a criminal, like an organized crime figure, and to deal with someone who is behind on a student loan or child support payments. The collection tools the IRS has are harsh and cannot be easily softened. There is a danger for the IRS of losing these tools if their narrow limits are exceeded.
Opportunity Costs of Administering Social Policy.
Another significant issue is opportunity costs. To be successful, any endeavor must have clear goals and objectives. When I was asked to study the use of the IRS to collect student loans and overdue child support payments, the issue of opportunity costs became clear to me.
The IRS, like any enforcement agency, has more cases than it can handle. Thus, with more cases than people to handle them, priorities are set regarding collectability. If the IRS is asked to collect the dollars owed from several thousand overdue child support or other "non-tax" cases, the IRS will naturally measure the resources it would take (staff, equipment, etc.) and its impact on the current inventory. If, for example, the average student loan case was $3,500 in arrears and the average tax case in inventory was in the $20-30,000 range, it would make more sense for the IRS to use its collection resources to go after the higher dollar tax case.
The decision to collect a socially important low dollar case instead of a high dollar tax case is not easily made. We must ask what should be the primary focus of the IRS – to collect the most dollars that are owed to the government – or to collect fewer dollars owed to the government for various reasons that are then passed to certain, specific citizens. What is the mission of the IRS? What should the mission of the IRS be? If it is determined that the IRS should perform tax and non-tax functions (that is, be the ultimate government debt collection agency), then the current mission must be changed and the funding and oversight of the IRS must change.
However we decide to use the IRS, it must be remembered that the IRS is not a free good. IRS resources are expensive and scarce. The IRS has highly trained auditors and revenue officers who are expert in accounting and tax law. They have unique technical equipment for maintaining a data base of 200 million individuals and businesses. The IRS computer files are kept for revenue accounting purposes. Each extra function IRS computers are required to accommodate puts new stresses on a system that is urgently in need of updating. To add more complexity by new programs that require new information sources that are social in scope significantly increases costs and may actually decrease total dollars collected.
I should point out, however, that the IRS is only able to use about half of the information that it receives. That is, the volumes and types of data are more than the IRS can or need to manage. Also, due to the state of the IRS computer systems and the volume of the data involved and its complexity, not all the information is kept. If fuller use of this data is to be made, the IRS must modernize its information gathering, computer, and processing systems. This will take years and cost billions of dollars.
The attached chart illustrates the problems facing the IRS regarding administration of non-tax functions. Some of the non-tax functions the IRS undertakes predominantly involve low-cost data manipulation. For example, a refund offset to collect a non-tax debt is low-cost and involves little IRS resources. Once a computer tape is prepared, the names can be run against the tax files and the appropriate markers can be added to offset individual taxpayer refunds. The government agency requesting the offset must pay a user fee for this service. Any questions about the correctness of the offset are the responsibility of the requesting agency, not the IRS.
Example of opportunity cost to collection efforts from social policy administered through tax laws.
Distributing tax credits to investors in low-income housing (LIHC) and earned income credits (EIC) to low-income taxpayers involve extra data capture and manipulation. Each taxpayer claiming the credits (Form 8586 or Schedule EIC) must submit specific information that the IRS must process. Often, the information is subject to third-party verification. The extra processing and checking costs are not reimbursed by the true "social-purpose agency."
First, more tax return filings are generated during a time when the Congress should focus on reducing the number of tax returns that are required to be filed. Since the earned income credit is predominantly claimed by individuals with the lowest levels of income, many are filing tax returns just to receive the credit. Without the credit, many of these people would not be filing tax returns because they would not reach the minimum filing thresholds. Congress should be eliminating - not creating - the need for these citizens to file tax returns.
If resources must be used to assure eligibility through compliance checks, more expensive computer and compliance resources must be used. This reduces the resources that can be used to deal with purely tax matters. In the case of the EIC, different techniques and types of information are required than for the income tax. For example, it can be advantageous for taxpayers to overstate income, to create "new" family relationships that would not meet the requirements to obtain a dependency deduction. These are not circumstances that normally concern IRS persons steeped in tax law and accounting and administering an income tax.
IRS service center and compliance resources are diverted. The EIC is among the lines most changed on the tax return after processing by the IRS. The fraud potential is also high. Current estimates are that billions of dollars of earned income credits are going to ineligible persons. Rather than focusing on pure tax compliance, more resources are required to assure the ineligible are not getting the EIC. In an IRS compliance study of EIC filers for tax year 1993, the following represent the estimated number of taxpayers in the sample period who claimed more than the correct credit. (These statistics are weighted figures.)
¨ the sample included 1,273,000 returns claiming the EIC
¨ $1.48 billion was claimed on all returns
¨ 38.8% (or 493,924 of the returns in the sample) overclaimed EIC
¨ $386 million (or 26.1% of the total dollars claimed) was overclaimed
Granted, legislative and administrative changes have been made over the years by Congress and the IRS to help reduce the number of errors. But, the EIC is simply an illustrative example of how increased tax law complexity is driven by social purposes. This increased complexity adds to the difficulty in tax administration and compliance. Congress must acknowledge that distributing social benefits through the tax system is costly - it carries opportunity costs away from enforcement efforts. If Congress decides that the IRS should perform various functions, then a mechanism should be developed within the legislative process to ensure that the IRS’s administration of a function is properly addressed.
OTHER MEANS TO DO THE JOB
Albert Einstein once said that "you can’t solve today’s problems with the thinking that created them." I believe that this Commission is trying to bring some new thinking to the problems of the IRS and tax administration.
Use of the IRS Information
As stated, the IRS has large amounts of data on most taxpayers. In limited cases, the IRS shares this data with other governmental agencies for non-tax purposes. The authorizing statute, IRC section 6103, provides dozens of instances where disclosures are allowed. The Congress saw fit to provide extra protection for tax information – to protect taxpayer privacy and limit the ability of the government to use it. This raises two questions for the Commission. First, should tax information have such extra protection? Second, what information should be included as tax information?
I believe that tax information should continue to have this extra protection. However, I strongly urge using a narrower definition for the highly protected tax information. An individuals address, filing status, and number of dependents are all components of tax information. Since this information is useful to third parties – be it the Veteran’s Administration that is trying to locate someone to provide information about benefits or the risks of exposure to agent orange while in Viet Nam, or the welfare department to check the number of dependents claimed – this information should be entitled to less protection than other tax return information.
For traditional tax information, such as my actual income, its sources, who I made charitable contributions to, et cetera, this should be tightly protected. This tax information must be subject to greater protection and privacy. Why? Because this increased protection allows the IRS to do its job better and to protect my right to privacy.
In light of the needs of other government agencies and the types of information in the private sector, it may be useful to differentiate common information – such as my address – and pure tax information. The former should be subject to less protection and available to other government agencies for various official purposes. The latter should be tightly restricted.
Using the IRS Collection Resources for Non-tax Purposes
The statute creating this Commission requires that it examine whether the IRS could perform other collection, information and financial services functions of the federal government. There is pressure from many sources to have the IRS do more in the area of collecting governmental non-tax debts. Assuming more resources were provided to the IRS, it could obviously do more to collect these debts, such as student loans and overdue child support. Let us take it as a given that the IRS can do it better and cheaper than other governmental agencies or the private sector. The underlying question is whether this would have an adverse affect on the IRS mission as a whole.
If private or non-IRS government agencies wish to collect a debt, they must locate assets and use the court system to authorize that seizure of the assets or the garnishment of wages or other sources of money. Numerous procedural and legal safeguards must be observed first, with the debtor able to appeal and adjudicate up front.
If a tax debt is involved, the IRS usually sends a number of notices and then has the power to go after assets and funds. In unusual cases, the IRS can forgo the notices and seize assets summarily – using a jeopardy or termination assessment. There is no need to get a court order or the approval of a third-party. Just the opposite occurs, there are specific legal limits on the ability of the taxpayer and the courts to stop the IRS from using its collection tools. This is known as the Anti-Injunction Act.
The IRS has these summary powers because tax debts are involved. The Congress felt that tax debts should be given expedited treatment. Why not give the Education Department and HHS the same summary collection powers as the IRS? Congress has chosen not to do so. By putting the IRS in their shoes, acting as their agent, I am concerned that if problems develop or abuses occur because the IRS, for example, acts on the basis of incorrect data or the IRS is seen as being too aggressive in collecting non-tax debts, the Congress will eventually limit the collection power of the IRS by making the IRS use the same debt collection procedures that others have to follow today. Our self assessment system, however, is aided by the fact that the public knows that if certain taxpayers purposefully don’t report or pay their proper amount of tax, then more heavy-handed collection efforts are used by the IRS. The IRS’s collection tools ensure fairness in the system for those taxpayers paying their proper amount. This fairness should not be compromised.
Yes, the IRS could do more in non-tax debt collection, but the real question is, "should the IRS be asked to do more?" In the name of collecting more non-tax dollars, should we unleash the IRS on debtors at large? Or, should Congress require the other agencies to do their job more effectively with the resources available to them?
Technology and Information Sharing
I urge this Commission and the IRS to use technology as a critical component to solve the current dilemma of whether or not the IRS should be asked to perform non-tax functions. Use technology to "contract out" the data capture function for much of the data used by each agency and the result will be that the IRS is not needed as the government-wide debt collector. This is best accomplished through a refinement of section 6103. Specific and limited changes to section 6103 would allow the various government agencies to work with each other for the overall efficiency of the government without compromising taxpayer privacy and would encourage more public/private partnerships to provide data. These changes would provide for efficient government debt collection by each agency while allowing each agency to focus on their own unique functions.
It is important to retain each agency’s focus on their specific purpose. Each agency has unique skills (e.g., the IRS has accountants) and there is some common data that each agency should share, but the unique skills should not be blurred. Rather than having the IRS be the data library of all tax and social information, the IRS would be able to focus on targeted data. Thus, the IRS would be able to more properly manage the data that it does have, and the IRS would simply access the other needed data. The IRS and other agencies should be integrators and information processors of this private sector information rather than being a primary data source, putting lots of data into electronic form - data should only be keyed once.
The IRS determines a taxpayers liability through interpretation of tax laws and then the IRS collects the tax. For student loans, the individual has a coupon book for a previously agreed amount - there is no dispute as to the liability. The Department of Education currently works with private sector banks and financial institutions to collect student loan payments. We shouldn’t have the same heavy-handed enforcement personnel going after the student that moved several times and just hasn’t let the Department of Education or the financial institution know where they moved to. But, the IRS receives the students tax return and knows that the New Jersey student moved to California. The IRS should be able to give this information to the Department of Education so that the Department of Education can give this information to the financial institution. The proper changes to section 6103 would encourage these public/private partnerships for the most efficient overall government - both at the federal and state levels.
In 1967, the IRS created its large database - known as the Master File. This concept didn’t exist anywhere. A lot of progress, however, has been made outside of the IRS since 1967 and now the IRS is not the only organization creating and holding information. This information exists in secure databases within private sector firms (for example, accounting firms, banks, employers, stock market accounts, and exempt organizations).
I would advise and request that the Commission resist the temptation to ask IRS to perform other agencies business just because "their trains are on time." Resist the temptation to solve complex problems with the old thoughts that created them. Take advantage of the powerful information systems that our technology has created. Ask industry to help solve the problems with new thinking. The IRS must use the information as a resource, not use it as a punitive tool, and be legally able to share the needed information with other agencies. For the IRS to be responsive to tomorrow’s problems, we need to break up its concentration of information - not add to it.