House Panel Hears Testimony on IRS Policies

On March 13, the House Ways and Means Subcommittee on Oversight heard testimony concerning the 2008 tax return filing season, Internal Revenue Service (IRS) operations, the Fiscal Year 2009 budget proposals, and the National Taxpayer Advocate's Annual Report to Congress. Then-Acting Commissioner of the IRS Linda Stiff testified, and Nina Olson, the National Taxpayer Advocate, pressed for reforms that would both protect taxpayer rights and improve tax enforcement.

The two main issues discussed during the hearing were the progress the IRS has made on implementing the recently passed fiscal stimulus package and the rationale behind and progress to date of the private tax collection program run by the IRS since late 2006. Stiff reported significant progress in implementing the tax rebate portion of the stimulus package. The IRS estimates it will process 130 million payments to taxpayers who file income tax returns this year and will also identify and process rebates for over 20 million taxpayers who do not file income tax returns. Stiff reported the IRS is working with the Social Security Administration and the Veterans Affairs Department, in addition to outside organizations like AARP, to identify those individuals who will file no return this year.

Despite the less-than-ideal timing of the stimulus package and complications caused by the extremely late passage of changes to the Alternative Minimum Tax (AMT) at the end of 2007, the IRS is performing admirably, according to statements made at the hearing. In fact, Olson made a point of commending the IRS for its extraordinary work under difficult conditions, stating, "The fact that the IRS has managed to turn on a dime and deliver this filing season without significant glitches is a testament to the extraordinary people who work at the IRS."

Olson was less supportive of the other main topic during the hearing, the private tax collection program. Olson has repeatedly expressed serious concerns about the private debt collection program instituted by Congress in 2004 and implemented by the IRS in September of 2006. She reiterated her concerns during the hearing and in her annual report to Congress, particularly mentioning potential taxpayer rights violations and the lack of transparency within the private collection agencies (PCAs). Despite the fact that IRS has made changes to the program to try to address these concerns, Olson's fears have not been assuaged.

Olson focused on the basic revenue projection during the hearing, however. She testified the program would lose $81 million annually in tax revenue and opportunity costs for the IRS and could lose almost half a billion dollars over the next six years. Based on data from the program's first year of operation, Olson calculated the private debt collection program created a dismally small return on investment (ROI) of 1.45:1. She further testified if the IRS used the funds appropriated by Congress to administer the program ($7.65 million in FY 2008) on its Automated Collection System (ACS) program, it would yield between $91.8 million and $145.35 million in net revenue for the government each year. This is at least $81 million more than the private debt collection program is generating, which is around $11 million annually. Olson concluded:

Since the purpose of the PDC [private debt collection] program was to raise revenue, the fact that it is costing the government $81 million or more each year destroys whatever thin rationale might remain for its existence.

OMB Watch has stated similar objections to the private tax collection program run by the IRS and detailed many of the same types of arguments offered by Olson in a recently released report, Bridging the Tax Gap: The Case for Increasing the IRS Budget. The report calls on the IRS to end the private debt collection program.

There were two other areas of agreement between the report's recommendations and Olson's recent testimony. First is the excessive burden placed on taxpayers claiming the earned income tax credit (EITC). Olson testified the EITC audit process places "a heavy burden on taxpayers who may be ill-equipped to correctly navigate the audit process." Olson focused in particular on poor communication between the IRS and taxpayers claiming the EITC, reporting more than 70 percent of a sample of audited EITC taxpayers found the IRS audit notification letter hard to understand, and only 50 percent of those surveyed knew what they needed to do to answer IRS questions. Most shocking, more than 25 percent of respondents did not even realize their tax return was being audited. Olson encouraged the IRS to take steps to improve the services offered to EITC filers.

Second is the need for additional resources for Taxpayer Assistance Centers (TACs). Olson did praise the IRS for beginning to stop efforts to limit the types of services and methods of delivery of those services at TACs and for relaxing overly harsh or illogical rules for determining out-of-scope topics and providing tax return transcripts. However, Olson reiterated previous findings that TACs were only servicing 60 percent of the U.S. population and that recent efforts by the IRS to close one quarter of existing TACs and reduce staffing at the others was hurting taxpayer services. The president's FY 2009 budget request continues these efforts, as it cuts the budget for TACs by over $31 million and proposes reducing staffing by an additional 100 employees. Instead, Olson recommended providing a level of staff and resources for TAC offices necessary to meet all taxpayer needs.

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