Senators Kerrey and Grassley, Congressmen Portman and Coyne, 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 in my capacity as the Co-Chairman of our Government Relations Committee. The National Association of Enrolled Agents has over 9,500 members who are tax practitioners serving millions of individual and small business taxpayers every day. Thousands of Enrolled Agents deal with someone in IRS every working day on behalf of taxpayers. We are uniquely positioned to observe and comment on the average American taxpayer's views about the Internal Revenue Service.
As you know, we have followed the proceedings of the Commission very attentively for the past seven months, attended all of your public hearings and met on numerous occasions with individual Commissioners and staff. We applaud the way you have approached your task by soliciting feedback from taxpayers, tax practitioners, academicians and government officials alike in evaluating the best way to resolve the critical issues facing tax administration today.
As always, we appreciate the invitation to appear before you today to testify about our proposals for your consideration and possible incorporation into your final report.
Over the course of the past several months, we have provided testimony and written comments to the Commission for your consideration. These submissions contained our observations and recommendations on the specific areas your staff requested we comment upon.
To assist your staff in their unenviable task of wading through the truly massive amounts of information you have received in the course of your deliberations, we have appended an exhibit to this testimony which summarizes the recommendations of the National Association of Enrolled Agents on the major issues we have addressed.
While we have provided you with many recommendations, today we want to emphasize the importance of one major recommendation to you concerning the structure of the Internal Revenue Service. We have been very interested in the comments of the management consultants and academicians who have addressed the Commission and especially valued the constitutional debate between the Treasury Department General Counsel Edward Knight, and the law school professors regarding the status of the IRS/Treasury relationship. We found that session to be one of the most intellectually stimulating discussions on the nature of tax administration we have ever had the opportunity to observe.
Over the course of the past several months, we have had many discussions with our Members, our staff, our elected leadership, our strategic business partners, congressional committee members and staff, IRS officials and other practitioner organizations about the current state of tax administration and what could be done to improve it. We have made a special effort over the past year to seek out the input of our Members who have served as IRS officials and executives in the past and are now in private tax practice. Every one of them has told us that they were amazed by the difference in viewing the Service from the taxpaying public's perspective. Almost all said that had they had that understanding while still in government service that they would have changed the way they did business.
We have factored all the feedback and thoughtful suggestions we received from our Members into our deliberations about why the IRS is subject to such unprecedented levels of criticism, skepticism and cynicism today and conclude that you need to recommend major structural changes in our current tax administration system.
Change is needed because, in a democracy, people who have done nothing wrong should not fear their government. Yet today, if you were to select 100 people at random off any street in America and tell them IRS wanted to speak with them - the overwhelming reaction would be one of fear. This is true despite the fact that 85% of those people, by IRS' own statistics, have done nothing wrong and are compliant taxpayers. A contact from IRS should not have the chilling effect on law-abiding citizens that a contact from INS has on illegal aliens. The fact that it does is indicative of a system badly out of sync. Our Members have confirmed the pervasive nature of this fear among their clients. We know you have heard testimony to the same effect. We read and view horror stories about it in the media every day and we know that honest and caring employees of IRS feel it hinders their effectiveness in the performance of their duties.
We believe the seed cause of this fear can be traced to the root structure of the Internal Revenue Service. Over the years, the IRS has allowed its enforcement divisions to dominate its organizational culture to such an extent that it has hampered its ability to change. The law enforcement mentality is a much needed and highly valued component of any agency charged with tax administration. But, to secure the wide-spread support of law-abiding citizens, it must co-exist with an equally important customer service mentality. While significant improvements have been made in the past two years, the current corporate culture of IRS does not truly embrace this concept. It is a fact that 85% of American taxpayers do nothing each year to deserve having to deal with the effect of the Service's law enforcement mentality. They simply want a question answered so they can comply with the law - or they simply need a form - or they need to know how they go about setting up their new business. And they deserve to have these needs met competently and courteously.
The primary job promotion path available to the vast majority of IRS employees is through the enforcement divisions. Indeed, with the recent reorganization, taxpayer service has been curtailed or eliminated in most IRS offices around the country and in some places combined with the Collection Division. This has created the situation where in order to get promoted above entry level, employees working in taxpayer service have to qualify for jobs in enforcement positions. Thus even those temperamentally predisposed to customer service careers have to prove how tough they can be to get promoted. This situation is antithetical to good customer relations and quality customer service. There is a world of difference between "the customer is always right" and "do it because I have the power to make you do it." The predominance of this enforcement mentality has forged the image of an arrogant IRS in the minds and experience of many taxpayers.
When this public perception of agency arrogance is coupled with the increasing centralization into the Washington National Office in the IRS decision-making process, it is no wonder why the Service is accused of being insular and unresponsive. We have been told by current IRS executives and managers that they no longer feel they have the ability to have an effect on the direction of the organization. We are aware that your own meetings with retired and active duty Service officials confirm this information. The end result of this consolidation of power has been an employee and executive morale crisis of unprecedented proportion and we believe has contributed to the "brain drain" at the highest levels of the organization. We think your recent field hearings in Nebraska brought out this point in very stark detail.
We think the Commission ought to be very concerned about this concentration of power into the hands of fewer and fewer people. The true strength and integrity of the IRS has historically been the presence of multiple power centers in the organization both in the field and the National Office. This process afforded safeguards against abuses within the system since power was truly diffused between the National Office officials and the Regional officials. This is no longer the case. The regional offices have been reduced to the bureaucratic equivalents of prehensile tails - serving little real function - vestiges of their former selves. In an organization where some of the most creative thinking and experimentation originated in the regional and local offices, there is now a void and those tasks are now the responsibility of someone in Washington. We have been told by veteran division managers that even the most routine budget adjustments and program deviations must now be run through Washington.
The IRS of twenty years ago was broadly respected for the caliber of its executive leadership and we believe that was the direct result of the highly decentralized nature of its decision making process. Field executives commanded an organization which was characterized by a high degree of autonomy and as a result felt empowered to lead and execute programs based on their conceptions of local conditions. As a consequence, executive and employee morale and taxpayer compliance was higher than today. We believe the primary impact of this trend toward centralized decision-making has been to further isolate the decision-makers from the people whose lives are affected by the decisions. The recent field reorganization's negative impact in small states is a prime example of making decisions in this vacuum, as the testimony of the IRS employee in Nebraska pointed out. Another example is the controversial national and local standard criteria now used in making Collection case determinations - where local input is overridden by the use of Bureau of Labor Statistics data.
We believe that a well functioning tax administration system is as much an integral part of our national infrastructure as our interstate highway system or our air traffic control system. Our tax system depends on soliciting the support of taxpayers who voluntarily gather up their information, prepare their tax returns and self-assess themselves. This system demands that taxpayers perceive it as fair and impartial or it shatters. Voluntary compliance today is a very much threatened component of our national economic system. There are multiple reasons for this crises - by no means all of IRS' making. However, the public perception of IRS' arrogance complicates the reality we all have to deal with in correcting our system.
We know that one of the proposals you are seriously considering is the establishment of an outside Board of Directors for the IRS. We believe this concept has merit only if it truly functioned as an independent corporate board and was part of the complete overhaul of the IRS we are proposing. We would be concerned about the efficacy of this concept if it were merely tacked onto the existing IRS structure because it would not address the fundamental flaws in the corporate culture of the Service. It would treat the symptom but not the disease. We think it is also important to establish special exceptions to the usual government conflict of interest regulations in selecting these board members. It is critical to be able to appoint individuals who are knowledgeable in tax law, marketing, customer service, and technology integration issues and are still working in their industries as leaders and executives.
You need to address what has caused the current system to fail. The dedicated employees of the IRS will appreciate your help. And let there be no doubt that IRS has tens of thousands of dedicated employees. They would have to be dedicated to stay in an environment that so frustrates their spirits. The problem with the IRS is not the quality of the people who work there - they are generally as fine and honest a group of citizens as you are likely to encounter anywhere. It is not the problem of the executives who run it - they are a dedicated and hard working group. The problem with the IRS is that it is an agency with a schizophrenic mission. First and foremost in its own view, it is a law enforcement agency, yet it is charged with providing service and education and technologically sophisticated solutions for which its law enforcers have not been academically or temperamentally prepared. By way of analogy, the agents of the Federal Bureau of Investigation are charged with the responsibility of investigating the growing incidences of mortgage fraud in this country yet no serious voice would ever propose that they also be assigned to helping people fill out mortgage applications three months a year!
We believe that this fundamental conflict between the mission of the agency and the temperament required to be effective law enforcers creates a tension which inhibits creative resolution of the problems facing the Service today. We also doubt the agency, as it is currently structured, is capable of making the needed changes on its own initiative. All we need to confirm this view is the recent decision to fill the new Acting Assistant Commissioner for Electronic Tax Administration position with an executive with twenty plus years service in the Criminal Investigation function instead of selecting an experienced Information Technology manager. While the executive is a very well respected career official and has vast experience as a top "tax cop" - one has to ask where is the technology and marketing acumen so desperately needed in this new position? Where is the ability to think outside conventional approaches to meet the challenges on the electronic tax administration frontier? In any other business environment this position would have been filled, even on an acting basis, with a proven technology manager with a broad understanding of the market forces at play outside their immediate environment.
We believe the present fragility of taxpayer voluntary compliance requires extraordinary steps to restore public confidence and rebuild taxpayer relationships with their government. There is no longer any room for delay or conventional approaches. We believe the current structure of the Internal Revenue Service presents the prospect of effective tax administration with a "mission impossible" scenario and it should be changed immediately. Therefore, we recommend that the Internal Revenue Service be abolished and its functions divided and allocated into separate operations. In its place there should be established a Tax Enforcement Administration and a Taxpayer Service Administration.
We offer no firm opinion as to whether these entities should be under the aegis of the Treasury Department. We, like many Americans, just accepted the fact that tax administration should be a function of the Treasury Department. Needless to say, we were confused by the Treasury's recently announced five-point program to improve IRS. We had been under the impression that the new initiatives announced by the Deputy Secretary had been the responsibility of the Department all along. We leave it to the Commission, the Congressional Committees and the Administration to address the proper placement of these new agencies.
We envision the responsibilities of these two new agencies as follows:
Tax Enforcement Administration
The tax law enforcement functions of Examination, Collection and Criminal Investigation should be all that comprise the new Tax Enforcement Administration. This agency would have a Director, nominated by the President and confirmed by the Senate. To correct the past problems of constant turnover in Commissioners, we recommend that the Director, Tax Enforcement position be filled in the same manner as the Director, Central Intelligence and the Director, Federal Bureau of Investigation positions. We feel a five year term may make it easier to recruit potential nominees. Its field organization would be headed by local Tax Enforcement Directors. The organization would take over responsibility for Collection cases once those cases have completed the notice cycles and the taxpayer had not adequately responded. The existing Automated Collection Service would be part of this entity. The responsibility for examination cases would be assumed when the case required the taxpayer or their representative to appear. Thus, correspondence examinations questioning one or two items would remain with the Taxpayer Service Administration. Obviously, all criminal cases would originate in and be worked by the Tax Enforcement Administration only. The Chief Counsel of the Treasury would still provide legal support services through a Chief Counsel for Tax Administration function. This agency would not have its own data processing operation, but would secure its information technology services from the Taxpayer Service Administration.
The benefits of locating all law enforcement functions under one roof and permitting one organizational focus to dominate direction should improve morale of the individuals working in the agency, should concentrate efforts in combating the growing problems of taxpayer non-compliance, and permit innovative solutions to targeting law enforcement.
Taxpayer Service Administration
The new Taxpayer Service Administration would be headed by the Taxpayer Advocate, nominated by the President and confirmed by the Senate. This position should also be filled like the Directorships of the other agencies cited above. This would bring the degree of independence to the Advocate's role sought by Congress and the public. The field organization would be headed by local Taxpayer Service Directors. This agency would be responsible for:
- Taxpayer Advocacy function (taxpayer intervention, systemic monitoring and legislative advocacy),
- Taxpayer Communications (TDA and TDI notices, correspondence examinations, information returns programs such as document matching, underreporter program etc.),
- Taxpayer Service function (telephone assistance, taxpayer education, small business education clinics, local walk-in services),
- Tax Forms (design, printing and distribution),
- Electronic Tax Administration (electronic filing initiatives, electronic tax payment programs, web site maintenance, electronic commerce applications, electronic communications applications),
- Data Processing and Information Technology functions,
- Appeals function, for resolution of disputed collection and examination cases,
- Technical function for issuance of Revenue Procedures, Rulings, Technical Advice memorandums and private letter rulings - in short anything that has to do with interpretation of the tax codes enacted into law, and
- Internal Audit and Internal Security Functions.
Legal services to the Taxpayer Service Administration would also be provided by the Chief Counsel of the Treasury's Chief Counsel for Tax Administration function, thereby assuring coordination on Tax, District, Appeals and Supreme Court cases as they progress through the system.
The benefits derived from separating these functions from enforcement functions are numerous:
- It permits recruitment of creative individuals with the temperament for taxpayer service and provides a promotion ladder for advancement up the taxpayer advocacy and customer service line;
- It permits technology issues to be addressed by individuals with technology expertise and broader business experience than traditional IRS managers;
- It permits technology decisions to be driven by overall business judgment as it affects 200 million taxpayers and not be dominated by inappropriate concern for a statistically irrelevant number of criminal cases;
- It permits taxpayers to seek answers to their questions from an organization the Congress has appropriately funded with an adequate budget to serve citizens and it populates the technical tax law interpretation function with individuals driven by customer service motivations and not enforcement attitudes. We believe these points alone will go a long way towards assisting taxpayers in understanding the complexity of the tax law;
- It places the ability to enforce the Taxpayer Bill of Rights legislation in the hands of truly independent Taxpayer Advocates who will have the right to intervene in Tax Enforcement Administration cases when appropriate; and
- It provides taxpayers with a truly independent appellate process thereby improving perceptions of fair and impartial administration of the tax laws.
The Commission has heard testimony from Citibank regarding the way it managed technology integration issues. We took away from that hearing a broader lesson about identifying critical components of customer service. No customer service organization would approach 100% of its customers with an enforcement mentality applicable to only 10% of its customers. It would not long retain the 90% who felt abused by the process if it did so. Just because the Service has a monopoly doesn't mean that this is a lesson it doesn't need to learn. Taxpayers calling the IRS for technical information or on an account issue have the right to expect the same helpful attitude encountered when ordering clothes from L.L. Bean or booking tickets on United Airlines or questioning their American Express bill. As taxpayers they have paid for quality service and they are entitled to it.
Perhaps the most basic benefit of this suggested change is that it restores an appropriate balance to the priorities of tax administration. We believe the issue of appropriate balance was best expressed by President Kennedy in the aftermath of the Bay of Pigs debacle when he said it taught him that "generals should be kept on tap, not on top." Perhaps the same analogy can be drawn about the "cop culture" within IRS - it is a necessary supplement but it should never supplant the "customer service culture."
Congressional Tax Administration Office
We also believe that Congress should impose some discipline upon itself in the performance of its oversight responsibilities. We were stunned to learn from Commissioner Richardson's testimony before the Commission that the Service currently has a staff of approximately 250 people assigned to responding to GAO, Internal Audit, Inspector General and Congressional subcommittee probes. This is an outrageous waste of taxpayer resources and involves significant duplication of effort. We believe Congress should establish a Congressional Tax Administration Office, similar to the CBO, which would coordinate all oversight issues addressed by GAO, the Congressional tax and appropriation committees, the Taxpayer Service Administration's Internal Audit function and the Inspector General of the Treasury, (assuming the agency remains in the department). In addition, this office would coordinate IRS responses to problems raised by the Members' constituents. This would provide an independent point for analysis of trends, eliminate the wasteful duplication of investigations and reviews, and provide for a centralized overview of the agency's effectiveness. Hopefully, it would also provide a reality check for Congressional tax law change proposals by requiring some process of informed review and analysis before inclusion in new legislation.
We believe that if our suggestions are adopted by the Commission, there will be a collective sigh of relief from America's taxpayers that finally someone in their government will represent their interests, advocate their positions, and protect their rights. If this occurs, we will see renewed taxpayer support for both voluntary compliance and vigorous tax law enforcement against those who are not voluntarily complying. These are win/win propositions and should be adopted.
We hope that our recommendations will stimulate discussion and debate on the best way to achieve fair and impartial tax administration. America's taxpayers deserve a responsive and sensitive tax system and the government employees who work in that system deserve a chance to realize their individual potential in an environment that makes them proud of the work they do and makes us proud to have people of their caliber working on our behalf.
Thank you again for the opportunity to appear today. I will be pleased to respond to any questions the Commissioners may have at this time.
1. The IRS should be divided into two separate functions: a Taxpayer Service Administration and a Tax Enforcement Administration. In addition, Congress should establish a Congressional Tax Administration Office, similar to the Congressional Budget Office, to coordinate all oversight issues and IRS responses to problems raised by the Members' constituents, to provide an independent point for analysis of trends, eliminate the wasteful duplication of investigations and reviews, and provide for a centralized overview of the agency's effectiveness.
2. NAEA believes the IRS is as vital a part of the national infrastructure as the interstate highway system or air traffic controllers. Congress must ensure that IRS has the financial resources to be adequately staffed, trained and supplied. NAEA supports long-term, multi-year funding for IRS systems that cannot be built in one year.
3. NAEA recommends that IRS be at the table as tax legislation is being developed so that implementation issues can be resolved early in the process. The current filing season is going very smoothly despite the fact that Congress made several hundred tax law changes in late July and early August last year which required significant implementation work by IRS. It is a tribute to the dedication of IRS staff that necessary forms, instructions and publications were available in timely fashion.
4. NAEA recommends that the IRS standard for electronic filing submissions should be written to an unencrypted, open-document standard so that individual taxpayers and practitioners may 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. Once this cost logjam is broken, we believe a significant increase in electronically submitted returns will occur.
5. NAEA believes that a fundamental taxpayer right is to be able to rely on the expertise of the individuals who assist in helping citizens meet their tax obligations. The tax laws of this country are too complex to permit commercial firms and individuals to offer services to taxpayers without requiring that they maintain a minimum level of technical proficiency and stand by their product in the event of error. For this reason, NAEA recommends that all commercial tax preparers be licensed.
6. The concept of client privilege should be extended to Enrolled Agents and Certified Public Accountants. It is a basic right of taxpayers not to have their own advisors used as witnesses against them.
7. The IRS should contract out the marketing of electronic filing services.
8. NAEA recommends that the General Accounting Office address what incentives could be pursued to bolster the IRS recruitment of competent, well educated, promotable individuals for government service.
9. In a number of areas, the tax code is overly complex or at variance with stated public policy goals. An example of this is the Alternative Minimum Tax (AMT). The Earned Income Credit, despite recent efforts at reform, remains overly complex to average taxpayers yet is relatively easy to abuse. User fees and penalties should not be used as revenue raisers. There should be closer collaboration between federal and state lawmakers as to the interaction of federal and state laws.
10. NAEA recommends that greater attention be given to bringing non-compliant taxpayers into compliance. A dramatic increase in the number of personal bankruptcies since January, 1996, despite a very strong national economy, may be attributed in part to IRS national and local standard expense allowances for housing, utilities, property taxes, homeowners or renters insurance, association fees and property maintenance and repairs. These expense allowances are used in collection cases, however, in many geographical areas, the allowances are absurdly low. As a consequence, many practitioners have been forced to recommend that their clients seek the protection of the bankruptcy court as there simply is no way to resolve the matter administratively within the IRS.