Senator Kerrey, Congressman Portman, Commissioners, my name is Joseph F. Lane and I am an Enrolled Agent engaged in private practice in Menlo Park, California. I am appearing today on behalf of the National Association of Enrolled Agents. The more than 9,000 members of the NAEA are all small business owners and tax professionals with a keen interest in the work of the Commission and in the betterment of our current tax administration system because of the direct impact it has on millions of our clients and for the broader impact it has on scores of millions of America’s taxpayers.
We applaud the openness of the Commission staff in approaching their task and appreciate the opportunity to appear before you today to testify about the tax practitioner’s perspective on Electronic Filing.
Until recently, the average tax practitioner held a fairly negative view of the IRS Electronic Filing Program. This view was formulated in the early days of the electronic filing effort due to an overemphasis on refund anticipation loans. Many practitioners felt that they were not interested in gouging their clients by recommending RALs, which at times carried effective interest rates above 40%, and correctly saw no benefit to themselves for filing electronically.
Indeed, their tax return processing costs were significantly increased by opting to support electronic filing because of the additional $.20 to $20.00 per return fees imposed by tax preparation software vendors for using their electronic filing option; by the initial insistence on expensive, non-standard modems by the IRS; by the number of tax forms the IRS would not accept electronically; and by the additional record keeping requirements imposed by program participation. These factors coupled with the primary IRS marketing thrust of "do it because it helps us" failed to elicit much response from the industry.
The IRS has never understood the economics of the electronic filing decision making process encountered by the average tax practitioner. The IRS does not understand it today. They insist on seeing "reality" through their own prism despite being told on countless occasions, by group after group, that they must find a way to incentivize the electronic filing process for the average practitioner. Our organization alone has met with IRS electronic filing staff many times over the years to offer suggestions on how the program could be improved. We have made available to the Service the results of member surveys about electronic filing, we have met with focus groups of IRS executives studying the issue, we have spent time at the annual IRS electronic filing shows talking with IRS electronic filing personnel about ways to improve their marketing. We are still awaiting the Service's revised electronic filing strategy which was due out last September.
We have reached the conclusion that the skill set for marketing just does not exist within the Service. This is understandable since they have only recently began to focus on the concept of having customers rather than cases.
We urge the Commission to recommend that Congress explore the possibility of IRS contracting out the marketing of electronic filing services.
One prime example in favor of having marketing professionals take a fresh look at how the electronic filing program is run is the "backwards" emphasis IRS has placed on securing relatively simple tax returns electronically instead of more complex tax returns. From the tax practitioner's view this is exactly the wrong way to promote electronic filing. The tax practitioner operates in an extremely competitive business environment within the simple income tax return marketplace. The price sensitivity of those taxpayers is hyper-extreme. There simply is no additional leeway to add another $10.00 or $15.00 charge to the bottom line - often that small amount will mean losing the client.
Where practitioners do have some flexibility on billing and where clients are less price sensitive is when dealing with the more complex income tax returns - yet those returns are often the very returns that cannot be completely filed electronically. When practitioners have to interrupt the processing flow within their offices during the hectic filing season to manually file three forms and electronically file 18 others - all benefit of electronic filing is lost for that client and the opportunities for error expand dramatically. What is more confusing about the IRS approach in this regard is the fact that more complex returns are the ones with orders of magnitude more data and thus orders of magnitude more opportunities for data transcription errors. We think common sense itself would dictate getting the complicated returns electronically first.
Today, the average practitioners with two or three hundred returns must, in most cases, pay a substantial fee relative to the average cost for their services to file electronically. This additional fee is the per unit cost charged by the tax preparation software vendor for utilizing the electronic filing option.
NAEA believes that there needs to be a clear delineation between the separate acts of preparing a tax return and submitting a tax return. No one argues that software publishers are entitled to be compensated for usage of their preparation program. But, to permit them to additionally control the method of submission is tantamount to permitting them to require that all income tax returns prepared using their software must be mailed via Federal Express at the cost of $15.00 per package rather than via US Mail for $.32. The current situation is akin to the early days of franchising when you had to buy all your cups and paper goods from the franchiser at exorbitant rates relative to the true market value. We believe that the Commission should recommend to Congress that the IRS standard for electronic filing submissions be written to an unencrypted, open- document standard and that the practitioner-consumers be given the option of utilizing whatever electronic filing transmission service they select based on market place pricing. The process already is in place to require all tax preparation software vendors to submit their program output to the Service for final approval. To add the additional requirement that they provide open access to the data file needed for electronic filing is relatively simple. The continuance of the software vendors hegemony must end if electronic filing is to receive the fair test it deserves and the American taxpayers are to recognize the return on their investment made in IRS computing power.
NAEA decided several years ago that one of the primary responsibilities of our National member service effort would be to explore the potential that new technology applications offered to tax practitioners. We became the first practitioner organization to establish a web site to provide information to taxpayers and tax practitioners alike. We sponsor the Tax Channel on America OnLine and have answered hundreds of thousands of taxpayer inquiries over the past several years and we have integrated our members’ web sites into our on-line programs. We have over 20% of our entire membership accessible via e-mail and frequently use this facility to survey members about issues. In fact, over the past several months we have conducted, at IRS request, several surveys of our members and provided valuable information back to the Service, often within 48-72 hours. Given this technological emphasis on delivering member services, NAEA decided more than a year ago that the entire question of practitioner support for electronic filing needed to be reconsidered. We surveyed our members to ascertain what would prompt them to consider electing to begin filing electronically.
Our research indicated that if provided with expanded opportunity to communicate with the IRS via electronic means and expanded opportunities for servicing their clients’ needs that tax practitioners saw it to their advantage to file electronically. We also learned that most practitioner views of the refund anticipation loan program and other financial products available along with electronically filed returns were based on outdated or erroneous understandings of the use of these products.
Armed with this data, we began to consider how we could effect a paradigm shift in practitioner perceptions of electronic filing. At the same time, we were approached by a tax software company who was studying the same data and proposed that we enter into a strategic alliance with them to bring our members a multi-functional Electronic Commerce Center. The NAEA Electronic Commerce Center is envisioned to be a vehicle for all electronic tax transactions handled by our tax practitioner Members. This Center would provide a reasonably priced electronic filing mechanism, coupled with a full spectrum of financial products ranging from the basic refund anticipation loan to automatic deposit of refund checks to refund checks printed in the practitioner’s office to lines of credit to enable clients to file fully paid income tax returns with the IRS to credit cards with tax lines for payment of future estimated tax payments.
We found that once we addressed the critical issues of concern to practitioners as business owners, i.e., retaining a competitive edge, client retention, customer relations, office processing efficiency, etc., that their interest in participating in electronic filing climbed dramatically. Our initial business plan projected 500 members might be interested in the Electronic Commerce Center during the first year - we received expressions of interests from over 2,000!
We also found that there was an inverse relationship between the interests of the IRS and the practitioner community with respect to supporting electronic filing. The IRS ranked in order of importance the following factors:
1. Increase the number of electronically filed returns
2. Increase the number of fully paid returns rather than balance due returns
3. Expand electronic communication with practitioners on taxpayer account related issues
The practitioners ranked their order as follows:
1. Expand the electronic communications with IRS
2. Increase the number of fully paid returns by offering additional services such as lines of credit and loan packages to customers
3. Increase the number of electronically filed returns
Based on this data, and assuming that the intense budgetary pressures the IRS was facing last year would propel a new look at old ways of doing things, we proposed a series of pilot tests of the following initiatives with the Service to the IRS National Office in the Spring of 1996 for implementation commencing with the 1996 filing season:
Initiative A: Establishment of an NAEA Electronic Commerce Center to provide electronic filing services. We contracted with Orrtax Software, Inc. to become our strategic technology partner and to provide us with a turnkey Center in time for the current filing season. NAEA was the first tax practitioner organization to establish a filing center for members.
Initiative B: Development of Balance Due Financial Products which would permit taxpayer clients of NAEA members to secure loans to permit filing of fully paid income tax returns rather than balance due returns. These products are now available via our Electronic Commerce Center.
Initiative C: Coordinate Electronic Funds Transfer payment procedures with IRS for our new income tax balance due products.
Initiative D: Expand the use of electronic communications between the NAEA members participating in the pilot and the IRS. This addresses the proposals to permit electronic filing of Powers of Attorney and electronic submission of transcript requests by NAEA members.
Initiative E: Expand the use of Electronic Fund Transfers for the filing of automatic extension requests, estimated tax payments and installment agreements.
Initiative F: Permit automatic on-line establishment of Installment Agreements by NAEA members using the National and Local Standards set forth in the IRM for cases in notice status, ACS or in the ACS queue. This assumes there will be an automatic electronic transfer to IRS of the monthly installment payment.
Over the past seven months we have held many meetings with IRS National Office officials to discuss the scope of our admittedly ambitious pilot proposals. We agreed to limit the items needed from the Service for the current filing season to two issues, the ability to file Powers of Attorney electronically and the ability to request taxpayer account transcripts electronically. These two features were the ones most requested by our members and if received would have significantly increased the number of Electronic Filing Program participants for the current filing season.
Our proposals were met with enthusiasm at all levels of the IRS. Unfortunately, that’s all that happened. For a variety of reasons, the Service was not able to respond affirmatively to even these two issues and as a result will not receive a significant number of returns electronically this year.
We are somewhat perplexed by this turn of events, especially given the enthusiastic response. We felt the pilot proposals offered the Service the opportunity to test new approaches with a controlled group of reliable, qualified and vetted practitioners, all of whom would be subject to the provisions of Circular 230 with respect to the rules of conduct and standards of professional ethics.
Partly we attribute this lack of responsiveness to remnants of the classic bureaucratic "not invented here" syndrome, but, more importantly and perhaps more critically, we are concerned that the lack of any type of coordinated proposal evaluation process renders the Service incapable of responding quickly to unique and radical suggestions for improvements in the way they operate programs. We believe this is largely caused by the traditional "functionalism" within the IRS National Office.
We believe the Commission should address this issue in its upcoming evaluation of IRS organizational components. Based on our experience this past year, we could easily see justification for providing the office of the Deputy Commissioner or the Chief Information Officer with a staff of independent consultants to function as an internal consulting group for purposes of initial evaluation and follow-through on Congressional and stakeholder suggestions for improvements. This may prevent the disappearance and premature death of many good ideas in the infernal bureaucratic maze of the IRS National Office.
The IRS has long talked about partnerships with the tax administration and practitioner community. The time has come for this talk to become reality and foster true partnerships that provide for valued input and benefit to both sides. There are many hard working, dedicated employees within the IRS who share this desire for partnership and progress. Despite the bureaucracy and obstacles we have confronted thus far, the NAEA does not consider its proposals a dead issue and are hopeful they will be implemented in the coming year for the ‘97 filing season. We are confident the work of this Commission will provide the necessary framework for successful IRS/practitioner partnerships and for a more effective electronic tax administration system.
Thank you again for this opportunity to meet with you today and share our views. I will be happy to respond to any questions the Commissioners may have and am pleased to offer the support of the NAEA for any future projects the Commission plans to address.