Statement of William Stevenson, President, National Tax Consultants, Merrick, New York,
 and Chairman, Federal Taxation Area, Right to Practice Committee,
 National Society of Accountants, Alexandria, Virginia

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

Hearing on the 2002 Tax Return Filing Season and the IRS Budget for  Fiscal Year 2003

April 9, 2002

Mr. Chairman, my name is William Stevenson, D. Ed, EA, CFP.  Thank you for the opportunity to testify before the committee today on the 2002 filing season and the IRS budget request for fiscal year 2003.  I am the President of National Tax Consultants of Merrick, New York and the chairman of the federal taxation area of the Right to Practice Committee of the National Society of Accountants (NSA). It is in my capacity as chairman of the NSA tax group that I appear before the Committee today. 

The NSA and its affiliated state organizations represent 30,000 accountants, tax practitioners, business advisors and financial planners providing services to over 19 million individuals and small business.  Most of our members are sole practitioners or partners in small to medium sized firms. NSA represents the accountants on Main Street, not those on Wall Street.  NSA has not received any federal grants or contracts for this fiscal year or for the preceding two fiscal years.

In order to place NSA’s remarks in the proper context, we need to explain the distinction between the two basic types of tax preparers.  Members of the first group usually see their walk-in customers once a year—to prepare their tax returns.  Members of the second group are tax practitioners/accountants who provide continuing services to clients (return preparation, tax planning and IRS representation, and other services).  NSA’s comments are from the perspective of the second group.

E-FILING

NSA is committed to electronic filing and has called upon its members to become electronic return originators (EROs).  In October 2001, NSA issued a Call to Arms to encourage the membership to embrace electronic filing and utilize the Electronic Federal Tax Payment System (EFTPS) to pay tax liabilities.  NSA’s intent was to help reduce the risks posed by mail disruptions, lessen the need of the IRS to process paper documents and do our part in helping IRS reach its mandated goal that 80% of all returns be electronically filed by 2007.

As the Committee is aware, IRS is lagging behind in reaching this goal.  NSA believes that part of the reason is that many tax practitioners have not jumped on the e-filing bandwagon.  Why have more tax practitioners not committed to electronic filing?  Some will not e-file unless it is mandated. Some may be near retirement and do not wish to invest in new technology or change long-established business practices.  NSA believes the primary reason is that the IRS has designed a system that is not user-friendly and, in fact, increases the workload (and cost) for tax practitioners in a business where time literally is money.

Perhaps the experience of my firm can illustrate the problems.  My firm made the commitment to e-file as many returns as possible this filing season.  This entailed capital expenditures to upgrade computers and communications equipment and required that we re-think our entire practice and restructure it to accommodate the requirements of the e-filing environment.  This we understood and accepted as a cost of doing business. 

As we began to prepare and file returns electronically, we quickly realized that the time needed to prepare a return had dramatically increased.  For a practice such as mine that will prepare 800 returns this season, this translates into 200 to 275 hours of additional work.  This required time competes with many other immediate time-consuming tasks including the preparation of several hundred-business returns and handling IRS CP 2000 notices received by clients. One point should be made clear.  The actual electronic filing of the return is simple and quick; it is the extra steps involved in preparing the return and post filing activities that consume the extra time.

First of all, additional data entry is required to prepare the return.  For example, on a paper return, the preparer transfers the dollar amounts from a W-2 and enters it on the appropriate line.  On a return that will be filed electronically, all the data from the W-2 including not only data about the taxpayer but also employer data (such as name, address and EIN, among other data) must be entered into the computer.  Multiple W-2s magnify the time factor.  Similar activity occurs for a form 1099-R.  Why the IRS requires this additional information has never adequately explained.  In effect, IRS has shifted its data entry process from the return processing centers to the practitioner’s office.

When the preparer signs a paper return, generally the job is finished.  This is not true with an e-filed return.  We transmit the return, wait for acceptance by the IRS and the state.   Once the acceptance is received we print out a letter notifying the client that the return has been received and accepted by the taxing authority.  If for some reason the return is rejected, we have to investigate the cause and correct the return immediately and resubmit.  In a paper environment, most of these problems would not be discovered until after the filing season and would be handled when time pressures are much less.

The Treasury is advocating that the filing date for electronic returns be extended to April 30 and the Ways and Means Committee adopted such a provision in H.R. 3991.  This initiative will not solve the time problem.  Tax returns not completed several days before the filing deadline go on extension anyway.  This proposal does not extend the number of hours in the day early in the filing season.  It will extend the time for people who already file late.  This may be a benefit to the commercial preparers and individuals filing their own returns, but for the tax practitioner, it is of marginal value.

The process to become and remain an ERO is not practitioner friendly.  If one is not an Enrolled Agent, CPA or attorney, the application process requires a background check, including fingerprinting and a credit check.  Preparers of paper returns are not subject to these requirements.  Another burden imposed by the IRS is a program known as the Revenue Protection Strategy.  Under this program, IRS will make unannounced visits to practitioner’s offices.  The process, which can take several hours, involves interviews with the practitioner and staff and a review of documents.   Having IRS agents appear in the office in the middle of filing season and flashing their badges in front of clients is an experience tax practitioners can do without. 

Electronic filing is the road of the future.  How rough will the ride be?  Until the IRS does a better job in making the system more practitioner-friendly, tax practitioners will be reluctant to accept this program.  The IRS can do better.  Not only must IRS improve its outreach to the practitioner community, it must listen and act on the advice that NSA and other groups are more than willing to provide.

If a picture is worth a thousand words, than a hands-on demonstration is the equivalent of the Encyclopedia Britannica.  I invite members of the Committee and their staff to come to my office in New York and experience first-hand a live demonstration of electronic filing from the practitioner perspective.  I guarantee it shall be an eye opening experience.

FEIN DEBACLE

IRS implemented a new process for issuing federal employer identification numbers (FEIN) in early 2002.  This included the transfer of workload from ten campuses to three campuses.  The result was a disaster with taxpayers and practitioners experiencing both difficulty in reaching the IRS and lengthy delays in receiving a FEIN.  Sometimes taxpayers received more than one FEIN.

Another problem we are experiencing in the field is inconsistent handling of the program by IRS staff.  In many instances, practitioners were advised that a power of attorney  (POA) needed to be on file before the IRS would speak to the practitioner.  This was incorrect.  Often, the IRS would refuse to fax a FEIN to the practitioner with a valid POA on file with IRS.  Again, this was incorrect.  The end result has been chaos and confusion in a program that once ran smoothly.

In a recent letter to IRS Oversight Board Chairman Larry Levitan, Commissioner Rossotti stated that IRS is committed to maintaining a level of service at or above 85%.  We believe the 85% service level is unacceptable. The goal should be 100%. Obtaining a FEIN is a fundamental need for many businesses and the IRS should not fail in delivery of a basic service to taxpayers entering the system.  Imagine an 85% service level in obtaining a telephone number.  A FEIN is a critical identification number and, among other purposes, is needed to open a bank account and apply for Subchapter S status.  The IRS can and should do better.  Dealing with this type of problem, particularly during filing season, burns up valuable time that could be better spent elsewhere.

On a positive note, the IRS acknowledged they should have had more involvement with stakeholders in the planning and development of this initiative, and according to the Commissioner, the IRS is “…committed to greater stakeholder involvement in the development of future initiatives.”   NSA hopes that this new attitude will carry over to the next Commissioner.

RETROACTIVE TAX LAW CHANGES DURING FILING SEASON

Another burden imposed on tax practitioners during filing season are tax bills that are enacted during the filing season that have provisions retroactive to the preceding tax year.    The software companies scramble to modify their programs, the IRS scrambles to put out guidance and the practitioner is left in the lurch.  Should returns in progress be filed under previous law and then corrected by filing an amended return? Should you delay processing affected returns until later in the filing season and hope for guidance?  Also, previously filed returns must be identified and dealt with.

The Job Creation and Worker Assistance Act of 2002 (H.R. 3090, PL 107-147) contain two such provisions:  the bonus depreciation provision and the net operating loss carry back.  We appreciate the concern and are grateful that Congress and the Administration acted to provide tax relief to workers and small business.  Unfortunately the timing of this legislation has caused problems in the field and dealing with these changes consumes time that must be obtained from another activity.  We ask that Congress carefully weigh the impact on tax administration when considering legislation that contains provisions with effective dates that affect the filing season.

IRS BUDGET REQUEST

NSA supports full funding for the IRS.  Simply stated, certain initiatives like business systems modernization, taxpayer outreach and pre-filing education efforts must receive adequate funding—and receive rigorous oversight from this Committee and the IRS Oversight Board as part of the deal.  We do take exception to the allocation of funds to the new National Research Program (NRP) compliance study that will go into high gear the fall of 2002. 

The IRS is championing the NRP audits because it says that the current audit selection system is yielding too many “no change” audits.  It believes that the new data harvested from the audits of 50,000 randomly selected taxpayers will enhance the audit selection process and result in more productive audits.

NSA believes that poor audit selection is a result of factors other than poor data.  The IRS is selecting the nonproductive returns because either the wrong people are involved in the selection process or the staff has not been properly trained.    Furthermore, management pressures auditors and Revenue Agents to find quick adjustments and close cases as they are measured on cycled time.  In other words, there is little or no incentive to close cases with adjustments, but a great deal of incentive to simply close cases quickly.

In recent years, the areas of review on a typical taxpayer’s return have become far fewer than in years past.  Many deductions on the Schedule A (Itemized Deductions), one of the major battlefields, on which the IRS auditors wage their attack, have been either eliminated or minimized.  For example, we can no longer deduct credit card interest or sales taxes.  The deduction for medical expenses used to kick in at 3% of adjusted Gross Income (AGI); now it’s 7 1/2% of AGI for the regular tax and 10% for the Alternative Minimum Tax (AMT).

The deduction for casualty and theft losses must exceed 10% of AGI plus $100.  Previously, it was 100% of the loss less $100 with no AGI limitations.  Not only must deductions for job related and investment expenses exceed 2% of AGI, but also, if they get too high, the alternative minimum tax (AMT) rears its uninvited head and robs the taxpayer of all subsequent deductions.

Mortgage interest is reported to the IRS by banks and mortgage companies and matched with Social Security Numbers and has limitations that affect the wealthy.  The untouched areas on the Schedule A are charitable deductions and real estate taxes.

Losses that are generated from rental property begin to disappear for those with AGIs above $100,000 and completely disappear when the AGI exceeds $150,000.  Furthermore, the AMT robs most taxpayers of income levels above $50,000 the benefit of a wide variety of credits:  low income housing, research and so forth.

Like mortgage interest, the IRS matches most 1099s and W-2s with taxpayers’ Social Security Numbers making it almost impossible to “get away with” omitting income that has been reported by a third party.  It will take an initiative far greater in scope than the proposed NRP to identify those who under report cash income.

It is no secret that more taxpayers are retaining the services of skilled professionals who tenaciously fight to protect the interests of their clients.  Is it any wonder that more audits are resulting in “no changes?”  Randomly pulling 50,000 tax returns for audit will do very little to improve the overall audit program.

On the other hand, the IRS’ ill-advised and ill-timed actions will result in frightening 50,000 citizens.  The IRS admits that 50% of the NRP audits will result in “no change.”   Many more audit battles will percolate up to the Division of Appeals and even the United States Tax Court.  In prior research programs like the Tax Compliance Measurement Program (TCMP), the results from an appeal are not included in the data pool, thereby skewing the results.

It appears that the NRP will affect two major groups of audit victims. The first group includes low-income taxpayers who are not exposed to the AMT, are minimally exposed to medical and miscellaneous expense thresholds and who cannot afford to retain competent representation.  Naturally, their charitable contributions will come under IRS scrutiny.

The second target group includes small businesses.  This area will generate many minor changes because many small businesses generally cannot afford to maintain efficient bookkeeping systems.  In these cases the IRS will actually be auditing the work of professional preparers who have attempted to keep their clients in compliance by sculpting reality from a foundation of canceled checks and oral testimony.

Based on the Service’s current performance, we are convinced that the IRS is not in a position to effectively administer its proposed National Research Program.  Despite assurance of IRS management to the contrary, we fear that this program is ripe for abuse by over zealous IRS agents.  Indeed, at a recent hearing of this Subcommittee, the IRS National Taxpayer Advocate in a question and answer session remarked that it may be necessary to have a third party monitor these audits to protect taxpayers.

The Service is an agency that is in transition.  It has plenty of work ahead without deploying its precious assets to an ill-fated and ill-timed National Research Program.  The taxpayer deserves better.  We ask the Congress to put an end to this program before it gets off the ground.