Statement of Nina E. Olson, National Taxpayer Advocate,
Internal Revenue Service

Testimony Before the Subcommittee on Oversight
of the House Committee on Ways and Means

Hearing on the 2001 Tax Return Filing Season

April 3, 2001

I am pleased to appear before you today and to address the Subcommittee on matters relating to the 2001 filing season. As you know, this is my first appearance before this Subcommittee in my capacity as National Taxpayer Advocate. I started my employment with the Internal Revenue Service on March 1, 2001, a little over a month ago, in the middle of the 2001 filing season. I have spent the last 30 days travelling the country, visiting service centers to observe the return submission process, and meeting with Taxpayer Advocate Service field employees and managers as well as employees and management of IRS operating and functional divisions. I emerge from this "on-boarding" process extremely pleased with the Service's progress in re-engineering its systems and its corporate culture. I believe that the Internal Revenue Service will continue to progress in this regard, however haltingly it may appear at times.

Although I come to this position with over 25 years of front-line experience in tax practice and procedure, during the last 30 days I have learned an enormous amount about the internal workings of the IRS, including its information technology systems. I know from my private practice that IRS employees are among the most dedicated of public servants. I also know that they are a valuable resource for anyone trying to identify and resolve taxpayer problems, making them essential to the mission of the Taxpayer Advocate Service. Thus, I am firmly committed to maintaining open lines of communication between my office and all functions of the IRS, whether located here in the Washington, DC area or in any of the field offices. To that end, I have held and will continue to hold Town Hall Meetings on my trips to the field. I will also continue to reach out to taxpayers, practitioners, and consumer and business groups, as my predecessor did before me.

I would like to publicly acknowledge, with gratitude, my predecessor, W. Val Oveson, the first National Taxpayer Advocate. Mr. Oveson came on board when the Taxpayer Advocate Service was more a concept than a reality. With the able assistance of the Deputy National Taxpayer Advocate, Henry O. Lamar, he carved this organization out of whole cloth to become the organization of dedicated and professional public servants that it is today. I can only try to imagine the effort it took to get the Taxpayer Advocate Service off the ground. Mr. Oveson has left the new National Taxpayer Advocate a truly wonderful gift - an up and running organization poised to undertake the challenging and interesting work ahead. I am the humble recipient of that gift, and I am forever grateful. I am also appreciative of Mr. Lamar's fine leadership of the Taxpayer Advocate Service during the period following Mr. Oveson's resignation and prior to my reporting to duty. His ongoing support in his role as Deputy National Taxpayer Advocate will be invaluable to me.

I look forward to presenting you with the Report on the FY 2002 Objectives of the Taxpayer Advocate Service on or before June 30^th, 2001. The Taxpayer Advocate Service is entering an exciting period, with challenges related to delegation of additional authorities, the revision of the content and format of the Annual Report to Congress, a pilot 4-year integrated training program, and improved procedures for monitoring and gathering case data.

With regard to the Annual Report, we at the Taxpayer Advocate Service take seriously Congress' charge to us that we give you suggestions, based on our and other's first-hand, front-line experience with taxpayer problems. We are in the process of redesigning the Annual Report, so that the final product will not only provide you with its current elements, including legislative recommendations, but also illustrative examples and a substantive discussion and analysis of each recommendation's impact on information and business systems, as well as privacy considerations. We may use the legislative recommendations to highlight developing issues, exploring and suggesting a range of solutions for your consideration. In short, we at the Taxpayer Advocate Service want the Annual Report to be a useful working document, providing you with valuable, practical information.

2001 Filing Season: General Comments

The 2001 filing season is a remarkable one for me, in part because I have experienced it from differing vantage points - initially as a private tax attorney and a low income taxpayer clinic director and now as an employee of the Internal Revenue Service. It is also unique on a personal level, in that it is the first filing season in 25 years in which I have prepared and filed no tax returns other than my own. In each of the prior 25 years, I have prepared between 25 and 200 returns for compensation. My comments thus reflect my past experience as a private practitioner, as well as the perspective of the National Taxpayer Advocate.

The Taxpayer Advocate Service (TAS) has an odd relationship with the filing season. We do not prepare or process income tax returns. Nor are we set up to answer customer service questions. There are, however, several discrete areas associated with the filing season for which TAS is responsible or which significantly impact TAS operations.

Manual Refunds: Requests and Processing

Taxpayers experiencing significant hardship and who need their refunds immediately, may contact the Taxpayer Advocate Service and request our assistance in expediting their refunds. The manual refund process may help in documented situations of hardship (e.g. eviction, medical coverage) and where we have the ability to intercept the automated refund process. Manual refunds can be issued by electronic funds transfer or regular paper checks. We secure authorized signatures; obtain documentation of the hardship; check for outstanding debts, which might offset the refund; and monitor the account to prevent erroneous or duplicate refunds from occurring. When these steps are not followed, the taxpayer can face financial responsibilities for a duplicate refund including interest. We exercise great care to ensure we do not create more costly and devastating taxpayer problems. We also recognize that IRS officials may incur financial responsibilities resulting from the issuance of erroneous refunds.

The Taxpayer Advocate Service is currently monitoring its issuance of manual refunds to ensure that second, erroneous refunds are not issued. We are increasing our access to various databases so that we may better identify situations when a manual refund will be offset by existing federal or state agency debts. Although field advocate employees review these procedures as part of their own filing season readiness, the TAS is also incorporating a review of these procedures in our 2002 Service-wide filing season preparations.

Social Security Number Problems

This past year the TAS identified a potential disruption of service to many of the two million taxpayers who have name and social security number mismatches on a joint income tax return. Frequently, the mismatch occurs because taxpayers neglect to inform the Social Security Administration of a name change following a change in marital status. We suggested that the proposed implementation of 1996 legislation, which required the IRS to strengthen validation procedures for social security numbers, would cause taxpayers concern and undue alarm. As described by Acting National Taxpayer Advocate Henry O. Lamar in our 2000 Annual Report, IRS Operations and the Taxpayer Advocate Service worked together to develop what we call a "soft" notice for taxpayers with secondary social security number problems. This notification allows taxpayers time to correct their official records before filing their next tax return. Thus, we were able to prevent taxpayers' 2000 refunds from being frozen without an opportunity to correct the information. This is an excellent example of how the TAS is able to work within the IRS in a nonadversarial manner in order to advocate on behalf of taxpayers.

Taxpayer Advocate Caseload

The filing season impacts TAS in another way: for at least the last 2 filing seasons, IRS personnel normally assigned to front line compliance positions were detailed to the customer assistance sites or phone lines for the worthy objective of assisting more taxpayers during filing season and improving its customer service level. Unfortunately, whenever other operational personnel are detailed out of their original areas, response times in those areas inevitably lengthen. If the delay is more than 30 days over normal processing time, the matter will automatically meet TAS case criteria, as set forth in Internal Revenue Code Section 7811.

The Taxpayer Advocate Service is currently preparing an analysis of its FY 2000 and 2001 monthly receipts inventory. We will identify the types of cases that are coming to TAS and their criteria for eligibility. We expect that this analysis will point up some of the deficiencies in our own case-tracking system and the current limitations of our case management system. We will use this information to address inconsistencies (or recommend design improvements) in our own databases, and we will work with both the Wage & Investment and Small Business/Self Employed Operating Divisions to determine how we can avoid unnecessary "overflow" referrals. To some extent this overflow will be mitigated by the hiring of Tax Resolution Representatives under the STABLE initiative, thereby freeing up compliance employees to do their own work. We also expect to see a positive impact on our overflow case inventory as the Service improves its monitoring and measurement of the level and delivery of service.

TAS is also reviewing our intake procedures to make sure we are accepting those cases in which we can actually "add value" to the taxpayer's case. In fact, we have identified "Reducing Inappropriate TAS Caseload" as a strategic goal. We are concerned that the dominance of cases arising from delays of more than 30 days or from multiple unsuccessful taxpayer contacts with the IRS actually prevents us from assisting the one category of taxpayers who TAS is uniquely designed and mandated to help, namely those suffering some form of financial hardship or irreparable harm. Over the next year, we will make a concerted effort to educate taxpayers about our unique role within the IRS and also review our case acceptance procedures. Finally, we will initiate an education campaign within the IRS to ensure that IRS employees understand the criteria for case referral and feel comfortable referring appropriate cases to TAS.

Earned Income Credit

No review of any filing season would be complete without mentioning the Earned Income Credit (EIC). Over the years I have been a consistent advocate for the rights of low income taxpayers, and I have personally represented hundreds of such taxpayers in EIC examinations, refund claims, audit reconsiderations, and Tax Court cases. I will be vocal in my advocacy that the statute and procedures developed to reduce error and fraud in this program must also protect the rights of taxpayers. Too often, taxpayers who file for the EIC do not have professional representation and because of the burdens of poverty, language or literacy barriers cannot make an effective case for themselves. It is my firm belief that if we subjected middle class and more affluent taxpayers to the kind of intrusive inquiries we routinely subject a taxpayer to in an EIC audit, the entire EIC audit program would be shut down in response to taxpayer complaints.

Last month I spent several days at two service centers, observing the return submission and processing pipeline as well as the operation of the Dependent Database (DDB). The DDB is a very sophisticated and valuable tool for EIC administration. It is essentially a series of rules that, when applied to a taxpayer's return, will identify those returns that present the possibility of taxpayer error or, more seriously, an attempt at fraud. The IRS employee reviewing these returns can determine which rules are implicated and can tell the taxpayer what information should be submitted to support the claim. This single bit of information alone will resolve many cases, since pre-2001 the IRS could not necessarily tell the taxpayer what information triggered the return review. However, the system is only as accurate as the underlying databases. If the databases are not regularly (or correctly) updated, we will be needlessly contacting taxpayers and causing them undeserved aggravation.

Another problem with the DDB is that it will sometimes flag the second-filed return in a dueling claims situation. In certain circumstances it is still possible for a noncustodial parent to file electronically and receive a refund, including the EIC, causing the second-to-file custodial parent's return to be audited. This occurs when there is nothing in the DDB to trigger an examination of the noncustodial parent's return; that is, no rules are apparently violated. Obviously in this situation, we will lose revenue and needlessly distress the custodial parent.

Representatives of the Taxpayer Advocate Service will be working with the DDB design team to explore solutions to this and similar limitations. It is my belief, however, that the DDB, once refined, will significantly lessen the number of eligible taxpayers examined, have a chilling effect on those taxpayers contemplating fraud, and provide an opportunity to better educate those taxpayers who are being examined.

Electronic Tax Administration and the Information Age Gap

The Taxpayer Advocate Service recognizes the importance of electronic tax administration to the integrity of the tax system. We stand completely behind the Service's efforts to modernize the return submission and processing pipeline. However, we are concerned that one category of taxpayers will be left behind in the push for electronic filing. Today, low income taxpayers have several options for filing a tax return. They may file a paper return and wait an average of 4 to 6 weeks for a refund. They might seek out a return preparer, pay one fee for return preparation, another fee for electronic submission, and a third fee for a refund anticipation loan, if they need their refunds immediately.

Low income taxpayers can also visit a Volunteer Income Tax Assistance (VITA) site, or, if they are elderly, a Tax Counseling for the Elderly (TCE) site. Such taxpayers may also be able to utilize TeleFile, or visit an IRS Taxpayer Assistance Center. Finally, if the taxpayer has access to a personal computer, he or she can file electronically through the e-file program, even accessing filing software from the IRS website. Thus, on the surface it appears that low income taxpayers have a multitude of filing options.

Taxpayer Advocate Service employees, VITA and TCE volunteers, and low income taxpayer clinics have all expressed concern about the impact of refund anticipation loans (RALs) on low income taxpayers. One particularly compelling example of the RAL's detrimental impact involves a taxpayer who uses his RAL as a down payment for an automobile and makes one or two additional payments before he learns that his refund is denied. The automobile is repossessed, the taxpayer loses the monthly payments he's made, he owes the financing company for a vehicle he does not have and, if the company forgives the balance of the loan, the taxpayer has cancellation of indebtedness income. Taxpayers do not necessarily distinguish the IRS from the parties driving this scheme. Such practices have a negative impact on tax compliance.

I believe that the Customer Account Data Engine (CADE) now under development and testing by the Internal Revenue Service, will ultimately remove most if not all of the demand for RALs. CADE applications for refund processing should enable taxpayers to receive a deposit of their refunds within 2 to 3 days of final return processing. Further, the IRS and Financial Management Services (FMS) are now able to establish deposit accounts for taxpayers who do not have bank accounts. These deposit accounts can receive direct deposits of tax refunds.

Although I applaud and support these efforts, I do not believe our inquiry should end here. Low income taxpayers may not have access to VITA sites (which are not necessarily located where low income taxpayers live or work); VITA sites may not be equipped with computer equipment appropriate for electronic return filing; low income taxpayers may not have access to personal computers or be computer literate; and finally, the TeleFile system does not accept a return from a single taxpayer who claims a dependent. These factors, combined with the sheer complexity of determining filing status and entitlement to dependency exemptions and the EIC, demonstrate that low income taxpayers will continue to require the assistance of return preparers in the future.

It is interesting to note that of 576,351 1999 Form 1040 returns claiming EIC with math errors, 44% of those returns showing computational errors were commercially prepared. In addition, commercially prepared returns accounted for 55% of the math error adjustments in which the EIC was partially or fully disallowed. Essentially, taxpayers whose income is so low as to be eligible for the Earned Income Credit are a captive market for return preparers who are not very accurate or who are not making the proper inquiries of their clients in order to accurately complete the returns.

The Taxpayer Advocate Service is concerned that down the road, as RALs become relatively obsolete, some commercial return preparers will seek to recover the lost revenue through increased electronic filing fees and/or return preparation fees. We are mindful of Congress' direction in Section 2001(a)(3) of the IRS Restructuring and Reform Act of 1998 that the IRS not interfere with the free operation of the market. We also do not believe that the IRS should enter the business of tax return preparation. However, I would like to suggest that there is a middle ground.

Congress, for example, could investigate whether low income taxpayers operate within a free and open market or if that particular market segment is imperfect and requires some corrective action. Congress could determine that a taxpayer who is eligible for EIC in order to maintain a baseline standard of living should not see his EIC reduced by large return processing or preparation fees.

One solution to this dilemma is to establish National Filing Days, similar to National Problem Solving Days, during the filing season. The National Filing Days could be located at public schools or houses of worship, be staffed by volunteers, offer on-site electronic return submission and direct deposit accounts. Congress could also establish a separate grant program for administrative expenses (including computer equipment) incurred by VITA initiatives. Thus, free tax return preparation would be available to low income taxpayers where they live and worship.

Other less complicated measures can address the more obvious consumer abuses. The Taxpayer Advocate Service is currently suggesting that the IRS incorporate a consumer alert into appropriate brochures and publications. This caveat would state in clear and simple language that taxpayers who pay for their return preparation should receive a copy of their returns, signed by the preparer. For that matter, members of Congress can include this information in their constituent communications. The notice might include a toll-free number so that taxpayers could report their preparer to the IRS if he or she refuses to sign the return. This program dovetails into the Service's current efforts to educate return preparers about the EIC substantive and due diligence requirements. It will enable the Service to actually locate those preparers most in need of education.

I must emphasize, though, that to some extent the solution to the low income taxpayer return preparation dilemma rests on a judgment call by Congress. Does the tax system have some responsibility to protect a vulnerable population from questionable market practices in the tax arena? This is not a decision the Internal Revenue Service can undertake without further guidance from Congress, given the directive in RRA 98 that the IRS refrain from interfering in the commercial return preparation marketplace.

Taxpayer Advocate Service Independence and Authorities

The final issues I would like to address are not related to the filing season specifically. As you know, the Commissioner of Internal Revenue Service delegated certain authorities to the National Taxpayer Advocate on January 17, 2001. These authorities, once delegated to the field, will enable TAS employees to resolve taxpayer problems more quickly. In many cases, the delegated authorities should eliminate the need to refer the case back to the originating function. Generally, the delegated authorities provide to the TAS the authorities that former Problem Resolution Officers derived from their district directors. We hope to have a redelegation, implementation, and training plan in place by July 1, 2001.

I am aware that some TAS employees will be dissatisfied with the redelegation order. These dedicated employees would like very much to resolve a taxpayer's case entirely within the Taxpayer Advocate shop. In some instances, this may be the appropriate result. I have made it clear to my employees that if, after we have tested these new authorities, we find that we need additional authorities, I will not hesitate to seek them. But I am keenly aware that if TAS takes on more IRS authorities, it risks becoming a "shadow IRS" and it loses its effectiveness as an advocate for systemic change. That is, after all, the ultimate goal - to work with the other IRS operating and functional divisions in identifying and mitigating individual and systemic taxpayer problems.

Some commentators doubt the Taxpayer Advocate Service's ability to maintain its independence while remaining part of the Internal Revenue Service. I have no such doubt. I believe that it is appropriate for the National Taxpayer Advocate and the Taxpayer Advocate Service to be located within the IRS. The Taxpayer Advocate Service is not TIGTA or the GAO. The National Taxpayer Advocate is not a watchdog. Rather, she is an advocate.

Congress has charged the National Taxpayer Advocate with the mission of assisting taxpayers with their problems and assisting the IRS and Congress in mitigating those problems. It is indeed a very difficult mission, with almost irreconcilable tensions built into it. But I believe that this tension can be a source of creativity for all of the participants. By being independent but remaining inside the IRS structure, the NTA is a player at the table with access to all members of the IRS management team as well as the field employees. This relationship places a strong obligation on TAS employees to persuade and negotiate, and to have courage in the face of opposition or bureaucratic obstacles. But that is the job of an effective advocate.

I am committed to seeing that each and every member of the Taxpayer Advocate Service is trained and supported so that he or she can well serve the taxpayer, the Internal Revenue Service, its Oversight Board, and the Congress. I look forward to this challenge.

Mr. Chairman, thank you for this opportunity to come before this subcommittee and discuss these matters.