Statement of Leslie Book, Assistant Professor of Law,
and Director, Federal Tax Clinic, Villanova University School of Law,
Villanova, Pennsylvania

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

Hearing on the Taxpayer Advocate Report and the Low-Income Taxpayer Clinic Program

July 12, 2001

Mr. Chairman and Distinguished Members of the Subcommittee:

Thank you for providing me the opportunity to testify on the important topic of low-income taxpayer clinics (LITCs). LITCs have been one of the true success stories of the Internal Revenue Service Restructuring & Reform Act of 1998 (RRA), and I am pleased to be able to share with the Subcommittee my experiences serving as a Director of a tax clinic hosted by an academic institution.

Let me introduce myself. Since August, 2000, I have been an Assistant Professor of Law at Villanova University School of Law in Villanova, Pennsylvania, and Director of our school's Federal Tax Clinic. Prior to joining Villanova, I was a professor at Quinnipiac University School of Law in Hamden, Connecticut, and Director of its Tax Clinic. Both of those academic institutions are unique in that they are among the dozen or so organizations that sponsored tax clinics prior to RRA's authorization to the Treasury to allocate up to $ 6 million for matching grants up to $100,000 to qualified organizations. Villanova University School of Law has been a recipient of LITC grants since the program's inception, and has received $87,250 for the year 2000 and is scheduled to receive $100,000 this year.

I. The Importance of LITCs

Prior to RRA and the work of pioneers in the tax clinic community, including two other distinguished witnesses here today, Professor Janet Spragens and the current National Taxpayer Advocate, Nina Olson, many in the tax community were surprised to hear about low income individuals' need for legal representation. Now, however, I believe there is a growing awareness of the need for professional tax representation for the low income taxpayer community. Today, LITCs across the country represent thousands of taxpayers involving all stages of the tax controversy process in issues involving the earned income tax credit, innocent spouse and injured spouse provisions, offers in compromise, educational expense deductions, substantiation of business expenses, and others. Moreover, LITCs are helping non-filers reenter the tax system.

Many clients of LITCs are those often least able to help themselves, including relative newcomers to the country who may speak English as a second language (ESL). These ESL taxpayers, while diverse in their backgrounds, often share significant language barriers and a fear of government, and have little understanding of our nation's voluntary system of tax self-assessment. Other clients include those who have re-entered or just entered the workforce from the welfare rolls, and recently separated or divorced taxpayers. A significant number of LITC clients lack access to computers and to the internet that many of us now take for granted in our lives, and have limited literacy skills and educational backgrounds. A large percentage of LITC clients have limited means of transportation, and are overextended, balancing the demands of both work and family in single-parent households. These factors hinder significantly their ability to work with the often complex substantive and procedural provisions of the Internal Revenue Code, which apply even to low-income persons. Merely answering IRS-generated correspondence, gathering facts through contacting witnesses and collecting documentary evidence in support of a matter can be difficult in the face of some of these factors.

While the amounts in controversy for these matters are often small (for a typical matter in the Villanova Tax Clinic, the amount in controversy is about $4,000, although some matters can involve much more), for our clients the amounts are significant. A few thousand dollars for a single working mother just getting by can mean the difference between being able to move to a better and safer neighborhood, clothes for the family, or steady access to transportation or child-care.

In the last year, the Villanova Federal Tax Clinic was contacted by over 100 taxpayers seeking our services. We were able to represent 42 of those taxpayers, as well as continuing to provide services to six taxpayers whose representation continued from the prior year. Six of those taxpayers were ESL taxpayers. These matters included all stages of the tax controversy process. In the past year, working with the IRS, the Tax Clinic was able to make a significant difference in our clients' lives. A few highlights included successfully restoring the earned income credit for a number of clients; abating a crippling tax assessment to young man who sold assets in a custody account upon turning 18 but who initially failed to file a tax return; successfully prevailing at Appeals on an equitable relief innocent spouse claim for a victim of domestic abuse who was unable to gather on her own the evidence needed to demonstrate eligibility; and many offers in compromise and installment agreements that gave our clients the ability to overcome past mistakes and the opportunity to become responsible taxpayers.

A number of the taxpayers we did not represent were taxpayers who had no basis in positions but who genuinely did not understand the often complex rules applicable to their situations, including issues involving filing status, earned income tax credit and the financial disability rules applicable to refund claims.

In addition to LITCs helping resolve individual cases for otherwise unrepresented taxpayers, they provide other benefits that are just as tangible, only somewhat indirect. Through their individual representation and outreach to communities such as the growing English as a Second Language population, LITCs contribute to a general sense of confidence among taxpayers that the tax system is responsive to all members of society. In the past year, the Villanova Tax Clinic sponsored informational outreach sessions to community service organizations working with victims of domestic abuse and the ESL community. Prior to our sessions, these organizations and their constituents were largely unaware of some of the more important tax issues applicable to their communities. Moreover, through the presence of LITCs working cases both in the court system and before the IRS, LITCs help ensure that the tax system is aware of issues and needs of constituencies that often do not have a voice in the system. LITCs help reduce the administrative burdens on the IRS and the court system often associated with pro se taxpayers. Through LITCs at academic institutions, enrolled students gain valuable educational experiences and practical skills necessary for professional representation, and are often exposed to the value of public service and the importance of pro bono activities.

II. The Growth of LITCs

The RRA LITC funding provision has contributed enormously to the growth of tax clinics. In the three years in which LITC funding has been available, there has been remarkable growth: in the first year of the program, FY 1999, the IRS received 43 grant applications and approved 34 grants totaling approximately $ 1.46 million; in the second year, FY 2000, the IRS received 88 grant applications and approved 81 grants totaling approximately $5 million; in the third year, for the calendar year 2001, the IRS received 141 grant applications and approved 102 applications covering the full $6 million authorized under section 7526.

Treasury and IRS have done an admirable job of creating the grant review processes and putting in place personnel necessary to manage and administer the grant program. Working with the American Bar Association Section of Taxation and the American University School of Law, the IRS has co-hosted annual meetings allowing the LITC community to come together to consider substantive, procedural and grant-related issues in a collegial atmosphere. The IRS has put in place program guidelines in grant application packages, and has generally been responsive informally to LITC-generated questions and concerns.

Nonetheless, largely because of the success and remarkable growth of the LITC program and the annual $6 million authorization limitation of section 7526(c)(1), the IRS has been placed in a very difficult situation that will only get worse. In FY 2001, 141 applicants sought grants totaling $9.8 million, almost 40 percent more than the statute's authorization amount. According to the IRS, of those 102 organizations awarded funding for 2001, almost 50 percent of those organizations would have received additional funding if the $6 million cap were higher and appropriated funds were available. Moreover, according to the IRS, in 2001, the $6 million funding limitation prevented eight otherwise qualifying organizations from receiving any funding at all. The effect of this is that many otherwise needy taxpayers in parts of the country are not able to receive representation, and many organizations that received only partial funding are not able to serve fully their communities. There still are 13 states without any LITC at all, and many large cities, especially those with significant ESL communities and high populations of those recently removed from the welfare rolls, could support more LITCs.

If things merely stay the same, the IRS will continue to be placed in the unenviable position of rejecting in whole or part worthy organizations' grant applications and denying the possibility of extending the benefits of LITC activities to deserving communities. It is likely that these problems will be exacerbated in the immediate future if the $6 million cap is not increased substantially. In response to concerns previously raised by many in the LITC community regarding the need to be in a position to hire more qualified personnel and to better plan resources, starting in 2001, as permitted by section 7526(c)(3), the IRS has awarded to a number of institutions multi-year grants up to a period of three years. Starting in 2001, the IRS has also switched the grant program year from a fiscal year ending 9/30 to a calendar year, which should also assist LITCs in their planning, especially those hosted by academic institutions. Yet, it is likely that the number of qualified organizations seeking LITC funding will increase and the amount of funds sought by already funded organizations will increase, especially among potential and existing LITCs at non-academic non-profit (NANP) organizations.

The growth in NANP LITCs has been truly astounding: in 1999, there were only 13 NANP's awarded grants, and by 2001, the IRS awarded 67 grants to NANPs. This development is one of the most significant aspects of the LITC program. Essentially, many of these organizations receiving grants (or organizations related to the grant recipient), were involved in other aspects of support for the low-income taxpayer community. The availability of funding through the LITC program has increased awareness among those providing a panoply of other services to this community about the importance of the tax system toward achieving societal goals benefitting low-income people. This awareness is growing, and those who have not traditionally been associated with tax representation are now an important part of the support system for low-income taxpayers, a development that will I believe create lasting benefits for the tax system. As the tax system increasingly is used as a tool for social policy benefitting low-income and the working poor, the intersection of tax and other areas of the law, including family law and public-benefits law, will become increasingly important. The NANP LITC growth will help ensure that our nation's working class citizens are afforded access to representation that considers their overall well-being, including tax matters.

The upshot of the LITC success, however, is that barring an amendment to section 7526(c) authorizing additional funding, the IRS has been and will continue to be placed in the difficult and unpopular position of turning away qualified organizations from funding. To ensure that there are adequate resources available for all organizations, the authorization limitation of section 7526(c) should be raised to allow the Treasury to allocate $15 million a year to LITC grants, which will allow for full funding for those qualifying organizations that were denied in whole or part in 2001, while providing a cushion for measured growth to permit the possibility of funding LITCs existence in areas not yet served or underserved.

A. Possible Objection to Funding

While there has been general support for LITC funding, one possible objection to increasing the amount authorized for appropriation under section 7526 would be that Congress might not wish to indefinitely fund LITCs or fund LITCs beyond a start-up period. The existence of federal funding has allowed organizations to leverage the federal dollars and successfully compete in the marketplace for matching dollars to be used for qualified LITC activities associated with representing low income clients or providing outreach to the ESL community. Section 7526's matching requirement ensures that no organization can remain complacent and completely dependent upon federal assistance. Nonetheless, in light of the great expenses associated with running a tax clinic and the scarce resources of many of these organizations, without Congressional funding it is likely that many of the LITCs would fold or scale down their operations. Continued IRS administration of the grant program will also ensure that organizations remain competitive, as the IRS will likely reward those organizations that demonstrate strong quality and improvement. In sum, continued funding is a good long-term investment for the taxpayers and the tax system overall.

III. Publicity for LITCs

One issue that has been important for LITCs is publicizing their existence among the target client community. Publicity is vital for LITCs to reach their statutorily-mandated audience and ensure that access to representation is readily available to those in need. One avenue for publicity is through IRS-generated distribution and posting of LITC-generated literature, including posters and so-called "stuffer" letters similarly advising unrepresented taxpayers about the existence of clinics. The stuffers provide information to unrepresented low income taxpayers about the LITCs, such as phone numbers, addresses, and hours of operation, while also generally making clear that, while the IRS partially funds LITCs, the IRS and LITCs operate independently and that a taxpayer's decision to use or not use the services of an LITC will not affect the taxpayer's rights.

While many LITCs have been conducting targeted outreach programs to both better educate taxpayers about their rights and responsibilities and also increase the community's general awareness of LITCs, the possibility of including stuffers in certain types of IRS-generated correspondence is an important means of accessing unrepresented low income taxpayers in need of representation. In the old Student Tax Clinic program, the IRS Manual authorized the IRS, in certain correspondence, to include stuffer letters advising taxpayers about the existence of Student Tax Clinics. There is no such authorization regarding LITCs. Instead, many LITCs have negotiated on an ad hoc basis with local IRS functions the placement of stuffers in select correspondence. (For some LITCs, the Tax Court includes a stuffer letter describing the availability of tax clinics in its notices setting "S" cases for trial to unrepresented taxpayers).

I understand that the IRS has developed a policy encouraging the use of LITC flyers at various walk-in offices and is in the process of studying ways to create and implement fairly an LITC stuffer program. In some areas, such as in Connecticut and Rhode Island, the LITCs and local IRS management have met to facilitate the creation of combined LITC stuffer notices. These notices have been placed in correspondence covering all IRS controversy functions, including EITC correspondence examination letters originating from the Andover Service Center, Appeals Office acknowledgment letters, certain collection due process correspondence, and pre-trial Counsel correspondence to unrepresented taxpayers who have cases on the Tax Court "S' calendar. In Pennsylvania, the Villanova Tax Clinic has similarly been successful in placing stuffers in certain correspondence, including Appeals acknowledgment letters, and is working with local IRS management on the possibility of expanding the placement of stuffers.

That notwithstanding, the lack of a public IRS National Office unified position tends to hinder the ability of local LITCs to negotiate with local IRS management on the placement of stuffers. I am encouraged by National Taxpayer Advocate Olson's commitment to this issue, and while I believe that there are certainly logistical concerns regarding implementation on a nation-wide basis (especially as the IRS is still implementing the many RRA-mandated changes to its organizational structure and compliance activities), a strong statement of support from other senior IRS management on the issue might facilitate the placement of LITC stuffers locally pending a more comprehensive IRS implementation plan.

I have found that once local IRS employees work with LITCs, they generally favor clinic involvement and encourage publicizing LITCs to taxpayers. LITC participation helps the compliance process for IRS employees in a number of ways. LITCs are often contacted by prospective clients who have no basis in certain positions or matters whatsoever. Taxpayers are more inclined to listen to LITCs than IRS employees no matter how courteous or dedicated the IRS personnel may be. Sometimes, LITCs are better able to dedicate resources to explain exactly why a taxpayer's position has no merit. This process helps ensure that IRS and possibly judicial resources are spent more productively. When LITCs do take on matters, they are often able to research the issues and develop the facts in a way that facilitates IRS or judicial consideration of the merits. Moreover, LITC involvement helps shepherd taxpayers through the incredibly complicated and often lengthy procedural maze of tax controversies. This shepherding helps ensure that taxpayers stay the course and understand the implications of actions and decisions. For the most part, I believe that fully informed IRS employees would favor early LITC involvement in the process, and the use of stuffers in appropriate correspondence.

I also believe that certain matters are particularly appropriate for LITC involvement and more active IRS publicity efforts, including pre-trial Counsel and Appeals correspondence to taxpayers who have docketed "S" Tax Court cases, equitable relief innocent spouse relief requests, EITC correspondence audits and doubt as to collectibility and so-called hardship offers in compromise. While LITCs should assist the IRS in addressing some logistical concerns, such as possibly creating combined stuffer notices and identifying with particularity the types of matters where stuffers are appropriate, without active and creative IRS facilitation, I fear that the stuffer matter will continue to be addressed on an ad hoc basis. I look forward to continued cooperation with the IRS on these matters; for while LITCs and the IRS may be adversaries on individual matters, we are partners in ensuring the continued health of the tax system. Access to representation that publicity can provide helps ensure that taxpayers entitled to important rights and substantive benefits are given an opportunity to exercise those rights and receive benefits (like tax credits) to which they may be entitled.

IV. The Possibility of Creating a Separately Funded LITC-type Program For Return Preparation Activities for Low Income Taxpayers

The IRS currently funds voluntary return preparation services for taxpayers through its VITA and TCE programs. In addition, through the LITC program, the IRS has taken the position that the preparation of tax returns for ESL taxpayers constitutes a permitted qualifying activity and is part of a program to inform ESL individuals. Thus, there are effectively three permitted activities under the LITC program: 1) the representation of low income taxpayers in controversies before the IRS; 2) outreach, not including the preparation of current year tax returns to the ESL community, including presentations on substantive and procedural issues to taxpayers; 3) and the preparation of current year tax returns for ESL taxpayers. There have been recent proposals by private organizations and proposed legislation, the Low Income Taxpayer Protection Act of 2001, S. 802 (sponsored by Senator Bingaman), to create a separate federally-funded program to assist organizations that perform return preparation work for all low income individuals.

There is a substantial need in the low income community for improved access to free and qualified return preparation services, including greater access to free e-filing. To the extent that Congress does in fact adopt additional legislation authorizing direct funding for return preparation clinics on a basis similar to that provided to LITCs, this new return preparation program, and not the LITC program, should be the exclusive means to support current year return preparation activities for all low income individuals, including ESL taxpayers. This would ensure that IRS management of the LITC program is simplified and targeted mainly to LITCs performing representation and ancillary non-return preparation outreach work to ESL taxpayers. It would also allow current LITC's that exclusively perform return preparation activities to avoid some of the administrative concerns associated with the possibility of commingling of resources dedicated to some activities that are not qualifying activities under the LITC program (e.g., the preparation of tax returns for non-ESL low income taxpayers). If such an approach were adopted, I would anticipate a high level of synergy and cooperation among 1) LITCs doing representation and non tax-return preparation outreach; and 2) organizations funded under this new provision that would be dedicated to return preparation for all low income individuals. This approach reflects the strong need for both preparation and controversy activities, while also recognizing that preparation and controversy are different functions often performed by different organizations or individuals within organizations.

V. Delays Affecting Consideration of Offers in Compromise

While not exactly related to the administration of the LITC program, the IRS's implementation of some of RRA's provisions has direct effect on LITC clients. Recent GAO testimony before the Senate Finance Committee (Information on Selected IRS Tax Enforcement and Collection Efforts, GAO-01-589T (Apr. 5, 2001)) highlighted the delays taxpayers have experienced who have claimed innocent spouse relief or submitted an offer in compromise (OIC) request. While the IRS is administering innocent spouse requests on a more timely basis, the delays associated with considering OIC requests seem to be getting worse.

It is not uncommon for clients of the Villanova Federal Tax Clinic to be told that they will have to wait close to a year for the IRS to consider their OIC requests. From the tax system's perspective, the delay in OIC consideration has a particularly pernicious effect among low income taxpayers. Many have significant credit problems as a result of an IRS filing of a notice of federal tax lien and genuinely wish to resolve their delinquencies on a timely basis so they could put past mistakes behind them. The long response time contributes to an inability for our clients to manage their financial affairs and weakens confidence in the tax system. The delay also often necessitates duplicative requests for information, as the financial information on the OIC request is often stale when the IRS eventually gets around to considering the matter.

While there has no doubt been a surge in OIC requests since RRA, LITCs and their constituents would greatly benefit from the IRS improving and expediting the review process.

I wish to thank the Chair and distinguished members of the Subcommittee for inviting me today to testify and discuss these matters.