GEORGETOWN UNIVERSITY LAW CENTER
THE IRS: WHAT IT DOES AND WHAT IT NEEDS
Friday, March 23, 2012
Capitol Tax Partners
former Treasury Assistant Secretary for Tax Policy
Ernst & Young, LLP
former Treasury Assistant Secretary for Tax Policy
Treasury Tax Legislative Counsel
Ernst & Young, LLP
former economist, Joint Committee on Taxation
President and Publisher, Tax Analysts
FRED T. GOLDBERG, Jr.
Skadden, Arps, Slate, Meagher & Flom LLP
former IRS Commissioner
National Taxpayer Advocate
Van Scoyoc Associates
former Chief of Staff
National Commission on Restructuring the IRS
MR. TALISMAN: Good morning. On behalf of Tax Analysts and Georgetown, I want to welcome you all to our conference examining the current demands on the IRS and the resources the agency needs to do its job. I particularly want to welcome any students who are here today. My name is Jon Talisman and I will be moderating our first panel. When I served in the Treasury Department in the late '90s I gave a speech describing the challenges facing tax administrators in the coming years caused by changes in the economy particularly, globalization in e-commerce. And I thought Dr. Seuss summarized it best: "We had come to a place where the streets are not marked, some windows are lighted but mostly they're dark." Since that time, those challenges have magnified at a pace even greater than anticipated and Treasury and the Service are being asked to do more, far more, with relatively less resources.
This conference arose out of a concern, a joint concern shared by Tax Analysts in Georgetown over these issues. How do we ensure that the IRS and Treasury can meet ever-increasing demands on the resources given current budget constraints, can the IRS keep up with an increasingly complex economy, and how do we find, as Commissioner Shulman said yesterday, the right balance between fiscal discipline and investing in IRS programs that produce a high rate of return? In other words, how do we make sure that the IRS is operating efficiently? We have two outstanding panels today to help examine these issues. Our panelists are all current or former senior tax administration officials, who have years of experience focusing on tax compliance and enforcement.
Before we turn to our panel, I want to thank the folks at Tax Analysts led by Chris Bergin, Larry Haas, Genilson Brandao, and Peter Billingsley for co-hosting this conference and for helping pull this together. I also want to thank Albert Lauber, John Buckley, Jill Castleman, and Brittany Cain and the rest of the faculty and staff here at Georgetown for their efforts.
Now, let's turn to our first panel. They're intended to set the table for the conference in our roundtable discussion which will be led by Chris Bergin and I'll let him introduce the second set of panelists. We really are fortunate on our first panel to have such an experienced group of panelists who have been involved on a current basis in the thinking about tax compliance. Our first panelist is Mike Mundaca. I was fortunate to serve with Mike during the Clinton administration. He led our efforts on a number of critical issues at that time including a number of high-profile international projects and the e-commerce commission. Subsequently, Mike was foolish enough to return to Treasury at the end of the Bush administration and then stayed on to become the assistant secretary during the Obama administration. Mike has, obviously, a wealth of experience and interest in these issues.
Next, we have Lisa Zarlenga who currently serves as the tax legislative counsel at Treasury. That means she has supervisory responsibility for most domestic tax issues currently at Treasury including most compliance initiatives. Lisa was previously a partner at Steptoe & Johnson and is familiar to many of you for her work with the ABA and D.C. Bar tax sections.
And finally, we have Mike Udell with us. Someone who truly has spent most of his professional career thinking about compliance and enforcement and revenue and resource implications of new legislative regulatory initiatives. Mike served for many years as the Joint Tax Committee's chief economic analyst regarding administration and compliance. He left the Hill just a few years ago and is now a senior manager at Ernst & Young where he still spends a great deal of time analyzing these issues. Before I turn it over to my panel, I just want to highlight a few statistics from Commissioner Shulman's testimony yesterday. It was very nice of him to testify yesterday because I didn't have to do a lot of research. So, the IRS already has received over 70 million returns for this filing season. The agency collects nearly $200 for every dollar spent on their budget. There are 5,000 fewer staff on the IRS payroll this year than last year and 3,000 less from enforcement. In fiscal year 2011, IRS compliance activities returned $55.2 billion of the Treasury to exam and collection activities. Finally, the IRS budget submission request 403 million in new IRS enforcement activities, which the commissioner says are expected to raise $1.48 billion in revenue annually at full performance.
In other words, according to his testimony, the return on investment is 4.3 to 1. The return on investment is even greater, according to his -- quoting him, "when factoring in the deterrence value of these investments and other IRS enforcement programs, which is conservatively estimated to be at least three times the direct revenue impact." The enforcement budget also includes $200 million in additional examination and collection programs that will generate more than $1.1 billion in additional annual enforcement revenue by fiscal year 2015, again a 5 to 1 return. OK. It's time for me to get out of the way and turn the microphone over to Mike who will start describing some of the challenges for tax administration and a global economy.
MR. MUNDACA: Thanks, Jon. What I'd like to do is talk a little bit about, as Jon mentioned, some of the challenges that the IRS and Treasury are facing in trying to implement, enforce, get compliance with our tax system in a more global economy with more cross-border transactions and frankly more opportunities for taxpayers if they make the choice to try to evade their U.S. tax obligations. Talk a little bit about the history, sort of how we got where we are today, what the future might be, and where we think some of these initiatives may be going.
As Jon mentioned, I've been in the government for a while before I left to go back to Ernst & Young, in and out over the last 15 years or so. I think both of us would agree it's been an extraordinary time to be in government with respect to tax policy, tax reform; with respect to changes and compliance. Especially in the international area, what's happening overseas, what's happening here in the U.S. I think a real sea change with respect to some of the issues we're going to talk about.
As we've seen over the last 15 years or so, starting really, I think at the end of the Clinton administration. We're taking forward some of the principles that the Reagan administration put into effect with trying to increase information exchange and reporting cross-border transactions. We've seen a development from more information exchange agreements between developed economies, then more pressure put on tax haven jurisdiction, more coordination at international organization levels. And now, we've seen sort of the last stage of the U.S. in its FATCA legislation, taking some unilateral actions that I think, though, are going to lead to more multilateral actions and some greater coordination globally on some of these issues.
Before we start, a couple of general comments. Why is this happening? As I mentioned, part of it, I think, is the global nature now, the economy more cross-border transactions, more opportunities for U.S. taxpayers to take advantage of the global financial system. I do think in part, though, it's driven by the needs for revenue that every government around the world is seeing. And not only seeking additional revenue from enforcement but I think trying to establish the credibility with the taxpayers to whom a lot of governments are having to go now and ask for increases in what they pay. Before you do that, you want to establish that the current laws are being enforced to the maximum extent possible.
So, it's not only the revenue from the enforcement but as Jon mentioned, as was highlighted yesterday by the commissioner, the deterrence effect by having those who might think about taking advantage of opportunities overseas rethink it and then also, the credibility in the tax system itself. People think that the tax system can be evaded, they are much less likely to meet their obligations themselves and furthermore, much less likely to embrace needed tax increases if that's what the government presents to them.
So, with that as a background, why do we see what we've seen over the last 15 plus years? I think in part, you know, going back to the old Willie Sutton chestnut, you know, why did he rob banks where the money was? So, why is the global community looking at cross-border transactions? Well, to a large extent it's where the money is. One estimate puts the worldwide annual revenue loss from offshore evasion at about $250 billion.
It's hard to get a figure here in the U.S. We've seen estimates, although they include some other elements of corporate -- not evasion or avoidance but structuring somewhere of $100 billion. If you look at the recent tax gap numbers, it looks like it's at least tens of billions of dollars a year in offshore evasion, not avoidance, not planning but straight up evasion; hiding of assets and income overseas. And again, as Jon mentioned commissioner addressed some of these issues yesterday in his testimony before the House Ways and Means Committee, the Subcommittee on Oversight. And he laid out the approach the IRS is taking to offshore evasion, saying it's the cleaning up of past abuses. And then, I'll quote him here. I think it's particularly relevant. "Mining and leveraging the data we received to mount a greater attack on the abuse."
So, I think what we're seeing now is the next stage. We've seen the information exchange networks put in place. I'll talk a little bit about that and now we're seeing the IRS taking that information and starting its major enforcement efforts targeting offshore noncompliance. A couple developments over the last couple of years, I think, spurred this. As we all know there were some issues in 2008 and 2009 that came to light with respect to U.S. taxpayers using the Swiss banking system to hide assets.
I think the extent of that abuse put to lie some of the concerns that some had expressed. There just wasn't this amount of abuse to go after, that some of these efforts weren't worth the costs but the amount of money that was at issue in those enforcement initiatives was extraordinary. The IRS pursued those and then as it tightened the rules, it also put in place a number of voluntary disclosure programs. Two so far, a third currently in place and the IRS has collected so far close to $4.5 billion from those initiatives.
So, again this is not an insignificant amount of money especially given the current environment. So, that's the background. That's where I think the IRS is going with this. I want to talk a little bit about what the IRS is doing, what are the initiatives the IRS is engaged in, and what Treasury and IRS are doing to address this problem.
As I mentioned, this is not new but starting back in the Reagan administration there was focus on increasing the U.S. access to information overseas. And initiatives started to sign tax treaties that required exchange of information and then tax information exchange agreements. And at this point, because of various initiatives and focuses, again the Reagan administration, when Jon and I were at Treasury at the end of the Clinton administration, some worked through the OECD to increase information exchange. Then, Secretary O'Neill took it up as a personal initiative at the beginning of the Bush administration, then continued by Secretary Geithner now. And now there are over 90 partners the U.S. has some relationship with through TIEAs (tax information exchange agreements), tax treaties for multilateral agreements with respect to tax enforcement.
And the increase over the last decade or so in the reach of that network into so-called tax havens has been extraordinary. That, I think, has been -- helped in part by some of the initiatives we've seen on the global level and I'll talk a little bit about those as well. Continue to focus on the U.S. though, we've seen over the last couple of years, increased information required pursuant to FBARs and foreign asset reporting. Again, another tool the IRS is using to get information or at least require that information be reported and then have a hook that if that information is not being reported but comes to light through some of these other means. And then, I want to spend some time talking about what I think is the real game changer here and that's FATCA.
As I mentioned, I recall a fact that came about as a result of a series of events in 2008 and 2009 with respect to a significant number of U.S. citizens who were assisted in their global noncompliance by some of these global financial institutions. And it developed over the course of the beginning of the Obama administration, some budget proposals to straighten the program that was in effect at the time and still is. The so-called qualified intermediary program, where banks could voluntarily come in and participate in a program, supply information, and return for some easing of withholding tax reporting requirements.
It came to light, though, in the course of these disclosures from some Swiss banking employees who turned over information to the IRS and others that there were some gaps in that program. So, we at Treasury at the time put forward some proposals to tighten that regime. That became the impedance for the Hill to get involved, and John Buckley's here. He was a leader in this in crafting what eventually became FATCA, which is much broader as you all know than merely tightening the qualified intermediary regime.
What FATCA does again, not to get in too much detail but just to set the stage about what I think has really changed here, as opposed to having what was under the qualified intermediary program, again, voluntary cooperation from financial institutions in return for some lessening of the reporting requirements that the U.S. otherwise might impose.
What in fact it does essentially is require increased due diligence with respect to financial institutions, identifying U.S. persons, requires reporting of that information to the U.S. much like U.S. financial institutions have to report to the U.S., and if this is I think the big change, the game-changer in all this, imposing withholding tax obligations on U.S. payers and, in some cases, foreign financial institutions if there is not compliance with these requirements to report back to the U.S. and to perform due diligence with respect to their accounts and their account holders and in addition going beyond merely the names in the account but looking behind either the institution or the entities that are the account holders. That, I think, was unprecedented. That has been, I think, now leveraged onto the global stage, because -- and this is one of the criticisms of the fact that I think it's going to turn out to be one of its strengths -- that it's going to be difficult to have that actually work and be implemented if we don't have significant cooperation for foreign governments. But Treasury has been extraordinarily diligent and successful in getting that cooperation lined up, and we saw, a few months ago, the announcement by Treasury that it had reached a tentative framework with a number of significant jurisdictions -- the U.K., France, and Spain -- and I imagine that is going to be the way forward on this.
So, what has been termed a unilateral initiative by the United States, I think, is going to turn out to be a global initiative that other countries will participate in, and what we'll see now, I think, is not only the information supplied, pursuant to that, but to the U.S. But we'll see reciprocity on behalf of the U.S. with the jurisdictions that enter into these arrangements with the U.S. on behalf of their financial institutions.
And then what I think we'll see is an extraordinary amount of information that is currently not available to the U.S. and other governments be made available, and this is a key on a more automatic basis as opposed to the per-request basis we see now under the information exchange network currently in place.
A couple of other things that I just want to highlight. I think, you know, a factor is the game changer here. I think one of the reasons why it is going to be successful -- it fits in with what other organizations were doing. The OECD, again, since at least the late '90s has been focused on information exchange, has been focused on increasing the amount of information available to different jurisdictions, has been the sponsor of the so-called Global Forum on tax information exchange and transparency that has brought in over a hundred countries into that initiative, again on a number of so-called and so-named tax havens as part of it, again increasing the amount of information that's available, setting up the network and the legal framework for some of these initiatives under FATCA and other legal changes domestically to be able to play out better on the global stage.
It fits in as well with what the E.U. is doing. The EU has a savings directive, which requires information exchange within the European Union, but the EU has been pushing through the G-20 and through the OECD to have that network expanded. And I think FATCA and the Global Forum are going to supply the means by which the EU initiatives can light up with what's happening in the U.S. and some other countries as well.
So, I think what we're seeing is a coming together, a consensus by number of jurisdictions that the information exchange network we have needs to be expanded and, as well, that the information that is supplied within that network needs to be available not only on a per-request basis but needs to be available on a more automatic basis. And we saw that very recently highlighted in a G-20 communiqué. And, again, that's a big change to say that not only do countries, when they have a case developed, go out and ask for information but countries and their financial institutions are going to be required to gather information themselves, then supply that information to tax authorities. And then with the global network in place, that could be shared amongst the jurisdictions themselves.
So, again, exciting time. Game-changers. What we'll see, I think, as Commissioner Shulman highlighted, is whether all that increased information can be leveraged into increased tax collections. And that's going to be the comeback to a lot of the concerns that people have about whether this is an overreach, whether the cost is worth the benefit, and we'll see how it plays out.
MR. TALISMAN: OK.
MS. ZARLENGA: OK. Can everyone hear me OK? All right, I'm going to focus more on some of the domestic compliance initiatives. Here, you know, in some cases there have been burdens placed on the IRS, how we do to -- you know, the interoperability to reach out to millions of taxpayers and have at its fingertips a lot of information and using the IRS resources to implement programs. So, mainly, implementing the Affordable Care Act and the healthcare regime. And I'm also going to talk a little bit about some other initiatives, primarily to the tax gap. So, you've got things like information reporting that helps to close the tax gap, the IRS initiative on the regulation of tax return preparers to try to increase compliance, and also initiatives relating to low-income taxpayers, namely the earned income tax credit.
So, I'll start with the healthcare. So, the primary thrust of the Patient Protection and Affordable Care Act, which was amended by the Healthcare and Education Reconciliation Act of 2010, was kind of just by virtue as the Affordable Care Act.
Too much of a mouthful. Primary justice is health reform, but the Internal Revenue Code plays several key functions in achieving that goal. First, there are tax breaks that are provided to encourage healthcare coverage. There's a refundable premium assistance tax credit for individuals with household incomes between 100 and 400 percent of the federal poverty line. Individuals are going to be able to apply to healthcare insurance exchanges for eligibility for this credit in advance so that the credit can be paid directly to health insurers so that they don't have to wait until the end of the year and claim it on the tax return. That will be the alternate way to get it.
There are also tax breaks that are being provided to certain small employers, basically employers with less than 25 employees with average annual compensation not greater than $50,000. Those employers can claim a tax credit for premiums paid towards health insurance coverage for their employees.
The second aspect of the healthcare regime is penalties that are imposed for failure to obtain insurance coverage. There is an individual -- a penalty on individuals who fail to get insurance coverage. There's also a penalty on certain larger employees, those with more than 50 -- larger employers, those with more than 50 employees for failure to offer their full-time employees independent, affordable employer-sponsored heath care coverage.
The third aspect of the healthcare regime is additional reporting requirements. Employers are required to disclose a total cost of employer-sponsored health insurance coverage on the employee's W-2 forms, and there's also information reporting both by health insurers and by larger employers regarding the minimum essential coverage that they're providing either to individuals or to employees.
The fourth aspect of the healthcare regime is there are some new provisions that govern tax-exempt organizations involved in, you know, some aspect of healthcare. There are new requirements for tax-exempt hospitals primarily relating to financial assistance and a requirement to conduct community health needs assessments. And there are a couple of new tax-exempt entities that are created by the Affordable Care Act. There are qualified non profit health insurance issuers that receive grants or loans under the Consumer Operated and Oriented Plan program who are now going to be eligible for a tax-exemption as are -- a trust fund, a patient-centered outcomes research trust fund, that is funded for the purpose of conducting research. And it's funded through fees that are going to be imposed on, you know, health insurance providers and employers that offer self-insured health plans.
And then sort of the fifth aspect, which is sort of tangential to the healthcare aspect of ACA but is quite necessary are the revenue raisers that help pay for the healthcare regime. And these include things like there's a 3.8 percent tax that's imposed on net investment income, certain high-income individuals, and certain trusts in estates; and there's a 0.9 percent hospital insurance tax that's on wages of certain high-income individuals. There's also a 10 percent tax for indoor tanning services, a 40 percent excise tax on Cadillac health plans, 2.3 percent excise tax on sales of medical devices. There are annual fees that are imposed on manufacturers and importers of branded prescription drugs and also on health insurance providers. And then there's one that's near and dear to my heart, which was the codification of economic substance doctrine.
MR. TALISMAN: Mm-hmm.
MS. ZARLENGA: Which doesn't quite fit with all the others, but it's there nonetheless.
So, as a result of sort of all these aspects of the healthcare regime, there are a number of additional burdens that are placed on the IRS and Treasury. You know, the IRS is expected to administer the penalties that are imposed on individuals and employers and just providing the rules to carry out the premium tax credit, a small business health insurance credit, you know, the tanning tax and that investment tax.
These are all complicated rules and are very resource-intensive to provide guidance.
The IRS is also expected to administer the annual fees on the sale of brand-new prescription drugs, medical devices, and those fees on health insurers. And these fee structures are different from many of the taxes or excise taxes that the IRS has administered in the past. Some of the fees are allocated. There's a certain, like, total fee and it's allocated based on market share. That's a whole new regime that the IRS and Treasury need to sort of come up with guidance on how they should be administered.
There is obviously the information reporting, so you should develop forms and accept the forms, I guess, from the larger employers and health insurance providers. And then there are certain disclosure requirements of certain taxpayer information to the Department of Health and Human Services and to the Social Security Administration to sort of keep this whole thing operating.
So, IRS and Treasury have been actively working on guidance. The IRS has set up an excellent team of lawyers that are dedicated to healthcare and then other lawyers that are just throughout the organization in different divisions, and we've been working closely at Treasury with the benefits tax counsel on a lot of these provisions. We've got proposed regulations that have been issued on the premium tax credit, the medical device tax. There are temporary regulations on the branded prescription drug fee and the tanning tax. We've issued notices on the various tax-exempt entities and requirements.
We're currently working on guidance related to the charitable hospital requirements, the patient-centered outcome research trust funds, the employer penalty, the information reporting requirements, you know, disclosure of taxpayer information, the net investment income tax, and the additional HI tax. So, you're likely in the next few months to see a wave of guidance associated with healthcare. The exchanges are supposed to be up and running beginning in 2014. A lot of the taxes -- some of the provisions have already gone into effect. Many of the other provisions go into effect in 2013. And so I think over the next several months you're likely to see a lot of guidance.
There has been, you know, the exchange system -- the IRS and Treasury also play a key role in the healthcare exchanges. The exchanges themselves are regulated by the Department of Health and Human Services. They have issued regs already on setting up these exchanges. But individuals will come in, apply to the exchange for coverage, and then the exchange is expected to make, sort of, an upfront determination as to, you know, the advanced premium tax credit and eligibility for other forms of government insurance like Medicaid.
And in order for the exchanges to make their advanced determinations, they are going to rely on certain data from the IRS. And then at the end of the year, the individuals that apply to the exchanges obviously have to, you know, report on their income tax return. There's going to be a true-up process to determine whether they've gotten the correct amount of the advanced premium tax credit.
There's also the information reporting from the employers and from the health insurance providers. So there's a lot of back-end information reporting that then feed into the next year's, you know, exchange advanced determinations. So it's an intricate structure and this has required, you know, unprecedented coordination between, you know, Treasury and the IRS, Department of Health and Human Services, and the Department of Labor in doing a lot of this guidance.
So it's really been sort of a fascinating process. I've been amazed at how actually well it's going. It's just an enormous amount of work but it's also quite interesting. So stay tuned for much more guidance on that. Another area of -- another compliance initiative is information reporting.
Because information reporting involves third-party filing of return with the IRS and providing that information to an individual, it's quite effective in increasing compliance. And so over the years Congress has enacted more and more sort of information reporting provisions to try to close the tax gap.
And it often requires a balancing on the part of the IRS and Treasury for the need for the information and what kind of information we need versus the burden that's placed on taxpayers trying to provide that information. So two of the recent reporting initiatives are broker basis reporting and merchant card reporting.
The Energy Improvement and Extension Act of 2008 expanded the broker reporting rules. Before that act, brokers were required to report gross proceeds from sales of securities. Now they have to report three additional types of things. They have to report adjusted basis and whether gain is long-term or short-term with respect to sales of securities. There's also reporting requirements for transfers between brokers.
So if you're moving your account someplace else and they're going to be transferring securities, there is a broker reporting -- you know, transfer reporting regime. And then there is issuer reporting. So when issuers engage in some sort of corporate action that's going to affect the basis of securities, they're required to do some information reporting.
So the securities to which the reporting requirements applies are fairly broad. It's like a stock, debt instruments, commodities and commodity derivatives, options, and other financial instruments. And because of the wide range of types of securities and the difficulty associated in reporting information on some securities and, you know, a little bit easier on other securities, they were sort of phased-in effective dates.
You know, stock went first because we were already reporting some stuff on stock, and stock basis is a little bit easier to determine than debt basis. So for stock acquired after January 1, 2011, those requirements are now in place. Mutual fund shares and dividend reinvestment plan shares were next, beginning in January 1, 2012. And then beginning in 2013, we're going to be looking at reporting for debt instruments and options.
We've issued final regulations already on stock basis reporting in October of 2010. There has been some relief provided from the filing deadlines given the difficulty and sort of ramping up in getting that information. We issued proposed regulations on the debt and option basis reporting in November of last year and are receiving lots of comments on those.
The proposed regulations for debt and option basis reporting basically used the framework that was already established for the stock basis reporting and then tried to incorporate the debt instruments and options. Merchant card reporting was added to the code by the Housing Tax Assistance Act of 2008 and it requires third-party payers to file information returns with respect to payments made and settlements of, like, credit card transactions and third-party network transactions like PayPal.
In addition, certain payers are required to do backup withholding and we issued a notice to delay the effective date of the backup withholding given the difficulty of -- the folks that were required to comply with backup withholding hadn't really had a backup withholding requirement before. So for them to get ramped up, it was a lot more difficult than I think we had initially foreseen.
So we delayed that to the end of this year. Also the draft tax form that went out had required merchants to reconcile their gross receipts with the amounts that were reported by the payment settlement entities. The business community responded forcefully, that that would be too onerous and the IRS considered those arguments. And, you know, Steve Miller, the deputy commissioner, confirmed in a letter to the National Federation of Independent Business on February 9th that the IRS will not require that reconciliation.
So I think that was relief to a lot of small businesses. On the tax return preparer front, basically you have many professionals who prepare tax returns that are already regulated by the IRS and other organizations for that effect. I mean, you've got lawyers, CPAs, enrolled agents, and the like, but there was a significant group of return preparers that were not regulated.
And studies have showed that there was sort of a wide variation in the quality of tax returns prepared by these individuals. So the IRS announced in 2009 a tax return preparer initiative attempting to bring some of these unenrolled tax return preparers into the regulatory fold by creating a new category of preparers, the registered tax return preparer.
There have been -- the IRS conducted an extensive study. Various groups have previously called for increased oversight of return preparers. You know, there were GAO and TIGTA studies. The national taxpayer advocate had repeatedly raised the issue in her report, IRS Oversight Board, IRS Advisory Council, all of those organizations had expressed concern.
And so the initiative basically involves sort of a staged approach. The first thing to go into effect was preparer tax identification numbers a couple of years ago. So I think most people are now operating with PTINs. We issued proposed regulations recently that sort of provide some guidance on PTINs and who needs to acquire -- you know, obtain PTINs.
And the second stage of initiative involved the competency exams and continuing education requirements. These requirements don't apply to attorneys, CPAs, enrolled agents, and enrolled actuaries because those people are already subject to very similar requirements. So it just has been duplicative. We have now a competency exam available for the 1040 series of tax returns.
We have issued final regulations establishing user fees for the exam in November of 2011. And then shortly thereafter began -- a third-party vendor began administering the exam. We also issued a revenue procedure in December of 2011 providing guidance on how continuing education providers can become approved, and as of February of this year we had -- about 170 providers had been approved by the IRS. There is now a new Return Preparer Office which oversees all of this -- all of the return preparer initiative.
And just sort of a brief word on the earned income tax credit. The EITC program -- it's basically the largest anti-poverty cash entitlement program. It began in 1975 as a temporary program to return a portion of the Social Security tax that were paid by lower-income individuals, but then was made permanent in 1978.
There have been reports of significant noncompliance in this area. A study in 1999 estimated that the over-claim rate was between 27 percent and 31.7 percent. So as a result of the over-claim rates there have been a number of legislative changes to improve the EITC, including requiring dependents to have identification numbers, prohibitions on receiving the earned income tax credit after you've been determined to have fraudulently claimed the EITC.
And in addition since more than two-thirds of EITC claims are prepared by tax return preparers, there are due diligence requirements for preparers. And the penalty has recently been increased from $100 to $500. And we also recently issued final regulations requiring those return preparers to submit -- there's a checklist of due diligence that's required for the EITC that used to be required to be maintained by the return preparers, that now has to be submitted to the IRS. And I think I see that I have kind of gone over my time. So I'm going to pass it over to Michael.
MR. UDELL: Great. Great. Let me come up here and get my -- you need that?
MR. TALISMAN: No.
MR. UDELL: No? OK. Of course I might need a little help here to -- here we go.
MR. TALISMAN: You got it?
MR. UDELL: So I just want to thank Jon for inviting me to speak today to you. I'm going to -- there are always numbers when I talk and so there will be numbers today, so you'll get a different perspective. I am a former revenue estimator for the Joint Committee on Taxation and so I'm going to try to give you an insight into how revenue estimators think about tax administration proposals, how they score them, and the problems that they face when they look at tax administration compliance proposals.
But first I want to say that nothing that I say in my presentation today can be relied upon for tax advice. They already know that, but I have to tell you. And I also want to say that my comments are my own and I'm not speaking for Ernst & Young on any of these issues. So just a real quick agenda here.
I want to talk just a little bit and tell you what is a revenue estimate and I'm going to give you just two definitions and then we're going to apply them to a number of tax proposals, some that happened in the recently passed transportation bill that came out of the Senate. And then also more broadly as to the kinds of tax administration proposals that are scored just for congressional scorekeeping purposes.
And so this is a narrower set of tax administration and compliance issues than, say, what commissioner Shulman might be talking about when he talks about tax administration, and he says we're going to hire more employees, and we have a good return on investment. We're going to go and do that kind of stuff. You will learn by the end of my talk that those proposals tend not to be on the plate for congressional scorekeeping purposes, but only a subset of administrative proposals are on the plate. And we'll talk about that.
We'll talk about the effect of IRS budget on scoring. I'll bring up an arcane but key, key assumption that estimators and budget scorekeepers have to use which is called the Fixed GDP Assumption. I'll explain that to you. Talk about the different types of tax administration proposals that end up being scored and some examples from the transportation bill. And then I want to end with, well, what's the size of the tax administration proposal?
As an economist, I'm going to give you some numbers about ways we can -- you can leave the room and go, OK I kind of know the size of it. We've talked about the tax gap. We'll also talk about IRS accounts receivable. These are things that measure the size of the tax compliance proposal.
All right. So what's a revenue estimate? And most of you all know that it's really just a change -- it's a change from a baseline that is prepared by the Congressional Budget Office and it's a baseline of revenues coming into the federal government from the tax system. And it's a change between that baseline, which is a 10-year baseline, and any legislative proposal.
Some legislative proposals increase revenues, and so the change is a revenue raiser, and some proposals decrease revenues over 10 years and that's a revenue loser. All right? The CBO sets that baseline each year in January and for the next 10 years. And the Congress vote, the Joint Committee on Taxation, and the Congressional Budget Office use those baselines as the starting point for their analysis of all tax proposals. OK?
A little bit of nomenclature here. Revenue estimators think of estimates as having two kinds of basic effects. They call them direct effects, which is where we're just taking a change in a tax rate and we're multiplying some known base of activity by a tax rate or a penalty rate. We've got a rate and we're going to change it, and we calculate it and go, well that's our revenue change. All right?
There's also a change in revenues because statutes interacted with each other. And so when we, for example, start reducing the amount of charitable deductions that someone can take, if it reduces it enough, they may all of a sudden not qualify to itemize anymore. They may flip into a non-itemizer and use the standard deduction and that changes revenue too. So there are direct effects that are just about the interaction of rates that are in the tax code, whether they're tax rates, or penalty rates, or withholding rates. There's just the interaction of that.
And then there's a second kind of effect, and it's a little bit squishier, and it's called an indirect effect. This is where behavior takes place. This is where we think about how do taxpayers react or respond to a change in rates. Do they do more of something or less of something?
And since we're economists generally doing revenue estimating, the stock and trade of applied economists is estimating and analyzing these behavioral effects. And so there are journals full of articles estimating the effects of a price change on cigarettes, or a price change on gasoline, or a tax rate change on an individual income. All right.
Estimators take all of this information into account. Fixed GDP; this is sort of the boogeyman in the room and it prevents congressional scorekeepers from doing much with scoring revenues for the IRS budget. Fixed GDP simply means that each year when the CBO estimates the gross domestic product for the economy for ten years, that that number stays fixed.
And regardless of the legislative proposals that Congress is considering, however -- on whatever incentives they provide, incentives for capital investment, incentives for education investment, those incentives, even though they may improve the overall quality of the economy, they're not allowed to affect gross domestic product; all right.
So this has a number of key ramifications and at the very bottom of this sheet you'll see, can changes to IRS funding be scored? It turns out that the fixed GDP assumption foils any effort to change scoring of the IRS budget. We want to increase the IRS budget. We don't -- congressional scorekeepers don't score any revenue to that.
So what the fixed GDP assumption means is that some big macroeconomic aggregates in the economy, and we think of them as total wages in the economy, that's a big number, it's $6 trillion, all right, a really big number, and total investment in the economy, they don't change from one year -- they don't change from what CBO says they are in the forecast.
A legislative proposal may give you an incentive to invest in capital in one industry, the wind industry for example has an incentive to invest, but -- and there will be more investment in wind energy but in the overall scheme of things, total investment in the economy doesn't change. That's what fixed GDP means. It drives a lot of people crazy because they think that I've got -- I'm providing an incentive, I should get a bigger kick out of the economy; all right.
It's not a conservative or liberal rainstorm that falls on people's parades. People who want to invest in tangible capital think that it sort of foils investments and fixed capital, but it also rains on the parade of people who want to have education incentives because education incentives create a higher skilled workforce, generates higher wages and salaries, and gross domestic products should change. So it's just an assumption that sort of rains on everyone's parade a little bit.
Interestingly, the government sector, and that is where the Treasury, IRS, DOD, they're sort of treated separately; they're fixed in the baseline and they're fixed for their own odd little reason, which is appropriation bills, not tax legislation. But appropriation bills only commit the government to a year. All right; there are not -- we do not have budgeting where we do multiple year appropriations, although it's often talked about in terms of budget reform.
And because of that, if a legislative proposal comes along that says IRS hire 1,000 new auditors next year, and 1,000 in the following year, and 1,000 in the next year and on out, you would think well geez, we're going to increase the workforce, we're going to increase return on, you know, have all of this return on investment from these auditors, we should be able to get something for it.
Well you can only commit government funding for a single year and because of that estimators don't look beyond the current appropriation. And what that means is that there's no way to score a funding change to the IRS. Let's give the IRS a larger budget, let's give them a smaller budget, all right. For congressional scorekeeping, this is just for tax legislation. That has no impact; all right.
So the answer here is can changes to IRS funding be scored and the answer is no, they can't. OK. But what types of proposals can be scored? All right; I know this print's a little fine, but we'll use this notion that there are direct effects and indirect effects and I'm just going to go down this list and tell you what kinds of things, as an estimator, we have scored.
We know that changes to appropriations can't be scored anymore; all right. But we know that rates and fees that the government charges, well they can be scored. We can charge fees for private letter rulings and if a proposal comes along and ups the fee for a private letter ruling, we get to score that; all right. We know how many private letter rulings there are and we just multiply it out; all right.
We know that there are fees for installment agreements. And the IRS has changed those fees quite a bit from time to time; all right. And they generate a lot of revenue from that.
We know that tax penalty rates can change. So both fees -- these are direct effects.
There's not really any behavior here. People are going to ask for private letter rulings, people are going to ask for installment agreements, the fees are just sort of the freight of going along, and for the most part, there isn't any behavioral inducement there to speak of, so long as the fees are not crazy. I think that an installment agreement is -- is it like $43 I think, used to be, it might be more than that now. She smiles.
MS. ZARLENGA: I don't know.
MR. UDELL: It might be $100 by now. But tax penalty rates are a little bit different. So we have lots of penalty rates, penalties for failure to file, and failure to pay, and for understatement. And so clearly we can just take the change in the penalty rate and that will generate some revenue, but -- and that's the direct effect.
But there is an indirect effect to penalty rates. A penalty regime is supposed to coerce or induce a certain kind of behavior and if you've got too low rates in a penalty regime you would think that maybe it's not corralling the correct behavior that it's trying to corral. So there can be some taxpayer behavior from penalty rates, and we're going to see a rather, what I think is a rather novel penalty rate that was put into the transportation bill in moment.
Well let's talk about other administrative tax compliance proposals; increased information reporting. Is that a direct effect? Is there a direct effect to that? We're not changing a rate, we're not changing a penalty -- a withholding rate, it's not a direct effect. What it is is an indirect effect. It's a behavioral response. And we have pretty good research that information reporting really does work.
We know that compliance with wage, which has information reporting, is far greater than compliance with sole proprietor business income in general. All right; so we can -- and we score that because we have a good measure of it.
Increased withholding; it's a great one. We know we're going to get it. But is that a direct effect? Yes it is. All right; and of course, we have passed both increased information reporting and increased withholding, the Congress has in recent years, and decided that they've gone too far. Increased information reporting; you remember about super 1099s for corporations, for payments between corporations. Enacted, repealed.
Increased withholding; three percent withholding proposal on government payments to contractors, to government contractors. Probably a bridge too far, to borrow from the movie. It probably should have been one percent; all right. And so that got repealed.
And increased levy authority. So let's think about that. Is that a direct effect; increased levy authority? We're not changing the rate, it's not -- it is a direct effect because all it does is push out the pool of tax debts that the IRS can use a particular tool for. And we will see in the transportation bill that they did this.
So here are a couple proposals that just came out of the Senate's transportation bill. The top one is the one that I think is particularly novel. It's called revocation or denial of passport in a case of certain unpaid taxes. And so I think that the Joint Committee write-up describes a seriously unpaid tax liability, of something of about $50,000 or more. And so if you are applying for your passport, all right, and you have a seriously unpaid tax liability, all of a sudden State Department can hold back and say we're not going to issue you a passport. But I think that's awfully novel.
So is that a direct effect? Well, part of this is direct, all right, because there will be passport applications, they will be tested against IRS data, all right, and we will know if they have a liability. And as Mike said, one of the things that's happening here, we never saw proposals like this in the 1990s, we didn't even have the data. This requires State Department and the IRS to actually do some cooperation to get that data. We didn't have that kind of data in the '90s. Now we're in another century and we're getting -- the system is getting that kind of data.
So this has both a direct and, undoubtedly, a behavioral effect. Some people want to go on their holidays outside of the country and they're not going to go if they owe taxes, at least if they owe serious amounts of taxes.
The next one, 100 percent continuous levy on payments to Medicare providers. This is another example of an information exchange occurring within the government. This is really a small amount of revenue being raised from what is a substantial problem, a $2 billion a year problem, in terms of Medicare payments going out the door to contractors and healthcare providers who have tax debts.
A hundred percent; usually when you're levying you can't take the full payment, right. There are rules about that and you can only take 15 or so percent. A hundred percent means that this is a -- I would call this a meat cleaver. So this is going to get a lot of attention from a lot of people who get Medicare payments as a line of business. And there's probably both a direct effect because we can see these numbers of tax delinquencies, probably an indirect effect here too. The taxpayers are going to start paying up.
Internal Revenue Service levies on thrift savings plan accounts; as a former government employee I chaff at this. This rubs me the wrong way. But -- I don't want my thrift saving plan account to have a levy, but this is just another tool that the IRS can use. All we've done here is increase the pop of activity that the levy could apply to. So I would call this a direct effect.
And finally, require information reporting to the IRS by insurance policy owners who sell their policy to a third-party. These are these viatical settlements. And this is sort of an interesting pattern, which I don't really know how they got this, but I'm sure there is a good story that at first loses revenue, and that's what these bracketed amounts in the first three years mean.
Is, it loses revenue and then it raises revenue. And my guess is it loses revenue because it's giving somebody cover not to report its information reporting. And somebody might not be getting an information report onto this regime and realize if they don't get it they don't have to report it.
So these are kinds of administrative proposals. But finally, I just want to conclude with how big is this problem? How big is the tax administration problem for budget scorekeeping purposes? So I want to leave you with two big ideas. One is the tax gap, which we often talk about, and the other is IRS accounts receivable.
So the tax gap for 2006, which are the latest years of estimates, $376 billion, that's an annual number; all right. And that's a statistical estimate of taxes owed across all of them, individual and corporate income taxes, employment taxes, excise taxes, the state and gift taxes.
By far the bulk of this stuff is on the individual income tax side, 63 percent, and the bulk of that is on businesses that are reporting through the individual income tax channel; all right. Corporate taxes, 18 percent, that's like $67 billion, of which I think 25 or 30, I'm going to get this wrong, are large corporations. All right; so large corporations on this method don't really show up each year with a huge amount of -- mean it's not small but it's not huge compared to the rest of the tax gap.
And then finally, there's a lot of underreported amount for business income for individuals and 13 percent for large corporations. There's this tax gap but as an estimator it's hard to get to it. The estimates are done at a very high level, they don't build up from -- give me an inventory of all of the tax evasion schemes out there, tell me how much revenue is in a SILO issue, tell me how much revenue is in EITC. These are two things we actually have measured. But all of the other tax evasion schemes we don't measure.
So it's hard as an estimator to close the gap because we don't really have a map. But let's look at something that is so much more concrete, is so much more tangible to look at for tax administration, where it really ought to get perhaps more attention, and that is IRS accounts receivable.
If you're a debt in the IRS accounts receivable, there's an assessment. They know who the taxpayer is. They know the amount; all right. So this table here shows you what's happened to IRS accounts receivable. So these are IRS -- this is from the IRS financial audit statements that the GAO does. So this is their data. This is a no speculation here and they're just adding up how much assessed liability they've got out there.
And you can see from 2000 to 2010 in this top line, it's a growing number. That's not too surprising. In 2010 it was $138 billion was sitting in the accounts receivable inventory.
Then they broke down some of that and got to the amount that's in collections. And so they had $114 billion sitting in collection efforts; OK. And the IRS has a pretty significant regime and set of tools to collect unpaid tax. They collected $44 billion. That's a lot. But they didn't collect $70, all right. And one of the things I want to leave you with is, if we look at the very bottom line of this table, we see the uncollected amounts year over year. And what you should all very quickly get is, this number is snowballing, this number is getting really, really big. And so that is the tax administration problem.
We have a tax gap, but we have an enormous and rapidly growing accounts receivable that can't be worked. And so this is a problem for a revenue estimator, because how would you solve this problem? How would you get this money? You would increase the IRS budget. We don't score increased IRS budget. The fixed GDP assumption says you can't get any revenue from increasing the IRS budget.
So if you want to increase the IRS budget to get this accounts receivable money, you're not going to get a score from the Joint Committee or from the appropriators for doing that. And so for legislative purposes, there's no avenue there to get the traction to work, to credit it.
It will credit the debt. If you increase the IRS budget, they'll collect more of this money, and the debt, the federal deficit will go down because there will be more money in the system. It just won't show up for congressional legislative scorekeeping purposes. And with that, I'd like to conclude.
MR. TALISMAN: OK. We have probably about 10 minutes for questions from the audience. So yes. Oh, and please announce who you are and wait for a microphone, too, from -- I guess there's someone that's going to be bringing around a microphone. So hold for just one second. Let's go here first.
MR. TEMPLE-WEST: Hi, I'm Patrick Temple-West with Reuters. This question is for Lisa. On the healthcare implementation, is Treasury and IRS getting any pushback, any rebuff from any states? You guys are calling up and saying, I don't know, we want to harmonize our IT software to get ready for this, just because a state may not be cooperating with healthcare for political reasons, have you been getting any pushback, rebuff from any states that are saying we're not ready to sign off with you on this?
MS. ZARLENGA: I'm not aware of any specific. I mean other states have been active in, you know, commenting on guidance and things that have been going out. We have recently released interagency regulations that set forth procedures for states to be able to opt out of certain aspects of the ACA. The substantive rules haven't been issued yet, but -- so I think the states were sort of active in that, in commenting on that. I'm not aware directly of specific, you know, rebuffs that we've gotten from states, but I know that they have been interested stakeholders.
MR. TALISMAN: Next.
MR. BRANDT: Hi, my name is Dan Brandt and I'm with the Senate Budget Committee, and my question is for Mike. With the IRS uncollected debts, is it possible that you could use private debt collectors to collect that and have that provisions for?
MR. UDELL: I think the answer is, been there, done that, right. I mean that's Section 6306. It still sits in the tax code, but it's defunded, and so it can't be used. The Service under then-Commissioner Rossotti made a big effort to try to implement that, and it was implemented briefly, and Service decided that it wasn't what they wanted to go forward with, so I think that's, you know, a tough fill.
MR. TRINCA: Hi, Jeff Trinca. Mike Udell, how are you? If I recall, and I'm going to show my age, in the mid '90s, there was a proposal that was put together where they set up a special account at the agency, and they essentially assigned money for that to hire 1,000 collections officers very specifically, and then they trace that money to those 1,000 folks, they train them, set up the special unit. Of course, Congress, in its wisdom, in about two years after that, I think then defunded that and the 1,000 people went back out the door. That got scored, if I recall.
MR. UDELL: It did.
MR. TRINCA: Has the law changed or is that still possible?
MR. UDELL: It did get scored, and I think in retrospect, when we reviewed -- I was at the committee at the time, reviewed, well, what happened, we realized that we didn't know enough to really score it well. So the defunding was essentially this issue that you can commit the IRS to a one-year appropriation, because that's all an appropriation can commit them for, but you can't commit the Congress to funding the IRS three years from now at a particular level for a particular activity.
And so what happened was, if we had scored it, and we did, as a revenue raiser, it turned out it was not a revenue raiser because of this one-year rule, so we learned.
SPEAKER: The last slide about the tax, that is very interesting, you know, from 2000 to now, it increased tremendously. But also we know the tax expenditure during the, you know, more than 10 years, it increased tremendous, as well. Have you did analysis, if there's a correlation between the tax expenditure increase and the tax debt increase that were bringing the --
MR. UDELL: I have not, and I don't know if Mike or Lisa would want to comment if there's a relationship between accounts receivable -- the growing uncollected accounts receivable and the quite dramatic increase in tax expenditures. I kind of think they're unrelated.
MR. MUNDACA: Yeah, I don't -- I've not done any particular analysis of this, but I know in the government, we were concerned more about the downturn in the economy having an effect on collections, and that I think you see in the data.
I also think some of this is sort of -- the more recent ones look worse because there are multi-year efforts to collect that don't get reflected until further out. But I do think, as Mike pointed out, the numbers are growing, but the more recent spike in the numbers I thought was due more to the downturn in the economy and people's inability to pay because of their own economic hardship.
MR. TALISMAN: Any further questions?
MR. NAFZIGER: Hi, Jeptha Nafziger from OMB. I would just point out that the 2013 president's budget and actually previous budgets have included things called cap adjustments, or it used to be allocation adjustments, before the Budget Control Act was passed last summer. And CBO has scored the 2013 president's budget.
What those cap adjustments do is increase the IRS budget by increments by amending the Budget Control Act to allow additional spending for mostly enforcement, but there's some other stuff in there, too.
And that was actually scored saving $35 billion over a 10-year -- is a nine-year cap adjustment because we only have nine years left in the Budget Control Act from where the budget goes. So I would just point out that that was scored and it was actually part of the discussions for the payroll tax extension that fell out at the last minute when they decided not to offset it. So Congress can choose to use that as an offset if they so choose, just not for Pay-Go purposes. It's revenue generated, but not for Pay-Go purposes.
MR. TALISMAN: Marty.
MR. SULLIVAN: Marty Sullivan with Tax Analysts. I really appreciate your presentation, it was very helpful. I want to get back to Jeff Trinca's point because I think it's so essential to this conference. You're saying if we hire 10,000 IRS agents and we put that in the permanent budget, there's no revenue score to that, which would seem to be an important policy for Congress to be considering going forward.
Are you complacent with that scoring assumption? And do you think there's anything we can do to change that assumption, assuming people think that it might be a good idea?
MR. UDELL: So let me just make a good refinement to that. There's no revenue for tax legislation purposes, right. There is revenue in terms of changing the deficit. So when the CBO does the analysis of the budget for 10 years and they estimate the deficit, if there's, in the plans, a dramatic increase in funding, the deficit will go down. But for tax legislation, scorekeeping, which is really the hat that I look at, it's a small part of the world, there would not be any scoring until you could actually get to something like a multi-year budget, because you cannot -- the Congress cannot be committed to what they will do three years from now. And as Jeff Trinca said, we went through this exercise in the 1990s, only to find out that Congress pulled away the money in the second and third years of a funding initiative. So I think if you went to multi-year budgeting, you'd get something to track for tax legislation purposes, but otherwise not.
MR. MUNDACA: I'll ask you, Marty. Do you think it's such a bad thing that it can't be scored that way? Because, you know, again, if it's for actual deficit projections, you get the benefit. What it just can't be used for, as you know, is then to offset another tax cut. So --
MR. SULLIVAN: We all know that those deficit numbers matter a lot when you see them in the CBO, but in the day-to-day legislative process, they don't matter for squat. The Pay-Go rules are what matters.
MR. MUNDACA: Right.
MR. SULLIVAN: And so if we want to incentivize Congress to provide more tax enforcement, you've got to give them the reward of that. And it just seems to me a quirk in our rules, not an essential feature of our rules, that these positive benefits can't be scored, especially since the economics tell us that there are positive benefits.
MR. UDELL: But the economic effects are -- I hear you, but you cannot commit the budget company, the Congress, you can't commit them to that spending plan and that really is a problem. That was the guts of the issue in 1990. And so I think the rule is a good rule, because it doesn't say trust me, you know, we'll give you your money, it says -- it really says what's in the tax code. So if you want to put an appropriation in the tax code, I'd say go ahead, but that would last about 30 seconds before the appropriation committees would come down and say you can't do that and everyone would back off.
MR. TALISMAN: Fred.
MR. MURRAY: For squat, is that an economics term as opposed to a legal term? There seems to be a little bit of a difference in philosophy I guess. I've noticed a methodology perhaps I should say between the Joint Committee approach to compliance related proposals and how they score and how OTA approaches some of these things.
For example, back in the '90s, when I was working at IRS and Treasury and we were working on a package of compliance-related proposals, I think OTA had scored the package at something in excess of a billion dollars, and the Joint Committee estimate on the proposals was something like $200 million or $100 million or something like that, and, you know, made a big difference in terms of congressional willingness to take up some of the proposals because they were somewhat controversial, to say the least anyway.
So I just wonder if you could comment on how that works. Or is there a difference in the methodology or is it just a difference in the sort of philosophical approach to some of these things?
MR. UDELL: I don't really think it's either. I think, you know, as I said, there is a direct effect that the estimators look at, changes in rates, changes in levels or penalties, and there's an indirect effect having to do with the behavioral response of the tax payers to the change in the law.
Reasonable people can have pretty big disagreements about what is the behavioral response. And the Joint Committee I think tends to have a pretty narrow view on how effective are behavioral responses and tend to look at other ways that a taxpayer can defeat a tax compliance proposal, the other behaviors they may do, and I think -- I really think that's what it is. I don't think it's a philosophical difference, I think.
MR. SULLIVAN: And it has cut both ways. I mean I've seen estimates higher from the Joint Committee than the Treasury estimator, so I think you're right, it's the individual assessment by the revenue estimator of what the effects might be as opposed to some systematic or philosophical approach that's different between the two estimating bodies.
MR. TALISMAN: Mort.
MR. CAPLIN: I'm Mort Caplin. If you hear testimony, for every dollar you give the IRS, we'll give you four to one. Somebody says six to one, and the other day, 200 to one. How do they come up with these figures? These are responsible --
SPEAKER: I can answer that question.
MS. OLSON: OK. On a budget of $12.1 billion, the IRS created -- collected $2.42 trillion. That's for $1 appropriated, you got $200 back. You know, the collection occurred through withholding and various other mechanisms that a lot of other people had a role in, like employers, but that's where the 200 to one comes to.
MR. TALISMAN: Thank you, Nina.
MS. OLSON: The four to one is when you look at collection resources, just the actual collection employees, and you look at, you know, what their salaries are and overhead to the dollars that might come in there. So you can pick a number. It's like my research guy says, you don't like this number, I've got another one for you.
MR. THURONY: Victor Thurony. Yeah, just continuing along the same vein, I mean I wonder whether someone has done an analysis of what would be the optimum amount to spend on IRS enforcement. I mean obviously, you know, if you spend $1 on enforcement and you get an extra dollar of revenue, that doesn't make sense.
Because the return that you get is not the revenue, it's kind of the welfare enhancement. And so I'm wondering, you know, if we have a handle on this. One thing that occurs to me that -- a practical way of getting a handle on it would be to do a comparative analysis of how much is spent in the United States as compared with other OECD countries. Then at least you get -- because the problem is, you know, it's hard to figure out what your actual welfare enhancement is from a dollar of spending. We could observe the relative costs in other countries to at least get some approximation as to whether what we're doing is too much or too little.
MR. UDELL: Just let me quickly respond to that. That's a great comment, but there are so many things moving around, other countries don't have nearly as complicated tax systems. We like the tax income in this country. Income is very difficult to administer and get compliance around. Many countries pumped on doing it and they'll use a VAT instead, which is itself very complicated, but many, many fewer taxpayers to deal with.
And so a cross-national comparison may not be as illuminating as you might thing, because we really have about the most complicated tax system.
MR. SULLIVAN: Yeah, but that would suggest I think that we would be spending more per dollar of revenue than other countries. In fact, I think it might be the opposite.
MR. TALISMAN: One final question or comment. Actually, then I'll take the moderator's prerogative to ask the last question I guess. Mike Mundaca and I guess Lisa, you talked obviously about these new withholding regimes, FATCA, etc., and there's I guess two elements to it. One is, you talked about FATCA sort of moving to a mutual cooperation. And I guess the question, there has been a lot of resistance within the U.S. for U.S. banks to provide information outside the U.S., and the question is, do you think that's going to be a problem with respect to this mutual cooperation procedure? And then I guess the second question is just the sort of cost-benefit analysis, and I put this to all three of my panelists, the cost-benefit analysis not only for the service of these new withholding regimes, but also to the private sector of having to implement these new withholding regimes.
MR. MUNDACA: Yeah, I think those are both important points, Jon. As you know, I think you were the Assistant Secretary the first time Treasury proposed to make U.S. banks report with respect to interest paid to non-resident account holders here in U.S. banks, and it's been obviously over 10 years now and the regs have gone through withdrawal, reproposal, withdrawal, reproposal. But I think that while there has been some resistance, it looks to me, as an outsider, like Treasury is moving ahead to finalizing those regs.
And I do think it will be an element of what is required for the U.S. to be able to reciprocally provide what it's asking other countries and their financial institutions to supply to the U.S. And then the larger question, and I think it's what's been overhanging all of what we're talking about, is all of this worth it? Is all the information that's being asked for going to lead to increased tax collections?
And you have to have not only the cost to the IRS, and Lisa went over in detail all of the initiatives required around the watching just with information reporting all the Treasury and IRS have to do to implement that, not only those costs, but the costs on the private sector participants in this system, willing and unwilling, so that remains to be seen.
And we're only at the beginning of this real ramp up I see in the information required from taxpayers and intermediaries and whether, as Commissioner Shulman said yesterday, that can be leveraged into increased collections, you know, and unfortunately we just don't know yet, but that is the key question.
MR. TALISMAN: OK. With that, we are going to take a break for 10 minutes. I want to thank Mike, Lisa, and Mike.
Mr. BERGIN: Welcome back, everyone. My name is Chris Bergin. I'm the President of Tax Analysts. As many of you know, Tax Analysts is the non profit publisher of Tax Notes, Tax Notes Today, State Tax Notes, Tax Notes International, and many other fine print and online products on federal, state, and international taxation.
One of our top areas of focus, as an organization, is the IRS, so we think the topic of this conference is a top priority. As such, we are very pleased to partner with the Georgetown University Law Center on this conference, not only because of our great respect for the Law Center, but because of this topic in particular. And I want to thank Albert Lauber, John Buckley, Jon Talisman, and everyone else associated with the Law Center for working so closely on today's event. It has been a pleasure.
In the last panel we learned quite a bit about the growing challenges that the IRS is facing and what it is doing to meet those challenges. It clearly has lots to do and more and more, it seems, every year.
For this panel, the question is: What does the IRS need to do its job? For decades now we Americans have had a love-hate relationship with our nation's tax collector, and for several decades now that love-hate relationship has resulted in a, kind of, what I call pendulum swing between enforcement and customer service.
When the political winds blow in one direction, with the federal government short of cash and the public demanding action against tax cheats, Congress pressures the IRS to crack down, beef up enforcement, and generate more money for Washington. That lasts for a few years, it seems, until we see stories, real or imagined I might add, about IRS abuse of taxpayers, high-handed audits and the like. At that point Congress steps in, demands that the IRS back off enforcement and beef up its customer service. Not surprisingly, that pendulum in public attitudes had led to something of a pendulum in IRS funding.
Today the IRS is buffeted by a swirl of conflicting political headwinds. On one hand, the Obama administration has proposed a boost in IRS funding, no doubt in part to ensure that the agency can help generate more revenues in order to reduce our spiraling federal budget deficits. But on Capitol Hill, some House Republicans talk about not only cutting IRS funding, but if they had their way, eliminating the agency altogether. I don't think I'm going out on a limb too far here, and I assure you that the IRS is here to stay, at least for a while.
But what does it mean in the way of money and people? And what will happen if it is shortchanged, even in the short term? Here to help us sort all this out is our distinguished panel of three speakers. I'm eager to hear what they have to say. Each will speak for about 10 minutes, and I will then moderate a discussion among not only them, but all of you, and I urge you all to participate.
Let me introduce our speakers in the order in which they will speak. Fred Goldberg, who is with the law firm Skadden, is among many other distinguished roles, a former IRS commissioner and a former assistant treasury secretary for Tax Policy. Nina Olson is the national taxpayer advocate. Jeff Trinca, all the way on the end there, is vice president of Van Scoyoc Associates and former chief of staff of the National Commission on Restructuring the IRS. Thank you all for being here. Fred, will you please get us started.
MR. GOLDBERG: Sure. Thanks, Chris. And I want to start by congratulating Jon, the two Mikes, and Lisa. I thought their panel was terrific and very informative. I will dwell solely in the world of abstractions and generalities, so bear with me. And one of the things I've learned with age, much to my children's chagrin, is I like to talk about history. So, I apologize in advance, but I think there are some lessons there.
I was working at the IRS the first time around in the early '80s and, as I think Mike mentioned, that was a period where, during the Reagan administration, there was initial focus on information reporting.
If you go back, those of you who want to dive deep into history and look at the '82 Act and the '84 Act, will see, I believe, three themes.
I think the first of those themes is tied to the tax gap. The tax gap was secret information. Prior to the early '80s, the data, the full reports, and all of the information were not released. The decision was made -- past tense is useful in some circumstances -- to release that information for a couple of reasons. One was a belief that structured thought about compliance could lead to legislative initiatives and enforcement, and administrative initiatives that would improve compliance.
Second, talking about taxpayers paying what they owe and tax cheats and this and that is abstract. When you can boil it down to a single number, right or wrong, it helps to focus a conversation. And as I think all of us noted during the panel discussion, tax gap was referred to repeatedly. That was one thing that happened.
Within that context, a second judgment reflected in that legislation. What was to dramatically expand the scope of information: reporting. As we heard today, that trend has continued and accelerated over the last 30 years; '82 to 2012.
The third was the advent -- an expansion of the scope of penalties. A substantial understatement penalty was the illustration, and it started off as a no-fault penalty.
And these are very important things. One, they tell you decisions matter because each of them is very current today. Second, they all have implications. My own grading is that there were pluses and minuses to issuing the tax-gap numbers to the extent they enforced more rigor and thinking about how to induce compliance. They were a plus to the extent Congress makes these notions. Well, let's eliminate the tax gap. That's preposterous, and those numbers are misused to the extent people believe those numbers. I think they're believing a fiction, but it's still useful. I think information reporting is an unmitigated good.
Mike mentioned the situation where things have been tried and repealed and in its own artful way, the democratic process keeps trying to find boundaries. Penalties are an unmitigated disaster. It was a terrible mistake. My list of personal regrets goes on for pages and pages from my time in government, but I would put that in the top five. It was an awful way to try to improve compliance.
I want to talk about information reporting for a second. When I came back as Commissioner, folks knew I'd loved information reporting. I thought this was a really terrific thing, and I had a meeting with some of the folks and they said, "Commish, we got a problem." You know how information reporting works, right? You get a return, and you match it and send out a CP2000 notice. "Commish, our yields are going down." Yes, and the problem is? There's no problem. Information reporting has induced improved compliance without the need for enforcement. And I think that's a very important lesson and it is a durable lesson.
FATCA was, I believe, an unmitigated and total disaster waiting to happen. I think Treasury and the Service deserve considerable praise for trying to make it as workable and as reasonable as they could do, given the constraints they were working under. I agree with the vision of sort of a coordinated effort moving forward is right.
But when you talk about I want to use this information to enforce compliance, I believe you missed the most important point. The most important point is the fact of the reporting is what induces compliance. Not, I'm going to go shake somebody down. And I think it's important to not lose sight of how that really, really works.
Second, I'd like to talk about funding, and in the context of this conversation we talk about funding to improve enforcement. And Mike did say there are behavioral responses but, to me, this whole conversation comes across as a footnote. It's about enforcement. Enforcement's important. It needs to happen. More of it needs to happen.
But when we talk about funding, and don't keep in mind the fact that in a democratic society the one institution of government that literally touches everyone, given our system, is the tax system. And if the tax system doesn't work right for the public, for the people, then the tax system, in my judgment, is doomed to fall apart. And I think that to have a conversation without talking and placing equal emphasis -- Chris, this was part of your point -- on responsiveness to the citizens? I used to serve -- all of us who have been privileged to work in the government, if we ignore that responsibility, we do so at our peril. And I think the danger of the tax gap number is that it doesn't talk about that latter concept. It, kind of, pushes against the notion of balance. And I just think, in the context of these discussions, it's critical not to lose sight of that.
The second point about funding, and it's something that -- this is personal experience, it's not truth -- but I believe that one of the biggest challenges the IRS faces is the feast and famine. In some respects, I believe that if somebody were to say cut the IRS budget 10 percent, but assure us we will receive that funding plus reflation growth, wage growth, whatever way you want to measure it, for five years, I believe the IRS would do a far better job, and a far more efficient job of administering the tax system.
The third point, and I understand that this is not the topic of this conference, but I think there's a whole other side to this equation. And the burdens, the cost on the IRS, the compliance burdens, everything we've been talking about, is ultimately derivative of the tax code. And, in my judgment, until our leaders come to terms with the tax code, by comparison, Sisyphus had a piece-of-cake job because we are pushing a big rock up a hill, and it's never going to get there.
Final observation: One of the impacts of information reporting, and one of the impacts of the penalty structure that we have, is it vests enormous power in the Internal Revenue Service. If that power is not used wisely and prudently, I think the consequences, again, are going to be horrific. And if we arrested every jaywalker, the system would simply not work. I'm a believer in strong commissioner positions. I think the commissioner is the man or woman with all the power, and I think the commissioner needs to exercise that power with discretion. I believe the current commissioner is doing, by and large, an excellent job of that.
But I fear that a lot of this -- when you can, sort of, score penalties, and when you can impose penalties on information reporting that would bankrupt any financial institution in the world if the penalties were applied literally because this stuff is very hard to comply with. If you are not cautious in the exercise of that power, the consequences are going to far outweigh any marginal revenue increase. That ends my comments.
MR. BERGIN: Thank you, Fred, very much. Nina.
MS. OLSON: Can you hear me? Good. I'm going to talk a little bit about the changes that have occurred in tax administration and what I see are our challenges in this funding environment. And I'm really going to take the perspective of what this means for taxpayers since I am, after all, the National Taxpayer Advocate, and I've got all these little taxpayers that I have to worry about.
In 1913, when the Internal Revenue Code was enacted, we had 358,000 taxpayers, most of whom were affluent, male, and professional. That's the demographic data. Doctors and lawyers. We know that from our data. 1944 we expanded the taxpayer base enormously through withholding. In conjunction with the war effort, we had 47.1 million taxpayers. 2011, we have 141 million taxpayers. And for the first time, as near as we can count, almost half of the U.S. population were tax return filers with our federal government. Pretty extraordinary.
So, to Fred's point about the U.S. population interfacing with the government, this is borne out in our data today, now that the taxpayer population base is radically different from the rich-white-male professional in 1913. Today, just on the most recent U.S. census, 79 percent of our population is urban, and 21 percent is rural. And rural taxpayers present particular challenges. Thirteen percent of the population is 65 or older. One-quarter of the population are racial minorities, not including Hispanics. A fifth of the population speaks a language other than English in their home. And 15.1 percent of the population is in poverty, and many of those taxpayers have a return filing obligation because of the benefits that we're now distributing through the Internal Revenue Code such as the earned income tax credit, the additional child tax credit, various other refundable credits that can come to them.
Seven million U.S. citizens live abroad, and five percent of U.S. households are unmarried partners. And then, the point about the complexity of the code, you've got, at our last count through Microsoft Word, you have 3.8 million words and growing. In 2010, you had 579 changes in the tax code, more than one a day.
And in the context of all of this, between 2010 and 2011, the IRS's budget decreased overall by 0.2 percent, and between 2011 and 2012, our budget decreased 2.5 percent. And the only reason why it didn't decrease more is because there were increases in enforcement for those years. But what I will say to you is that the cuts in taxpayers' service were enormous, disastrous, and we are only beginning to see the implications of those cuts to taxpayers' service.
So as we talk about enforcement, we can't separate out as you're trying to collect or assess or do all of these things with taxpayers to enforce the laws that, in every single action, there is a service component that you have to pick up the darn phone, read the mail for the taxpayer, or else you get into these abuses, this improper wielding of power that could occur.
Now, this is one of the reasons why, in the Annual Report to Congress this year, I made the fact that the IRS has too much work and too little dollars as the number one most serious problem for taxpayers, because it does affect taxpayers. So here's where we are. The falling level of service, the percentage of taxpayers who wanted to speak to a live human being in the IRS, and was able to get through to that live human being.
The percentage of those calls that got through in 2004 were at 87 percent. That was a very good high, we were all really proud of it, rightfully so. Last year, it was 70 percent. Year to date through last week, it was below 68 percent. One out of three calls did not get through, and those that did get through had to wait 15 and a half minutes, on average, to get through to the IRS.
We all talk about how important practitioners are as our partners. We have a line called the Practitioner Priority Line, the level of service on that line is 70 percent; three out of ten practitioner calls don't get through. And if you're one of the lucky ones who do get through, you have to wait 25 minutes, on average. So you just wonder, why are taxpayers even trying at this point and if they don't try, no wonder you might have some issues dealing with compliance.
For correspondence, the adjustment correspondence where people are writing in, and the IRS has a responsibility to make some changes on the taxpayer's account, or at least read the mail, at the end of this past fiscal year in 2011, almost half, 47 percent of the correspondence was overage, meaning it was overage by 45 days, it was 45 days old or more.
Which I just have to say, taxpayers don't get a response, they call. Taxpayers can't get through, they write another letter, then that letter doesn't get picked up, and they call again. I mean, we're in this endless sort of cycle, here. Now, what is really disturbing in all of this, as I say, is the degradation of personal contact with taxpayers.
In the face of this enormous work that the IRS must do, the IRS makes decisions about we need to be efficient, and we move toward automation, and that makes us more remote from the taxpayer. And one of the ways we've automated things, and I've written about this a lot in my blog lately -- yes, I have a blog, if you haven't subscribed, you should subscribe to my blog -- about correspondence examinations, which are a process that is completely automated, unless a taxpayer manages to get through somehow, get their correspondence read, which often doesn't happen, or gets a phone call answered.
But there's no one employee assigned to that case, there's no one employee responsible from start to finish, it's a machine that's responsible for it from start to finish. That's how we conduct 75 percent of our exams. And what we find, particularly in the low income taxpayers, the Earned Income Credit exam, is that there is a 30 percent response rate to these correspondence exam notices, which shouldn't be a surprise.
One taxpayer advocate study what we did, which was an audit, a survey of EITC taxpayers who had been audited, was that 25 percent of the taxpayers who got an audit letter didn't know that the audit letter was telling them that they were under audit. So that accounts for the first 25 of that 30 percent who didn't respond, they didn't know that they were being audited.
However, when we do our NRP audits, our National Research Program audits of these very same taxpayers, these EITC taxpayers, and they're conducted face-to-face, we have an 85 percent response rate. Those statistics alone show you the impact of a personal contact, as opposed to a remote contact. Now, I'm just going to go through some statistics, sort of setting up Jeff, if you will, to talk about automation.
And also to talk a little bit about our accounts receivable, because I believe our accounts receivables, they really are an inflated number. And I just caution everyone to think about, keep that in mind as we're talking about, I think we have a lot of dollars that we need to collect, but let's just think about the processes that lead to those assessments.
With Automated Under Reporter, which comes from -- those were the CP 2000 notices -- he matching of information, 59 percent of the notices of deficiency that assessed those taxes were default taxes. Some of those people may be waiting in line for 15 and a half minutes to talk to us about the notices, and then finally give up. With the taxpayers, however, the IRS did abatements in 85 percent of those cases.
So you've got to think that, somewhere in that 59 percent that were not responded to, there are some more abatements, and those assessments are showing up as potentially collectible inventory. Math Error Authority, another process where we have the authority to say you've made a mistake, it's a math error, it's a clerical error.
You flipped the digits on your child's Social Security number, it doesn't match the name that we have from Social Security, you're disallowed dependency exemptions, disallowed earned income credit, etc. This past year, we did a study, and we wrote about it in the Annual Report to Congress, where we looked at every single dependent taxpayer math error for tax year 2009, we found that the IRS reversed 55 percent of those math errors for tax year 2009.
We went in and looked at a representative sample of that 55 percent, and we found that, based on internal IRS information, it could have reversed 56 percent of those math errors itself, without delaying the returns, the refunds by six and a half weeks, etc., sending a letter out to the taxpayer, threatening or doing the assessment, and then spending the employee time to unwind the assessment. But the point is, the IRS needs the time to do that programming, it needs the resources to do that kind of programming, and in this budget environment, we don't get that.
The last piece I'm going to just share, because I think it relates a lot to what Jeff is going to talk about is the Automated Substitute for Return Program. This is a program where we go out and we say we think you are required to file an income tax return. And we have gone out and asked people to do this. Now, we have a 10 percent undelivered mail rate, so we're sending letters to people that we know do not live there, but that's okay.
But they don't respond, and then we go by machine and we create a return. This part of the program is deliberately designed to create inflated assessments, because we want the taxpayer to go, whoa, look at this, this is not right, I'm going to file a return and answer to this. We do their filing status as single or married filing separately, they don't get any of their dependent exemptions, they don't get to claim their mortgage interest deduction or anything.
So, by definition, they're inflated assessments. In 2010, 83 percent of the ASFR, these Automated Substitute for Return assessments, were defaulted, there was no response. 76 percent of the dollars collected on ASFR accounts were collected by prepaid credits through withholding, through estimated taxes. We had them before we did that assessment, we had the money in the house, so we didn't really -- that's 76 percent, three quarters of the dollars coming in from these assessments.
In March 2011, these assessments, 83 percent of which were defaults, constituted 43 percent of our potentially collectible inventory. The dollars that we think are the most likely and the best to be collected constituted largely default-inflated assessments. And in 2011, the IRS abated 2.4 times the dollars that they actually collected in ASFR, and they put into currently not collectible status four times the dollars that we actually collected in ASFR.
So what do you do in this environment? Well, I actually think that when you're driving us to more automation, less personal contact, you have a recipe for disaster, and you really have to think about not closing the tax gap, but preventing the tax gap from growing larger because taxpayers, who are compliant today, have a foot fault, and they can't get through to the IRS in order to resolve that, and they become noncompliant and alienated in the future.
And I personally think that that's one of the greatest crises that are facing us in the future today. I think the response to this is that we have to deal with the IRS budget and give it the kind of funding. Now, my office has made several recommendations about taking the IRS budget offline, either through an enhanced Program Integrity Cap that some speaker spoke about earlier.
The problem with the Program Integrity Cap, and I'll let others more versed in this explain it better, because I always mess it up, is that it applies only to enforcement. So, because it doesn't apply to service activity, what you have is increasingly more dollars for the enforcement, really going out and getting the taxpayer, and less and less dollars picking up the phone and talking to the taxpayer who has been gone out and got. And there you have that horrible distance and that horrible crisis that I believe we're facing.
And I'll just close by saying, as someone who runs an organization in the IRS with about 2000 employees, that yin-yang, that yanking back, that feast and famine is just devastating. When we have a continuing resolution for the first six months of every fiscal year, and then that becomes the norm, which it has, so you can't make any funding decisions for the first six months of the year.
You can't hire employees, because you don't know whether you'll be able to pay for them for the next six months of the year when you finally get your budget, you can't plan for the next year, you can't hire for the next year, because you may -- you could afford to hire them for 2012, but you don't know what 2013 is going to be. I'm not going to hire employees that I can't pay for the next year.
And that that happens year after year after year is an incredibly destructive thing, no business could run itself in that way. So I just close with that.
MR. BERGIN: Jeff?
MR. TRINCA: Thanks. I think Chris put me on this panel with these folks because I have a reputation of being controversial, so I'll try not to disappoint.
MR. BERGIN: Please live up to that, would you, Jeff?
MR. TRINCA: Yeah, I agree with most of what's been said here today, and I am thankful for being included. You know, when Chris asked me, I kind of envisioned this audience of young Georgetown law students. I hate to say it, but I've been seeing a lot of these faces for, like, 25 years.
But what I was really hoping was, I was going to paint a picture here with some data of what happens when you understaff the agency, and I was hoping to get them so charged up that you were going to see them run out into the streets of Washington and start turning over cars and burning them --
MR. BERGIN: Stop paying their taxes.
MR. TRINCA: -- rush to the Capitol and say, you know, fix this problem now. But, with that said, I would like to thank TIGTA, and I really have to say that the Trends in Compliance document that they put out every year is the best source of data out there on the compliance side. I think the Board does a great job on the customer service side; Nina does an excellent job in her area, as well.
But in Compliance, this is the best that's out there, and it's been done every year since '97, so we actually have a baseline. And I think what it shows is that there is definitely a cost, and the agency is unique, in that sense. In any other agency that's underfunded, what does it do? It doesn't write its grants, it doesn't give out its farm programs, our Defense Department has one less aircraft carrier.
I mean, those have effects, but the agency, in a sense, is the only one where you can measure like a for-profit company and say, well, how are they doing? We give them a dollar, and we had a commissioner on there, Josh Weston, he said, someone tells me give me a dollar, and I'll give you four back, Josh. So I give him a dollar, right? I mean, it was just that simple.
And I don't do Josh as well as I used to, but -- so let's talk a little bit about this data, here. And, hopefully, you guys will all riot and run out in the street. The first one, and with IRS data, the larger the numbers, the more worthless they are for policy, because they are, as Michael said, they're just, the tax gap is the most worthless number.
Policymakers, I wish they would throw it out. It's worthless, it's not -- I don't even really know where it comes from.
But this number is almost equally worthless but it does kind of set us up. This is gross accounts receivable and these are dollars on the IRS books that are debt and Nina, I think, has done a great job of explaining why this number is not of great value. But it does sort of show for this period of time what's happened to that, and surprisingly, it's not that bad. I mean, considering what we'll review here, the gross accounts receivable number looks like, you know, that could be inflation.
MS. OLSON: Consistently worthless.
MR. TRINCA: Yeah, it's consistently worthless. But what has IRS done otherwise? I mean, in '97 they had 158 million 1040 Forms. They have in -- for some reason I only have '09 here -- 187 million. The gross taxes that they collected or that employers have collected for them and then remitted over to the Treasury Department were $1.6 trillion in '97, and they are now $2.35. So that kind of just gives you sort of the really large numbers and we'll just kind of move on down here.
This is a number that is of some use, I think. This is the number that is the sort of gross number that the agency's actions actually -- he actions that they take result in these revenues coming in annually. So you've got examination and you've got notices in offsets. Those are big parts of it. And then you have sort of collection field function people which are individuals that are out there. They may knock on your door. They may call you. They have all sorts of powers. They're very highly trained. They're very expensive in that sense. And then you have ACS, which is a little less expensive folks on headphones but they can take some pretty drastic actions.
From their little cubicles they can send nice letters to your employer explaining that your taxes are not being paid and what can the employer do about it. Those are always very popular. They can send letters to your banks. They can send liens out. They can do all sort of tools. What it does is then generates an inbound call. When your checking account suddenly is frozen, the employer is complaining that they don't want to hear from the IRS anymore. Then you get on the phone and you try to find one of these individuals and respond. So there are lots of bits and pieces there.
Now the TIGTA report does a very good job on collection field function, which are fairly sophisticated people and they handle very large dollar amounts, businesses, that sort of thing. They really are very well-trained. It doesn't, for some reason, have the numbers on ACS. I was able to obtain just a little bit -- I guess in 2010 there were 41,000, and that's been a buildup for ACS. But 2011, there are 3,800. So immediately there was a hump, and then suddenly it's going down again.
For enforcement personnel overall, if you look at this in '97, the overall number, that's examination, collection field function, ACS, 20,000 people in '97. You know, the economy has grown, more tax returns, so obviously we've increased that, right? So 2010, we have 17,000 of these enforcement folks, and these are excluding management and overhead, so there's a lot more people down there.
This is an interesting -- underneath here -- the average that these field collection guys collect. We pay them now fully loaded, in the way a business would look at it -- depending on whether they live in a big city or where they live and that sort of thing -- but, you know, probably somewhere fully loaded benefits and taxes and everything else, maybe about 150,000. And you can kind of see what they would bring in.
The interesting thing is, as collection field function has gone up, you'll notice efficiency goes down, and that's because you take your most experienced people and you take them off line and you have them train new people. So it shows a problem that you have in a sustained buildup.
EVERSON: these low, low numbers down here in collection reflect the fact that a lot of folks were taken out and did customer service for a few years after the Restructuring Act, but he put them back in and then he really, really pushed them. He didn't get a lot of new bodies, but what he did was he got efficient use of the ones that he had and then it kind of peaked.
And then in this period right here, they started getting more field collection people, supposedly. I mean, if you'll look up here they really didn't get -- it's pretty stagnant. But in reality, they were getting them, they just weren't sticking around. The problem was retirements. There was a huge blob of people who -- well I won't say blob, but a big group of people who were retiring. It was hard to just keep up with retirements so they were trying to hire up. And as you could see, the commissioner is starting to have some success here before the rug was pulled out from under him last year, so those are all interesting.
This chart, total dollars collected on TDAs for collection field function ACS, TDAs are an account, you owe a dollar amount. TDIs are an unfiled tax return. So these are accounts and these are amounts that they actually collect, and it's kind of interesting. So you take the $2 trillion number and then you go down from $2 trillion to 50 some billion that comes in, and then you kind of go down to the -- this is the tough collections. This is people owe taxes and this is, you know, the rubber meets the road right here. These are unhappy campers. And someone is going and taking a fairly tough collection action on them or the person is coming clean and paying off their debt. But you can kind of see it started in '97 that these two groups of people brought in about $6.2 billion. And as you can see with the increase with returns, the economy -- the amount of taxes we're collecting. And guess what? They brought in $6.3 billion all those years later. So I always find that fascinating.
The other thing that's interesting on this thing is that you will look and see that the commissioner has made a commitment to ACS over field collections, because you can see that they are starting to come in about equal in amount. So there has been more of an investment at the agency and ACS. I think also just probably better selection of cases, better way of doing their jobs.
So the queue -- now we're really kind of getting down to nuts and bolts. We've got the big number, the big accounts receivables. The queue is really the potentially collectable inventory that is out there, the ones that they really think these are cases that we can really pay attention to. The other ones are -- there's a lot of double accounting in there for small businesses. There are the returns that are filed for these folks and all these things, so there's a lot of double accounting. But this is the one we really think we can collect. And the queue is the unassigned collection pile, if you would, like someone hasn't taken that case out and is working it, it just sits there. And you can see that the number of taxpayers went way down, and I'll show you a chart on the next page why that's probably the case. But you can see the amounts in the queue have just gone crazy.
And so you've got a queue down here in '97 with a little under $5 billion, and now you're up to about $46 billion in the queue of potentially collectible inventory. And since '06, you know, you see about a doubling. So you think, you know, how do you get out of the queue? You know, you can die. That's how you always avoid taxes, right? Or you can pay, or 10 years can go by. So 10 years go by and you get a free ride. And, so if you can hunker down for 10 years then you don't have to pay this obligation.
But the next page, this is my favorite. This is the equivalent of stuffing -- you know, you can't actually collect it. You don't want your numbers to look so bad, so what you'd do is you stuff these in the attic so no one will see them. These are the shelved and surveyed cases which essentially means that they hang around -- and believe me, they do collect some of these, because what happens is people forget and they get a refund. And so a refund offset is really the only means of collecting these cases. And interestingly, they don't really -- these are dollar amounts over here, but these are actually numbers of TDAs in there.
You have to kind of look in the IG's report to actually figure out that, essentially, in the last 10-year period, this shelving is about $50 billion.
So you guys can riot now. Everyone just jump up and say, "You've got to be kidding me." It's $46 billion that's sitting in the queue wasting away until 10 years shows up, and there's $50 billion that are shelved. Now is the time for everyone to riot.
So I guess I'll get controversial. So, you know, everyone up here today has basically said the agency is underfunded. We've got to figure out -- if you're serious about this -- and then all the downstream taxpayer service consequences of it, then you've got to get the agency funded. And I'm telling you I've spent my entire adult life -- I live on Capitol Hill. I work at the foot of Capitol Hill. I've worked on Capitol Hill. You've got to get Congress out of the picture. They are never going to properly fund the agency.
So what I would suggest -- and I've got three suggestions. Here is my policy. There are still staff here, I think, so maybe we can get a bill. The first thing I would suggest is that essentially you allow the agency to pay for itself by keeping a piece of the action, as something that was proposed in the '80s. You could set it somewhere around 20 or 25 percent of the collection, the enforcement piece. What I would give to Congress though is, I would give them the -- they would set the customer service goals and objectives, the high-leveled ones, for the agency. That's what the appropriations process would basically do. It would basically say, "We want you to answer the phones 80 percent of the time within 10 minutes. We want this many of these cases resolved up front."
A lot of the numbers that the board has put together on customer service and satisfaction, that that would be what the Congress and appropriations process would focus on, that the dollar amounts would be set across the entire agency and they could decide -- what I would suggest is, instead of splitting it up, which Congress is not good at at all either, is that they literally give them high-level objectives and say, "You've got to have this level of customer service and you've got to collect in this way." So that would be my first one, is, get them totally off budget and allow them to be paid for by the collections.
This is ironic for those of who you really, really know me from the '80s because my boss stopped such a proposal and I was the one who staffed it. It was a bounty-hunter mentality. I will tell you that, after watching for another 25 years, it's the only way that the agency is going to be able to have some budget certainty. I mean, you're still going to have up and down years, but at least they would have some sense of year-end and year-out of what their budget is going to be.
The second thing I would do is I would say, "OK agency, we're going to get you off your collective keister. You're going to start taking the age of debt seriously." Because they don't.
They age debt at the agency like you cannot believe it. And everyone in the collection world will tell you aged debt is less valuable. People die. They move away. So what I would suggest is, within 180 days of some -- you can take assessment or you can take -- you give FMS a shot at the debt. "OK. FMS collects debt?" Yeah, it collects a lot of debt. So I would say to the IRS, "OK. You figure out your staffing. You get the proper staffing in place. You collect these monies. If you don't collect them, they're going to the FMS. They're going to collect them and they will keep a quarter for every dollar." So that's my second one.
The third one that I would do, and this one is just going to -- Nina's going to slap me and I'm going to get prepared for it -- is that, you have one year to pay the debt or we're going to publish the fact that you owe the government money. So those are my three legislative proposals. And so I didn't see any rioting. No one fainted from my suggestion, so maybe my edge is gone at this point.
MS. OLSON: Can I make a few comments?
MR. TRINCA: No. No. No. That's not fair.
MS. OLSON: I just want to talk about that last one because I really just have to think about it. There's actually some interesting academic work that goes in both directions there, so I'm sort of actually open-minded on that one. I want to talk about ACS and collection field function because I've been having some interesting discussions. I do think some of the growth is a result of the economy. I mean, we can't ignore what's been happening since 2008, and I think the IRS has been responsive to that with some of its announcements under its fresh start initiative; you know, people unemployed getting a longer amount of time to pay the debt. But, you know, you're going to see that show up in our accounts receivable, because if you have a longer time to pay it means more interest and penalties are accruing and all of that gets added to that number. ACS does not make outbound calls. So the ACS is really in the business of levying on taxpayers. We looked a few years ago and found that the ratio of receipts in the automated collections system -- the ratio of levies coming out of the automated collections system to case receipts in the automated collections system was 83 percent.
So it's almost like for every case they get, they levy. And that's, you know, when they're not answering the phone, when they're not making outbound calls to talk to the taxpayer, and using the predictive dialer and saying at different times of the day and in different ways and, you know, things like that, you're really getting into an enforcement thing and that's where I talk about service with an enforcement. Some of these people, they really need to be touched, but they'll pay when you touch them.
And we're using levies to touch them, rather than calls and personal contact to call them. And that generates work for the IRS because some of these people when we levy them, we have to undo the levy and that costs us twice as much as doing a levy.
MR. TRINCA: So you are endorsing the debt collection program then?
MS. OLSON: No, I'm not.
MR. TRINCA: -- strictly an outbound call system.
MS. OLSON: No, I'm not.
MR. TRINCA: That's what I heard.
MS. OLSON: I didn't learn --
MR. TRINCA: You guys heard it here first.
MS. OLSON: We can learn some things from the private sector. The point about the age is extraordinarily important. The IRS currently looks at the highest dollar cases and that's -- and by definition, if you're an old case you're going to be the highest dollar case because the penalties and interest can triple the value of the case.
But anybody in collection knows, and the IRS data itself shows, that if we don't collect within the first two years we have virtually zero collections. It goes off to zero quickly after year two in the age of debt. And yet the stuff that's in the queue is by definition older than two years old. By definition it's older than two years old.
So you just see how just not standing back and thinking about the process really gets you there. The last thing I'm going to say, and this does go to some of the retirements and things, I was talking to the chief of collection the other day, and he was telling me, and I'm not going to get quite the percentages right so I'm going to talk in relative terms, but the vast majority of the work that's sitting either in the queue or is actually ready to be assigned out to the collection field function, is higher-graded work. It needs the highest-graded revenue officer to work, the vast majority of it. And we have right now about 30 percent of our collection field function workforce at that level.
So because of the retirements, it takes many years to get somebody up to that skill and to be able to understand and recognize what are the correct solutions in the case. So our retirements are making us really behind the curve and making us really out of kilter. And since we can't legally assign that debt to be worked by a lower graded employee, nor should we want to, it's going to age, until these other employees get up to speed.
So you know, even looking forward we've sort of got a recipe for disaster and if tomorrow we said let's hire these people who can work this complex higher graded debt, we would not be ready to work all of the debt that we've got until a few years from now.
And that goes by something that Charles Rossotti said in his last testimony -- it was actually report to the Oversight Board and he testified about it in his last hearing -- where he recommended that the IRS grow over the next, you know, ten years at an, you know, post, inflation adjusted rate of 2 to 3 percent. That was all the IRS could absorb but it needed that constant rate --
MS. OLSON: -- sustained growth and so you've got the benefits of people getting better trained. And so when, you know, yes, you would have a shock in the beginning of pulling someone off, the most qualified people off to do the training, but over time you would really get the benefits of, each year a class would get better up to speed and out on the streets and on the field. We're not doing any of that at this point. It's just back and forth and back and forth.
MR. BERGIN: Fred, you had a comment?
MR. GOLDBERG: Yeah, just very briefly. Commissioners live in a real world, of what they've got to do with what they have. And I appreciate the comments on collection. Collection is but one piece of what tax administration is about. It's important and I think it's important. This particular group of folks at the Service, I believe are taking extraordinary strides within the world they live in.
I think that they -- that they're -- the UTP, uncertain tax positions proposal, the CAP program, the foreign bank accounts, and I think that it is an adage that really pissed me off when I was the commissioner, but I think there is more than a little truth to the notion of working smarter. And I think the service is doing that. I disagree with Nina on technology. I think technology is the future. I think it's great that they are -- that the Service is using technology.
But I would not walk away thinking about the core issue in tax administration is all of the revenue lost with collection. It is much more complex and institutional in that -- and the commissioner and his or her colleagues have to decide: Where do I put very scarce resources? And I think my own assessment is that in the context of what they are forced to deal with they are doing a very good job.
MS. OLSON: I don't want people to think that I think technology is a negative thing. In fact, I'm supporting that the IRS be able to use technology to e-mail people, you know, receive e-mails.
My next blog is going to be a discussion at length about a really promising technology, virtual service delivery, that we're testing right now where people could, still in these centralized sites and getting all of the savings of centralization and, you know, sort of large processing of things. Still people could make an appointment and through computer technology, you know, see one another face to face, schedule the hearing, have a hearing face to face, and --
MR. TRINCA: I think there's a lot --
MS. OLSON: There's a lot we can do, but --
MR. TRINCA: -- can do.
MS. OLSON: -- but --
MR. TRINCA: And then some of the states are doing --
MS. OLSON: Yeah.
MR. TRINCA: -- very similar stuff.
MS. OLSON: And one of the things that Doug, the commissioner, really does make a point that I think is incredibly important, is that you know, most financial institutions today, you know, the large financial institutions, 20 to 30 percent of their budget is IT and research and development. How do you use technology to reach your customer base?
The entire IRS's IT budget -- The entire thing, CADE 2, everything we've got -- is 2 or 3 percent of our budget. You know, and so that is one thing that I would like to think about under the existing budget rules is how could you fund a research and development arm in the IRS that would allow people to experiment with technology and things and not look for the immediate return on investment and even allow for some mistakes. You know, just because we have to do that kind of experimentation to work smarter. I mean that's just what you have to do.
MR. BERGIN: I want to get to the audience in one second. Your idea, which did not cause the riot that you wanted, I find interesting. I have great respect for the former IRS commissioners that I know and I know a lot of them. Two of them here, I think could attest to that, although Mortimer is leaving me. Basically the Internal Revenue Service I always thought runs a generally terrific business.
I don't know how you run something that large. So I had a question for Fred. Did you think of yourself as sort of a CEO in your role as commissioner? Did you look at it as if you were running a huge enormous business?
MR. GOLDBERG: Yes, sir.
MR. BERGIN: Do you think Congress understands that?
MR. GOLDBERG: Yes, sir. Oh, no. I don't -- do you think Congress understands? You can stop --
MR. BERGIN: The IRS runs like a business.
MR. GOLDBERG: Yeah, but there is a challenge. I believe that the biggest tension in the system is that the IRS business is not law enforcement. And I think that that's the big tension. The IRS business is it is a gigantic financial institution.
Now that's -- I realize this is way out of vogue today but that's what I think, because it engages in financial transactions and maintains financial records with more than any, as I understand it, more than any other institution, maybe Social Security over time, but active interaction. And if you think about it as a financial institution with a function, you know, you've got to collect the debt, which financial institutions have to do, I think you come to better conclusions about how to run the system than say we're all about law enforcement. That is not --
MR. TRINCA: Well, you know, it's interesting. The Restructuring Commission, you know, seriously considered the concept that the agency has that data collection piece and then that sort of financial services piece and that there's actually a very small core that is in fact about law enforcement, I hope. I think they think they are. I think they're getting shot at out there in the field. But you know, should they be separated out?
And I think there was a realization that that was, you know, that was potentially disastrous. But the concept of one really focusing and collecting of the data and doing the financial transactions piece and then there is the core of folks who are really about badges and law enforcement.
MR. BERGIN: We heard a lot of figures. That's what the first panel -- especially the discussion about the revenue estimates. I'm not an economist so I find that stuff very, very interesting. We talked about tax gap, accounts receivable.
If service erodes at the IRS, considering it does touch most American citizens, there's another figure that's in my head, if I recollect this correctly, when the Oversight Commission first came in they did a survey, I think Roper did a survey for them, and if I remember the survey results were 12 percent of the people surveyed either cheated or thought of cheating on their taxes. And Nina, do I have that roughly right?
MS. OLSON: That's about right. It's 12 or 13 percent --
MR. BERGIN: So that sounds bad, but if you flip it on its head, that means 88 percent of us are trying honestly to comply with the law. I find that a terrific figure. So with tax gaps, and accounts receivable, and blah, blah, blah, that's a term sort of like Marty has, when does that number erode? When does it go to 15? The way things are going now -- without service is that number going to change?
MS. OLSON: Well that's what I worry about, is that, you know, as the law gets more and more complex, people -- I've always advocated that there are multiple reasons for noncompliance and you can't treat people the same, you know, because they have different reasons. And there are a lot of people out there that will make a mistake. As the law gets more complex, they'll make more mistakes.
And so what you want is for them to pick up the phone, call the IRS, and in that phone call have enough time to chat through what the issues are and come up with a resolution out of that call so that it's resolved. First conversation, taxpayer leaves the conversation knowing what to do. This is what the Restructuring Commission was all about.
MR. BERGIN: Yeah, definitely.
MS. OLSON: And when you get 15-minute wait times -- I mean the IRS has done studies, we have done surveys where we've asked taxpayers if you had to wait three minutes, you know, would you stay on the line to resolve a problem. If you had to wait five minutes, would you stay on the line? You know, and we would go to the extremes, you know, 10, 15 minutes, where you find it is five minutes and then they'd start getting really unhappy and a lot of them start peeling off.
And in some sense you have, like, a moment of -- you know, to me it's sort of like you've got this moment where the taxpayer is willing to give us the benefit of the doubt and if we blow it on a repeated basis that we're not there when they're reaching out for them, then at some point they start feeling like we're against them, we're not going to listen to them.
And then they're just going to say come and find me. And so then that creates the ACS cases, you know, you come and find me; I've got to pay other bills, I'm not even going to try any more.
MR. TRINCA: And I think that actually after a while they're kind of surprised; no one actually came.
MS. OLSON: Yeah, no one actually came. What does that mean?
MR. TRINCA: No one even bothered to call me.
MS. OLSON: Right.
MR. TRINCA: I've got a bunch of envelopes I've collected and I stuffed them under my bed, and I'm not sure what they say, but -- and then suddenly bing, one day the bank account freezes, or you know, if it's large enough, field collections has dropped off their card at your neighbor's house.
MS. OLSON: Right.
MR. TRINCA: "Hey, if you see Jeff, give him my card. I'm looking for him." That's a favorite field collections thing.
MS. OLSON: Right.
MR. TRINCA: So you know, those are the -- but I have to say, those guys are out there and right now it's a dangerous world out there.
I mean to go and try to knock on someone's home, and I'm not going to name parts of the country, and you're the IRS but you're, you know, poor kid wearing a hoodie, you know, I mean people are going to be carrying guns and it's very dangerous out there right now for IRS personnel and I think that that is probably part of the -- pushing over to ACS, which I'm in total agreement with Nina on, is it is a shoot first and then you -- well, I won't use shoot in this case, but it's a we will lien, levy, and notify third parties, and that will get you a response. And it's a top system. It's really -- it's amazing. Anyway, I'll be quiet. Let's see some questions.
MR. BERGIN: We've got about 15 minutes left. I'm going to go to the audience. Just a couple of things: Please raise your hand so I can see you, wait for a mic, and please tell us who you are. Joe, I think I saw your hand first.
MR. HUDDLESTON: Joe Huddleston with the Multistate Tax Commission. In a time perhaps long, long ago and maybe on a different planet, certainly in a different time zone, I was a revenue officer and that's a field collection officer. I'm here to tell you, as you talk about these numbers, it's not just retirement that's at the bottom end of the ladder because in my career now I've never had a job that was more psychologically challenging or physically threatening than being a revenue officer. Those people who manage to make it into the higher grades, as Nina points out, that the more difficult cases are assigned to, I don't know how they do it. It is a very, very difficult job. I don't know how the Revenue Service keeps however many they still have. I'm sure that today it has progressed considerably from where it was.
I would make two points about this process. One is that I agree completely that there is an over-focus, a lust after the supposed dollars, that are available. They simply are not. It's just a fantasy. What's actually collected out there is more the relationship of having touched the taxpayer in some fashion, so I would be very, very supportive of the concept that taxpayer services and the mechanisms that allow taxpayers to come in and deal with this in a reasonable timely fashion are far more important than anything else. As Fred pointed out, it is true that the overwhelming majority, as Chris pointed out also, of money that we're talking about out there comes through what we would call voluntary compliance. We're talking about where the rubber meets the road out here in the enforcement area. It gets mean and nasty and dirty and we spend a lot of time talking about it, but we don't spend the dollars appropriately where we can fix it.
The other comment that I would have is over time, both at the federal level and the state level, we've had a lot of discussion about private collectors and bounty hunter systems of raising revenue both for the fringe dollars and the actual operation of the agency. I would say to you, those people who would fund the operation of the agency out of the revenues collected in some structural fashion, that the problems associated with that in our kind of government are so broad and so deep that that consideration needs to be very closely discussed.
MR. TRINCA: It's a crisis. That's what I'm saying. Got to think of something.
MR. BERGIN: The young lady here.
MS. MARCUSS: Rosemary Marcuss, the director of the Research, Analysis, and Statistics Division at the IRS. When I came here we just produced the tax gap estimate and I wasn't expecting this Edsel moment, but I will embrace it. The tax gap concept was actually put in place back in the time of the reorganization and the Service had a commitment to update it. That commitment was something that we agreed to that came from really serious tax policy people. No one was more aware that putting out a tax gap estimate after a five-year gap would not lead to quite a bit of misunderstanding about what message might be conveyed. To the end, Tax Notes published a 10-page piece by me in November explaining what the tax gap is, what it isn't, and how it's really just a joint product of a very large research program that attempts to understand the taxpayer better. (For the Viewpoint by Marcuss, see Tax Notes, Nov. 14, 2011, p. 887, Doc 2011-22605 , or 2011 TNT 221-15 .) Along with the kind of points that Nina is making, we do try to use data smarter to understand the taxpayer so that the tax gap estimate is one little by-product of that. Thank you.
MR. BERGIN: Fred Murray?
MR. MURRAY: I wanted to put a little bit of additional emphasis on something Nina said. When we were working on testimony, and this is dated again to an earlier point in time, we were working on testimony in regard to taxpayer assistance and the telephone calls that come in to various people around the country that we're working on answering taxpayer questions about technical problems and how do I fill out my tax return, et cetera, and some of the problems there. The call volumes were something if my memory serves me correctly in the neighborhood of 180 million calls a year. So when Nina talks about a 7 percent or 10 percent amount of people who can't get through, you get a little better sense of how many literally millions of people are being affected by some of these reductions. To take that a little further, those of us who actually work in the real world and try to help taxpayers respond to some of the notices that come out in various places are quite familiar with the problem that you write a response back to the Service center and you write another response back to the service center and some of us affectionately call it the black hole problem. Friends of mine who work in the service also refer to this as the black hole problem because there literally is nothing -- the volumes are so significant, so substantial -- again, once you get out of the large corporate taxpayer arena where you've got people who are not necessarily represented by some of the firms that are here in the room, it is a very serious problem trying to get through trying to get a response, and it leads to a lot of the behaviors that have been discussed and that I think is probably even a much greater number than the number who are actually trying to get through on the telephone.
One second question I'd like to ask, going back to the tax gap numbers, looking at some of those estimates in the $345 billion or whatever it was that had been in some of these numbers and the various components of it, several of us in looking at the numbers came to the conclusion that something around 8 to 10 percent of the gap, or at least the numbers that were published in the data that we had to analyze, were somehow attributable to large corporate taxpayers. Yet it seems like a significant amount of the resources of the service if you will are at least in terms of guidance and in terms of some of the other programs that we see so publicly are related to that segment of the taxpaying public. I wonder if you guys think that the resource allocation is appropriate to where some of these real issues are.
MS. OLSON: First, I think just like you say that the field collection cases are the really hard cases. You can do a high volume in ACS because of the nature of the work. I really don't look at the tax gap as necessarily telling me specifically where I should be going. You have to ask a series of deeper questions. What is the nature of that debt? What are the characteristics of that debt? Who are the tax debtors? What is the kind of noncompliance that is in that debt? For the larger corporations, is there so much transactional planning there that you need commensurate highly paid people on the other side to identify that? That's going to raise the cost of the compliance work that you do targeted to that taxpayer base.
Having said that, I think that one of the great advances in tax administration has been the advent of the low-income taxpayer clinic program. I say that not as someone who founded, but if you think about the fundamental fairness of the system, the point that we made to the restructuring commission that resonated with them is that there is a whole component of taxpayers who have no representatives like the large entities who can speak up for them and that we needed to have in our system some groups that could come forward and say these are the problems, these are the issues, and this is the guidance needed for this group of taxpayers and advocate for them not just case by case but systemically as well and I think we have to everyone's credit achieved that. I'm worried a little now about the middle class who for the longest time got to file their income tax returns, but now they've got all these bells and whistles that are added to their returns and all sorts of credits and devices that they can participate in through the tax code and I think we need to think long and hard about what their needs are.
MR. TRINCA: This always reminds me of Everson's last hearing. They had the guy with the jumpsuit -- sports coat -- and he was really feeling great because this was going to be his last hearing. He said, "Why didn't you guys catch him? You didn't catch him. The credit card companies caught him." And Everson said, "Heck, it was only $40,000. We're not going to go after someone like that," and you saw the entire row of IRS guys jump up. He says, "Let me rephrase that." Whisper, whisper, whisper. The tolerance is at the agency. There was a gentleman back here about return and stuff. The larger number is not, what did I say, there's $46 billion in the queue and there's 50 billion that's been stuffed under their bed as my kids do when they don't want me to see something, but that's not the real number. The number is: Are you going to collect it? The issue is not about million-dollar debts. They're collected. It's not about $100,000 debts. You would be out there knocking on that business's door. You look at the shelved cases and what I said was there are fewer taxpayers in the queue but the dollars are increased because after very little effort, and I'll say the number, $5,000 or lower, drops off, it gets shelved or whatever they call it. It gets stuffed under the mattress, so the small dollar amounts. What my point to the agency is and to the Hill and for people who might get upset about this, and I don't know if that number is $46 billion plus $50 billion, and I don't know how good any of those numbers are, but I can tell you there's money in there and then there is also the larger compliance dollar. Do you tell me if I don't pay a $5,000 debt I really can just hunker down and if I adjust my withholding and everything else I'm going to probably get through this? I don't know. Maybe. It might be worth the risk.
MR. GOLDBERG: The short answer to your question is yes in terms of allocation to large corporations. The most exciting thing going on there in my view is they are not gadflies like us, they are actually trying to make fundamental change in how the work is done in that sector. The jury is out, but I think it is terrific.
MR. BERGIN: There is one thing I haven't heard of yet. And I totally agree with you, Fred, on FATCA, and you can see it coming but that one's here. The word I haven't heard yet is guidance. Congress passes a law like FATCA and then it cuts the IRS's budget, I have real trouble getting my head around this, and the IRS and Treasury are supposed to come up and explain how FATCA works which I have no idea how you do that. What does this do to guidance when you keep the rollercoaster funding of the IRS, up this, down this? Anybody?
MS. OLSON: I was out at the American Bar Association in San Diego and I sat in the back of the room when they did a two-hour presentation on FATCA and the council people were at the front table and there were all of these tax professionals. Everyone was very kind to the council people because everyone felt really badly for them. They were trying their hardest, but it's an impossible thing. I got to watch everybody's heads shaking every time somebody would say something and then the audience would almost in unison roll their eyes and shake their heads as you think about how to implement that.
On the one hand, I felt camaraderie in the room because people were very sensitive to how difficult this was, but on the other hand, how do you go back to your clients and try to explain it?
MR. TRINCA: The amount of brainpower at the agency that's trying to solve issues like that from my perspective that could be solving other stuff. With all due respect to Michael and his estimates from the Joint Tax Committee, if you're pulling the best and the brightest out of the agency to deal with that provision, then that means that you're losing money elsewhere.
MS. OLSON: If I can say this, we go through the priority guidance plan, and we have put issues over and over and over again on the priority guidance plan and we're told we can't work on that right now because we're working on healthcare. We can't work on this now because we're working on FATCA. There are only so many bodies so that that is the impact when you get more work and then these needs to develop this.
MR. TALISMAN: At the Treasury Department in particular you only have 30 to 40 people devoted to dealing with regulations and it's not just FATCA and healthcare reform. The major projects obviously are a big sinkhole and I can guarantee you that the ITC people, for example, that's all they're focused on right now is FATCA and within Lisa's department all they're focused on is healthcare and the problem with that is then you don't get guidance in the other areas.
It's also the constant legislative flow and the hearings. I can remember as assistant secretary that I had to testify at nine hearings in a two-month period. If you're testifying nine times in a two-month period, you're not going to be focused on regulations a great deal. We have the situation where there are going to be backlogs because of the pressures on people in chief counsel and the Treasury Department on these big major projects, so that every time we have a big major project, it takes all the resources away from everything else.
MR. BERGIN: I promised this young gentleman up here and then I forgot him. I apologize.
MR. TEMPLE-WEST: Patrick Temple-West with Reuters. That gentleman's last point was exactly my question, but I'll ask it again to get a clear answer. Is IRS devoting too many precious resources and energy in trying to catch the big fish corporate tax evaders offshore while leaving to languish potentially individual taxpayer services considering that that is the larger source of revenue for the tax code as opposed to the corporate side?
MR. TRINCA: Yes.
MS. OLSON: Are you asking me?
MR. TRINCA: It's not their choice. Congress is making them do it. They're going to have to deal with FATCA. That's just the way it is. But it's a big waste of time and focus.
MR. GOLDBERG: No.
MR. BERGIN: I'm going to end with that disagreement. Thank you, Georgetown folks. Thank you, Tax Analysts folks. Thank you, first panel.
(Whereupon, at 11:53 p.m., the PROCEEDINGS were adjourned.)
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