Statement of Janet Spragens, Professor of Law, and Director,
Federal Tax Clinic, Washington College of Law, American University,

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 Members of the Committee:

Thank you for inviting me to testify on the issue of low income taxpayer clinics, their needs and performance record. I come before you today in my capacity as a tax professor at the American University Washington College of Law and Director of the American University Federal Tax Clinic. The American University Federal Tax Clinic is an academic clinical program. The program is open to third year students at our law school who receive 6 hours of degree credit for their work. In the program, student-attorneys, under the supervision of two faculty members, Nancy Abramowitz and myself, represent low income taxpayers who have controversies with the Internal Revenue Service. The clinic charges no fees for its services. Since its inception in 1990, the American University Federal Tax Clinic has represented over 700 such taxpayer-clients, and it has given advice and informal assistance to hundreds more. The American University Federal Tax Clinic predates the Low Income Taxpayer Clinic funding program (Internal Revenue Code section 7526) created in the IRS Restructuring and Reform Act of 1998. Since the inception of that program, the American University clinic has received three $100,000 matching grants under it.

When the American University Federal Tax Clinic first began to represent clients in 1990, there were only 14 other such clinics in the country. Since 1998, the year Congress enacted Section 7526, that number has grown exponentially. This year 102 tax clinics around the country were awarded low income taxpayer clinic grants by the IRS out of a field of 141 applicants. The enormous growth in the number of clinics spurred by the tax clinic funding legislation represents an important commitment by the Congress and the entire tax community to ensure that fair results are reached in tax controversies involving taxpayers at all income levels, not only for those in upper income brackets.

The tax clinic funding program has, in my judgment and in the judgment of many, been a total and unqualified success. By any standard, the IRS has made a serious commitment to it at the highest levels, and has devoted significant resources to it to insure that it runs smoothly, provides timely information and funding to the clinic community, and addresses their questions and needs in a straightforward and complete way.

The program itself has resulted in the creation of dozens of new academic and nonprofit legal resource centers all over the country, which thousands of low income taxpayers have tapped into for professional help in the resolution of their tax matters. On an individual taxpayer level, the program has helped to build taxpayer confidence in the integrity of the tax system, and has resulted in the fair resolution of disputes all over the country. And finally, the program has helped to bring low income taxpayer issues into more visible focus for policy makers, for tax professionals, for the media, and inside the IRS itself. This is a remarkable record of achievement for a program after only three years of operation.

Owing in large part to its success, the tax clinic funding program is now in need of some minor adjustments and fine tuning which require legislative intervention. And that is what I would like to discuss with you today. In addition, I would like to discuss this Committee's role in insuring that the needs of the low income taxpayer population are properly served in the new era of the IRS under Modernization. As the legal representatives of this population, the tax clinics are a direct link to these taxpayers, and should be an invaluable source of information on this topic.

Low Income Taxpayers in Profile

Before addressing any of these oversight issues, however, it may be useful to describe some of the economic and cultural characteristics that make up the population of taxpayers who are represented by the clinics, and the types of issues raised in their audits and in the controversy process.

To begin with, many workers in entry level jobs in this country are immigrants for whom English is not only not a first language -- indeed, it would be a stretch to describe it even as a second language. (These taxpayers are generally referred to as ESL taxpayers). Many of our clients have no ability to speak English whatsoever, and require translators to communicate with us (which we provide through volunteers from our International LLM program).

These newcomers to the US are frequently entrepreneurial, starting their own small businesses as street vendors, merchants, or food service providers. They tend to use cash and money orders for their expenses, rarely have credit cards or bank accounts, and almost never have any records of their financial transactions -- or even copies of their tax returns. Many come from countries where there is no requirement of annual self-assessment of taxes, and these taxpayers often become nonfilers in the US. Language is an incredibly powerful barrier for these taxpayers in all aspects of their life, but it is particularly difficult for them in their attempts to understand and deal with a highly sophisticated and complex administrative and judicial tax system.

Whether English speaking or not, taxpayers working near or at minimum wage levels tend to have limited education and literacy skills, and minimal understanding of financial matters. Often these taxpayers work unusual hours (such as less desirable shift work) and many work two or more jobs, which they get to by public transportation. Housing and food expense are often a reach, and these taxpayers commonly qualify for some form of public assistance. Many of our clients share living space in apartments or houses among several generations and/or collateral relatives and friends, and they often take in boarders to help defray their expensive rent, especially in major cities. Having a phone is often a luxury, and their phones are often disconnected for lack of payment. Job tenure is often short, and many float from job to job. These taxpayers do not own their own homes and do not have retirement plans, brokerage accounts, or other accumulated assets. Most live paycheck to paycheck.

When such taxpayers receive a letter from the IRS that they are the subject of an IRS examination and that they potentially might owe $1500 or $2500 or $4000 to the government in tax deficiencies, it is an intensely stressful event, and they are understandably frightened. Sometimes they simply discard the letter out of fear. For the same reason, they also regularly fail to attend IRS conferences or return phone calls. Moreover, immigrant taxpayers, even though they may be legally living in the US, often also harbor a paralyzing fear of some immigration-related penalty, and are unlikely to communicate with the IRS in any way.

I would like to tell you that these instances of low income taxpayer audits are rare, and/or that when audits do occur, the issues are simple and easily resolved. However, exactly the opposite is true. Even seasoned tax professionals are often surprised to learn just how complicated low income tax returns and audits can be, as well as how often these taxpayers are audited. Indeed the frequency of low income taxpayer audits, compared to those of high income taxpayers, has been the subject of several front page stories in the New York Times in recent months.

These taxpayers come to interviews at our clinic wearing construction work boots or uniforms, often with young children in tow who draw on yellow pads, play with toys, or simply run around the room while we are conducting the interview.

Before enactment of the LITC program there were very few places in the country these taxpayers could turn to for legal help, or to whom IRS agents could refer them. Most legal services offices did not have tax specialists on their staff of poverty lawyers. And only a handful of tax clinics existed around the country. Without the LITCs, these taxpayers would be lost in a complex administrative and judicial world they had no hope of understanding. The LITCs have truly been a lifeline for these taxpayers.

It is hard to describe the gratitute these taxpayers feel for the help they receive from their student-attorneys at the AU clinic. At the conclusion of their cases, many write us effusive letters, send us plants and other small gifts, bring us food they have cooked, and offer us personal assistance should we have future plumbing or carpentry needs at our homes. Some continue to send us greeting cards year after year. If these taxpayers could, I am sure that they would also write to you personally and thank you for setting up the LITC program.

The Issues Of Low Income Taxpayers

The number of audit issues on low income taxpayer returns is surprisingly large and even more surprisingly, often extraordinarily difficult to resolve. A major source of complexity is the earned income tax credit, an income supplement program offering low income taxpayers with children a refundable credit of almost $4000 per year. The statute, however, is a minefield of technical eligibility requirements, passive income limitations, and tiebreaker rules. The GAO reported in November, 2000, that EITC claims "have historically been vulnerable to high rates of invalid claims" and the IRS has been ordered by Congress to devote a considerable amount of its enforcement resources to monitoring the credit each year. Therefore the credit generates a large number of taxpayer audits, resolution of which is by no means simple.

Adding to the difficulty of the statutory complexity is the fact that a large number of EITC audits are conducted long distance, through EITC centers. Long distance audits are, by their very nature, difficult for the low income taxpayer community to handle. In the case of a long distance EITC audit, for example, taxpayers seeking our services often bring in IRS form requests for documents they have received, such as for birth certificates, school records, and medical records of their children. In many of these cases, the taxpayer has carefully collected the information and sent off a timely response to the IRS to the best of his or her ability. But it is often the case that "substantiation" of the existence of the child and/or his or her residence is only one of the issues in the audit that the IRS is concerned about, which may also include double claiming of the credit, or the application of the tiebreaker rule.

Thus, despite fully complying with the "substantiation" request, the taxpayer may still receive a Notice of Deficiency stating that additional tax is due. Subsequent attempts to reach the agency and discuss why the matter is still unresolved will cost the taxpayer long distance phone charges which can grow to large amounts if, as commonly happens, the taxpayer is required to spend a lengthy period "on hold." For low income taxpayers living on the financial edge, imposing this toll charge for access to the system is a significant hardship and many taxpayers simply give up. These taxpayers come to our clinic expressing frustration, surprise, and puzzlement as to why the audit is still ongoing since the taxpayer has provided all the information requested.

Other seemingly straightforward tax issues, such as filing status, dependency exemptions, and child care credits can become rather complex issues in living situations that, as noted above, often differ markedly from traditional "Ozzie and Harriet"-type, nuclear, wholly functional families. Discerning what constitutes a "household", or whether a married couple is effectively separated, for example, can be surprisingly difficult in these circumstances.

In addition, low income taxpayers are frequently audited in connection with issues such as worker classification, tip income, social security income, automobile expense, Schedule C income and expense, charitable contributions, uniforms, gambling income, and a host of others requiring supporting financial records or data. Again, in a population where checks and credit cards are not used, and record keeping and retaining receipts are not common, these tax disputes can become quite time consuming and complicated as both the IRS and the clinics struggle to find alternative types of proof that will satisfy the statutory standard.

Divorced taxpayers interpreting the knowledge requirements of the new separate liability/innocent spouse rules make up still another large group of low income audit issues, as do collections issues including the availability of offers-in-compromise, installment payment arrangements, and collections-due-process relief. We are also occasionally seeing cases involving the Alternative Minimum Tax.

For immigrant taxpayers, there may be additional issues involving the lack of a validly issued social security number, or problems arising from borrowed or shared social security numbers, or the taxpayer's complete failure to file a tax return and the IRS's attempt to reconstruct income.

Success of the LITC Program

Even in the short time low income taxpayer clinics (LITCs) have existed to help individual clients, their contributions to the system have been nothing short of enormous. First, IRS statistics about the numbers of taxpayers assisted and of cases resolved surely confirm the success of the program. But numbers alone do not tell the whole story. I believe that the existence and growth of the LITC program has had a far more basic and important ripple effect throughout the entire system than the numbers themselves show; and that clinic representation of the working poor serves many functions above and beyond actual advocacy in individual cases.

First, clinic representation educates the working poor about their tax issues and responsibilities, thereby promoting better future compliance. IRS employees can of course talk to taxpayers about the importance of recordkeeping and future compliance, but the trust that is built between a lawyer and client lends itself far better to the giving of this advice. Better education and understanding tend to enhance our voluntary self-assessment system and to reduce the taxpayer/tax collection agency tension that figured so prominently in the 1997 Senate Finance Committee hearings leading up to enactment of the 1998 Restructuring Act.

Second, the availability of clinic representation of taxpayers who are frightened, confused, and often non-English speakers, tends to promote quicker and fairer resolution of disputes. The working poor are subject to some of the most complex provisions of the tax code. When the law and the processes by which disputes are resolved are not well understood, there is difficulty communicating, exchanging necessary information, and coming to a reasonable result. The presence of a representative facilitates the process on both sides and allows for a speedier route to a resolution agreeable to the taxpayer and the government.

Moreover, we have found that many taxpayers, on a fundamental level have some basic misunderstandings of just how the tax controversy process works. For example, any number of our clients whose cases have reached the U.S. Tax Court will, in the initial interview, focus exclusively on their perception that they have been abused by the IRS rather than talking to us about the merits of their case. These taxpayers believe that if they just "explain" to the judge how badly they have been treated, they will win in court. Therefore they haven't tried to resolve their case with District Counsel's office prior to trial. This approach, however, does not sit well with Tax Court judges who must reach a decision on the substantive issue.

Other taxpayers have trouble seeing the forest for the trees: they refuse favorable settlement opportunities which concede major items under review because the Service failed to concede a small single item to which they firmly believe they were entitled. Proper tax counseling as to the burden they have to meet at trial, the risks involved in going to court, as well as the time commitment in preparing for trial, often times leads taxpayers to settle their cases on very favorable terms, where they would not have done do without our guidance.

These resolutions not only reduce the government's cost of enforcement, but they also often increase the taxpayer's level of satisfaction with the process. Satisfactory dispute resolution also increases confidence in "the system" so necessary to taxpayers' willingness to comply with the rules.

Third, the proliferation of clinics has had the effect of increasing the visibility of low income taxpayers and their tax issues, as well as "democratizing" the case law to include low income taxpayer fact patterns and issues. Since the arrival of the LITCs, there seems to be a far broader base of understanding of these issues in recent years at the Internal Revenue Service as well as in the media, the tax community and the public at large. Increased visibility and publicity lay the foundation for better public debate about administrative and even legislative issues impacting this sizable population.

Fourth, the LITC program has fostered better communications among LITC clinics and between clinics and the government in bringing problem areas to the attention of the IRS. Clinics communicate among themselves and with the IRS via electronic mail channels (there is a very popular LITC listserv which is an important source of distributing information), allowing quick identification of common problems and quick access to appropriate government officials to alert them to matters of common concern. This communication has also resulted in the IRS being able to address issues (such as the need for toll free phone numbers for taxpayers to resolve appeals issues) that are of major concern to the low income taxpayer community.

IRS Modernization

The recent reorganization of the IRS into operating divisions based on taxpayer classification has important ramifications for all taxpayers, but has some unique and discrete issues for low income taxpayers in particular -- making the role of tax clinics all the more important. The reorganization, based on taxpayer segmented groups, essentially incorporates the idea that in a world of electronic commerce, high speed computers, fax machines, cell phones, and inexpensive telecommunications, that the IRS can better service its "customers" through end-to-end accountability based on segmented taxpayer groupings rather than geographical areas.

In respect of low income taxpayers, the Wage & Investment (W&I) Division will have the primary responsibility for dealing with these taxpayers with the Small Business/Self Employed (SB/SE) Division handing their controversy work. W&I services by far the largest number of taxpayers of any of the four new Divisions, and it is the historic IRS view of low income taxpayers, indeed, all individual taxpayers, that they are the most compliant group, a group that typically interacts with the IRS only once a year, who pay most of their taxes through withholding, and who typically receive a refund at the end of the year. Within the Service individual issues are also generally thought more manageable and easier to resolve than those in the other Divisions. This view will necessarily shape decisions regarding allocation of Division resources.

For many taxpayers, the 21^st century administrative approach of Modernization will no doubt work well. However, low income taxpayers do not, as a general rule, have access to computers and fax machines, do not have budgets for long distance phone calls, and do not have the resources to file electronic returns or retain professional representatives to assist them with tax compliance or audits. Language and cultural issues, moreover, seem to magnify where there is no face to face contact. In short, these taxpayers are not part of the sleek modern world of technology envisioned by the "new" IRS. Such taxpayers tend to fare less well in a world of geographically remote IRS offices dependent upon mail or long distance phone contact for customer service. These taxpayers are better off with walk-in locations and face-to-face contacts to resolve their problems.

To its credit, the IRS is aware of these issues and is grappling with them as it moves to reorganize the entire agency. Throughout its evolution the reorganization has been an extremely open process, with the agency seeking input in literally thousands of interviews around the country, including return preparers, tax clinics, professional practitioner groups, taxpayer representatives, and many others. And the agency has been receptive to outside suggestions. For example, when the issue of long distance phone costs in resolving audits was brought by the tax clinic community to the Service's attention, the agency created a number of toll-free lines to address the problem.

Nonetheless, given the increasingly complicated and constantly changing nature of the tax law, and the compliance burdens it places on low income taxpayers, as well as the sometimes difficulty of reaching and communicating with this group, the effect of Modernization on low income taxpayers is an appropriate oversight issue.

In this regard, the LITCs have a vital role to play in providing data and information as well as suggestions for administrative improvement.

Current Needs OF the Tax Clinics

The contributions of the clinics to the system are not without cost. LITC programs are exceedingly expensive to run (particularly for law schools for a variety of reasons); and law schools, bar associations, and others involved in the clinic movement are directing large amounts of resources and personnel into the program. The American University Federal Tax Clinic regularly contributes far more than the required "match" to obtain its LITC grants.

Various legislative amendments to Section 7526 and other changes could significantly aid the task of the clinics in carrying on their work, and providing these important benefits to the system.

(1) Increase the Section 7526 Statutory Cap to $15 million

The most pressing need of the LITC program is for an amendment to Section 7526(c)(1), increasing the annual statutory funding cap from $6 million to $15 million. In 1998, when section 7526 was enacted, there were only 14 tax clinics in the country. With a per clinic limit of $100,000 per year, the maximum grant amount the IRS could award, even if every clinic applied for and received the maximum amount, was $1.4 million. The $6 million cap therefore seemed to be an acceptable, even generous amount of funding for the LITC program.

No one could have predicted, however, the meteoric response of the academic and nonprofit communities to the LITC program. This year, however, with 102 recipients of grant money (from over 140 applicants), and even more applicants expected next year, the IRS is concerned that it will have to turn away qualified applicants, and/or cut back amounts to some because of lack of funding. This should not be allowed to happen.

The number of tax clinics in existence today is not excessive, and indeed, is still too small. Having 102 clinics nationwide is approximately 2 per state. But given the complexity of the rules and the numbers of taxpayers nationwide needing assistance, as well as the constantly changing substance of our tax laws, the system could easily support one clinic in each city in the country, perhaps more in some of our larger cities.

I hope that my testimony today has made clear why a significant increase in the cap amount is appropriate and would be a good use of funds. The benefits these clinics offer to their individual clients in particular and to the system generally, far exceed their cost to the US Treasury.

(2) Create a Separate Pprogram for Tax Filing Assistance outside Section 7526

Since 1977, the IRS budget has funded two important volunteer tax filing assistance programs, the "Tax Counseling for the Elderly (TCE) Program", which provides tax information and filing assistance for seniors; and the Volunteer Income Tax Assistance (VITA) program, which offers tax filing assistance on a walk-in basis in libraries and other public buildings around the country in the evenings and weekends each year in the months before April 15.

Accurate filing assistance, as well as the post-filing controversy assistance offered by the LITCs, are both critical needs of low income taxpayers; and the TCE and VITA programs are both excellent programs. But like the LITC program, more aid is needed.

Currently, the IRS has interpreted section 7526 to permit LITCs to assist ESL taxpayers with their filing needs as an appropriate LITC activity, though not other low income taxpayers. A better approach would be for Congress to create a separate matching fund program, apart from section 7526, with a separate funding stream parallel to the section 7526 controversy assistance monies, which would be available to any nonprofit, accounting school, or other institution which offered filing assistance to any low income taxpayer. Such organizations could also help small businesses run by low income taxpayers set up their books and records and file quarterly employee and other IRS forms. The separate program could then also administer TCE and VITA.

This streamlining of functions would simplify administration of both programs, as well as provide needed funds for tax filing assistance, currently an undermet need of this population.

(3) Insure that IRS has Adequate Budget for Translators to serve the ESL Population

The issues involving ESL taxpayers are a growing concern of the fair and proper administration of the tax laws. It is critical that the IRS have the resources to communicate effectively with this population of taxpayers.

CONCLUSION

I appreciate the opportunity to express my views to the Committee today on the subject of low income taxpayer clinics. The tax system is one of which we are all a part, and we all have a stake in insuring that it operates efficiently and fairly for all classes of taxpayers. Historically, providing pro bono attorneys to low income people has been the best guarantee that their rights will be respected, that the system will deal with them fairly, and that they will receive just results when they interact with the legal system. LITCs are working for those goals in the tax area, and the support and encouragement of this Committee toward those ends is appreciated by the entire LITC community.