Alvin S. Brown, Statement
Chairman Camp, Ranking Member Levin, and distinguished Members of the Committee on Ways and Means, thank you for the opportunity to provide comment on “fundamental tax reform,” as a consequence of the complex burdens imposed by the Internal Revenue Code on U.S. taxpayers and also the IRS.
The burdens of the current tax system require an evaluation of the many problems of the IRS in collecting revenue, and conducting examinations. Tax reform can be justified or supported to the extent it can be demonstrated that the IRS does not administer the tax law with integrity or fairness, consistent with the IRS Mission Statement. Tax reform is also necessary to correct actions of the IRS that are counterproductive to the collection of revenue, contribute to business failures and reduce American jobs. The identification of IRS administrative, managerial and technical problems is the best foundation from which to validate tax reform.
I have an informed opinion of the “complex burdens imposed by the Internal Revenue Code” based on my thirteen years of experience as an interpretative tax attorney, specializing in IRS controversies, and representing taxpayers throughout the United States and abroad. I had a full career in the office of the IRS Chief Counsel as an interpretative tax attorney/manager, and I have been representing taxpayers before the IRS since 1998. My experiences within the IRS and my current specialized IRS tax practice provide unique insight into the IRS and the problems of the IRS in its administration of the Internal Revenue Code that are intended to be helpful to this Committee in its consideration of fundamental tax reform.
The issues dealing with tax reform have largely been divisive political issues. The classic argument against tax reform is that it benefits the “rich.” That argument dissipates against a database of documented case histories of taxpayers with problematical experiences with the IRS, mismanagement and actions taken that are contrary to law. Although there have been small incremental changes in the direction of simplification, the Code has nevertheless grown in complexity along with the corresponding administrative problems and burdens of the IRS.
A focus on various forms of IRS administrative deficiencies and failures creates “talking points” that support tax reform. The goal of having an IRS that administers the tax law effectively is a nonpartisan issue. IRS deficiencies and failures create a nonpartisan platform that supports fundamental tax reform. The public and every Member of this 112th Congress, without exception, want improved administration of the law by the IRS in strict compliance with its Mission Statement to apply the tax law with “integrity and fairness.” The legislative proposals recommended by this Committee will get far larger acceptance with information made to the public identifying the nonpartisan administrative deficiencies of the IRS. The platform of documented IRS tribulations makes it far easier to reduce the political rancor from any tax reform proposal recommended by the Committee on Ways and Means. After the data platform of IRS problems are identified and documented, the issue then becomes how to best facilitate fundamental tax reform to resolve the IRS deficiencies. I will identify some IRS policies and activities that are counterproductive to the current economic policies to stimulate job growth and business growth. I will also identify some IRS activities that contrary to the intent of Congress under current law. Support for tax reform will increase to the extent the public and the media understand that something needs to be done to correct the distortions to the economy caused by inept administration of the tax law by the IRS. In this way the nonpartisan goal to have a better IRS can be blended into the need for tax reform.
IRS tax lien filing counterproductive practices
The IRS has the plenary power to file a “Notice of Federal Tax Lien” (NFTL) tax lien in the public records on a taxpayer if there is “any tax” liability. The IRS Internal Revenue Manual requires the filing of a tax lien for tax assessment balances of $5,000 or more and states that the tax lien should filed even if the tax balance is less than $5,000 if the filing of the tax lien will promote payment compliance. The tax lien will not be released until the tax debt is paid or otherwise discharged. The NFTL has severe negative economic consequences on individual and business taxpayers often initially and long after any tax obligation is resolved.
Tax liens destroy individual and business credit ratings. Most businesses cannot function profitably or grow their business with a tax lien on their credit report. It is very difficult for any business to remain viable after their credit reports reflect IRS tax liens. When the businesses close, jobs are lost, and taxable revenue is lost.
All of the U.S. credit agencies record tax liens in their credit reports and that tax lien remain in place until the tax debt is discharged. Even if the IRS tax lien has a short life, the credit agencies will still keep that tax lien in their credit reports for seven years after the IRS releases its tax lien. For this reason IRS tax liens are a long term economic disaster for individual and business taxpayers. At the present time, credit reports are instantly available and they are commonly referenced for most commercial and employment practices.
The IRS will file a credit-destructive and business-destructive tax lien even if the taxpayer agrees to fully pay the outstanding tax liability with interest and penalties in an Installment Agreement, documenting the financial ability to fully pay that tax liability. When a business sustains a federal tax lien, they suffer loss of credit, eventual business failure and loss of jobs, which further affects the IRS through loss of taxable revenue. The federal loss is exacerbated because those who lose jobs must survive on federal and local assistance provisions for the unemployed. In this chain reaction of events, creditors of the business reduce profit with even a greater loss of tax revenue collected by Treasury. Consequently, the capricious and mechanical filing of tax liens under current IRS administrative practices cause irreparable economic harm, especially in situations where the business taxpayers have the ability to make payments on their tax debt.
In the case of individual taxpayers who have received IRS tax liens, the loss of credit impacts negatively on their ability to get employment and housing. Employers and landlords commonly take into account IRS tax liens identified in credit reports. This credit impairment means that the individual taxpayer is less likely to buy a car, a home and other items that stimulate economic activity and grow taxable business income. The counterproductive policy of the IRS for filing tax liens is one haplessly ignored by the IRS and Treasury.
On the other hand, there are reasons that justify a tax lien filed in the public records in some cases. A tax lien gives the IRS a secured priority interest against other unsecured creditors. If a taxpayer has a large equity interest in real estate and has a large tax debt, an IRS tax lien is justified to give the IRS priority status ahead other creditors. In other cases where there are no serious assets (e.g., no real estate with more than nominal equity) a tax lien makes no economic sense when balanced against the economic harm it causes to an individual or business. There may be businesses that are just service businesses, yet the IRS will still file a tax lien even in these cases where there are no assets to give the IRS a secured creditor preference. In these circumstances, the tax lien only serves the purpose of destroying the credit of the business and the individual taxpayers. Tax liens filed in these circumstances are frivolous, punitive and imprudent. In some cases, the filing of a tax lien, when it will obviously cause irreparable harm, is malicious.
Any IRS revenue officer has the unencumbered statutory authority to file a tax lien on any individual or business even if the taxpayer has agreed to pay the tax debt quickly. The strong tax policy of Congress is to encourage taxpayer to repay their tax debt at the earliest possible time. When the full amount of the tax debt cannot be paid, taxpayers are authorized to pay their tax debt in an Installment Agreement. The IRS will normally not agree to allow a taxpayer to enter into an Installment Agreement without the filing of a NFTL. When the IRS agrees to the taxpayer’s offer to pay the outstanding tax debt, the IRS will then punish that taxpayer with a tax lien that destroys the taxpayer’s credit. The tax lien is perverse in this situation because bad credit reduces the ability of the taxpayer to make installment payments and fully pay the outstanding tax debt. These tax liens are required even in cases with the taxpayer does not have property that could be seized in any kind of an enforced collection action; in these cases a security interest in property owned by the taxpayer is meaningless and counterproductive. The National Taxpayer Advocate (NTA) has the power and authority to use Taxpayer Assistance Orders (TAOs) to stop the filing of capricious and counterproductive tax liens.
The $5,000 threshold for a mandatory filing of a tax lien is contrary to the law
The $5,000 standard for mandatory tax liens is contrary to law. The authority of the IRS to file tax liens in the public records is discretionary, as decreed by Congress. Congress made that authority discretionary. Section 6321 which provides:
If any person liable to pay any tax neglects or refuses to pay the same after demand, the amount (including any interest, additional amount, addition to tax, or assessable penalty, together with any costs that may accrue in addition thereto) shall be a lien in favor of the United States upon all property and rights to property, whether real or personal, belonging to such person.
The language drafted by Congress under § 6321 creates an unperfected lien, and not one that requires that the tax lien be perfected. When the IRS created a mandatory filing of tax liens in the public records in its Manual, it converted a discretionary power to a mandatory rule that is in conflict with the intent of Congress. If Congress wanted to write a mandatory lien statute, requiring that unperfected tax liens be filed in the public records, that would be an easy addition to § 6321. The IRS mandatory tax lien policy is direct conflict with the intent of Congress under § 6321 to make the public-record filing of tax liens discretionary.
IRS abuse of § 6323(j)(1) authorizing the withdrawal of tax liens
Section § 6323(j)(1) of the Code provides discretionary authority to the IRS to withdraw a tax lien for the withdrawal of a tax lien in certain: if the filing was premature and not in accordance with IRS administrative procedures; if the taxpayer has entered into an installment agreement under section 6159; if the withdrawal of the notice of lien will facilitate the collection of the tax liability; or, with the consent of the taxpayer or the National Taxpayer Advocate, with withdrawal of such notice would be in the best interests of the taxpayer (as determined by the National Advocate) and the United States.
If tax liens are withdrawn from the public records, the result would be the same as if the tax liens were never issued and the tax liens will be expunged from the credit reports. Withdrawn tax liens restore credit but will not restore a business that has closed as the consequence of a tax lien.
It is anomalous that § 6323(j) provides statutory standards to withdraw a tax lien, but IRS revenue officers file economically destructive tax liens on businesses and individuals that eliminate or substantially reduce IRS collection potential. The standard that permits the withdrawal of a tax lien under § 6323(j) should apply as a statutory threshold before the IRS has the authority to file a tax lien. I view this as a legislative drafting error. It makes no sense for Congress to draft a statutory standard to have a tax lien withdrawn, but no statutory standard of filing a notice of tax lien in the public records. This is an additional argument that supports my observation that the IRS has misused its plenary authority to file tax liens in the public records.
The standards in § 6323(j) are quite clear, yet the IRS rarely uses its authority to withdraw a tax lien when the facts are within the standards of § 6323(j). The withdrawal of a tax lien by the IRS is rare and unusual even in cases with strong documentation of economic hardship (e.g., documentation that the tax lien will result in the loss of a profitable business). Neither the IRS nor the NTA support tax lien withdrawal applications even where severe economic hardship is documented. Generally, applications for tax lien withdrawal are granted only in cases where the tax liability was assessed by the IRS in error. It is my experience that the IRS will not withdraw a tax lien even if: the tax lien will result in employment discharge; employment is available only with lien withdrawal; or only if it is the only way a person can get work as a contractor. In short, the IRS and the NTA do not follow the statutory standards of § 6323(j) where there is a mutual benefit to the IRS and the taxpayer and it will allow the taxpayer to generate taxable income sufficient to repay the person’s tax debt. Here again is one more example of an IRS and the NTA, ignoring the intent of Congress under the clear language of a tax statute.
Counterproductive tax levies
The tax policy of § 6343(a)(2)(D) to prevent or stop a levy in the case of an “economic hardship” is explicit and unqualified. The regulations under this statute provide objective standards to determine economic hardship. Under Reg. § 301.6343-1(b)(4), there is “economic hardship” for individuals if the if the levy denies a family, food, housing transportation, medicine, health insurance, child care, court ordered payments, and other reasonable and necessary living expenses. Since “economic hardship” has a clear definition, it should be easy to stop.
The IRS does not make an “economic hardship” determination before they file the levy. To the contrary, in most cases, the levy is invariably excessive. This hardship is exacerbated because levies on wages and gross income are continuous. If the levy is excessive, the employee will leave the job rather than work for any residual amount that is insufficient for necessary living expenses. Excessive levies force employees to go jobless or work in the underground economy and not disclose income that would be subject to levy. The obvious intent of § 6343(a)(2)(D) is to prevent excessive levies and permit a levy to the extent it does not deny a taxpayer basic necessary living expenses.
Levies on businesses include continuous levies on one or more accounts receivable (i.e., gross income). Most small businesses struggle to survive. Therefore, a levy on even a small portion of business gross income will likely result in closing the business along with the resulting job losses of employees. In these circumstances, an excessive tax levy on gross income will create job losses, business failure, and a loss of tax revenue. It is important for the IRS to make sure that any levy does not create the kind “economic hardship” described in § 6343(a)(2)(D) because the net effect of the excessive levy will create an accelerated business failure with all of its pyramiding negative ramifications on the economy.
In the case of IRS wage levies, the IRS does not inform employers about the “economic hardship” prohibition under § 6343(a)(2)(D). For that reason, employers think their entire employee wages must be handed over to the IRS, with one exception that is misleading to employers. Each request for levy of wages is accompanied by Publication 1494, which identifies the amounts excluded from levy under § 6334. When employers receive the chart within Publication 1494, the erroneous impression they have (and the impression left by the IRS) is that the employer can give over to the IRS all of the wages of the employee in excess of the amount in the chart. The statutory exclusions from income under § 6334 are quite limited and are essentially summarized in the chart within Publication 1494. For example, in the case of a family of four, the exemption is $2,200 per month, well below the median family income of families that size. That family of four would have to pay for housing, food, transportation, medical and similar necessary living expenses. That $2,200 is insufficient to pay the fixed support a family of four in most cases. Nevertheless, the real issue is that the use of the Publication 1494 chart ignores the mandatory language of § 6343(a)(2)(D) that the IRS shall not levy if it creates an “economic hardship.” Publication 1494 does not test for economic hardship (e.g., whether or not there is a serious health issue in the family) and it ignores the statutory exclusions from levy under § 6634 (e.g., workman’s compensation). The IRS use of Publication 1494 is not accompanied with instructions to the employer that will allow the employee to receive the full amount of income necessary to for reasonable and necessary living expenses. This IRS misapplication of its statutory responsibilities of § 6343(a)(2)(D) generates job losses and economic hardship, contrary to the intent of Congress. A large part of the requests for assistance to the NTA deal with abusive tax levies. If the IRS is compelled refrain from any levy prohibited by § 6343(a)(2)(D), that would relieve the NTA of a major part of their workload.
The NTA and the IRS have taken the position that a business cannot have an economic hardship within the meaning of section 6343(a)(2)(D). The IRS and NTA positions are each wrong because § 6343(a)(2)(D) and Reg.§ 301.6343-1(a) do not distinguish between individual and business economic hardship. Here again, the IRS and the NTA take positions inconsistent with clear and unqualified statutory language. The IRS and the NTA cannot deny the reality in our present economy, or at any other time, that businesses can suffer an economic hardship.
Individual and business taxpayers severely suffer due to the inability of the IRS and the NTA to properly administer the law on “economic hardship” levies. The administration of the law on tax levies by the IRS is not only technically incorrect, as noted, but also counterproductive to the objectives of the Congress and the Administration to grow businesses and grow jobs.
Refusal of the National Taxpayer Advocate to comply with the language of § 7811
The heading of § 7811 is “Taxpayer Assistance Orders”. Congress identifies TAOs as the primary task and function of the NTA. Under § 7811(a)(1)(a), the NTA is authorized to issue a Taxpayer Assistance Order if the NTA determines the taxpayer is suffering or about to suffer a significant hardship as the result of the manner in which the IRS is administering the tax law. A TAO would require that the IRS not levy or file a tax lien if those actions would create a significant hardship. The definition of a “significant hardship” is a serious privation.
The primary function and purpose of the NTA under § 7811 is to have the NTA issue a TAO to prevent the IRS from taking any collection action against a taxpayer if that action will create a “significant hardship.” Congress intended the NTA use TAOs to prevent the IRS from causing taxpayers any economic hardship. As noted from the prior discussion on tax liens and tax levies, the IRS does indeed cause widespread economic hardship contrary to law, and the NTA does not issue TAOs to stop the IRS from the creating “economic hardship” in most cases. If I get a call from a taxpayer stating: “The IRS is levying my income, how to I feed the kids?”, that call will not generate a TAO from the NTA, but it should under a basic analysis of the law that I have previously identified. I can document the fact that the NTA is not using the authority it was empowered to do under § 7811. Instead, the NTA case worker offers liaison services with the IRS Revenue Officer or is helpful providing information about the case. The NTA case workers do everything but stop levies or tax liens that create economic hardship, which results in closed businesses and jobs lost.
In my tax practice, I see onerous and economically destructive tax liens and tax levies regularly if not every day. I see businesses close, job losses, and significant hardship. I regularly file Form 911s, an appeal for a TAO, in these cases. I have worked with these issues since 1998 and in all of the years to the present time; I have never received a TAO from the office of the NTA. As a tax expert, interpretative tax attorney, with a 27 year career in the office of the IRS Chief Counsel, I have no difficulty interpreting § 7811 to require the NTA to issue a TAO in every case where there is a documented significant hardship determination. In effect, the NTA has refused to use the authority Congress intended her to use under the plain language of that statute to issue TAOs to prevent the IRS from causing taxpayers significant economic hardship.
In the recent NTA Report to Congress (over 600 pages in two volumes with supplements), she did not even discuss TAOs. In one appendix, it states that the NTA issued 95 TAOs in 2010. My small boutique law firm sent the NTA more than 100 requests for TAOs in 2010, a negligible portion of the requests received by the NTA. The Form 911 is a one page form that permits one to identify the economic hardship. All that the NTA case worker needs to do is sign that Form 911 and forward it to the IRS to stop the verified hardship. TAOs are not issued even when the hardship is fully documented.
The underutilized TAOs have the effect of reducing taxable revenue caused by closed businesses and lost jobs. In these instances the NTA does not stop clear IRS “misconduct” for abusive tax liens and abusive tax levies that, in each instance, cause job losses and business failure.
The NTA’s substantive non-use of the statutory authority to issue TAO’s is at the same time a statement by NTA that TAOs are not needed to prevent a significant hardship. That premise leads to the conclusion that there is no need for the 65 local taxpayer advocate offices and the 10 area offices. The elimination of that function would permit the reduction of 2,000 IRS employees. Other residual services of those offices pertain to incidental services and are not necessary.
There are legislative and administrative solutions available to replace the need to use the office of the NTA. It is possible to draft objective standards to prevent IRS abuses of its authority to file tax liens in the public records as well as objective standards creating a statutory threshold before the IRS can file a levy on individual and business taxpayers. The excesses of IRS Revenue Officer and Revenue Examiners can be fixed either by legislation or by Treasury Department regulations. It would be easy to construct some new guidelines to prevent tax lien, tax levy and other IRS abusive conduct, that undercuts the intent of Congress, on issues of integrity and fairness or are counterproductive to the intent of Congress to promote economic growth for both business and individual taxpayers who are willing to resolve their tax issues under current law. These are issues that should be considered by the Department of Treasury. It is my recommendation that this Committee hold hearings to determine the extent to which the office of the NTA is not essential to the effective operations of the IRS.
The Need for IRS “Transparency” to Facilitate IRS Oversight
Many of the distortions I have identified occur because there is presently no effective IRS oversight and there is no IRS transparency. The Senate Finance Committee held IRS abuse hearings in 1997, and the result of those hearings was the IRS Reform and Restructuring Act of 1998, a very pro-taxpayer body of legislation. IRS oversight hearings are needed and will be constructive in promoting tax reform. Although I have only addressed a few topics, my statement highlights the apparent need for IRS oversight by this Committee. IRS hearings are needed to properly evaluate the extent the IRS is meets or fails to meet its responsibility to apply the law with integrity and fairness and the extent to which the IRS misapplies the law. The other reason for hearings, as I previously noted, is to publicize the inefficiencies and ineffectiveness of the IRS in its administration of a very complex body of tax law and thereby support tax reform. Congress needs to know “what is broken” in the IRS before making legislative decisions to provide fundamental tax reform. Hearings are also needed to evaluate the effectiveness of the Office of the Treasury Inspector General for Tax Administration to consider the need to improve sanctions for IRS employee misconduct.
“Transparency” – National Database – Voluntary Taxpayer Submissions
Congress is largely aware of the IRS abuses I have identified in this statement. Due to privacy law, very few know what the IRS does because of the statutory prohibition on disclosing taxpayer information. In the cases I work, the only people who know what happens the IRS employee, my client and myself. Congress and the public do not get the kind of insight that I have provided to this Committee on just a few topics. I am a witness to many other IRS misapplications of law in other areas, for example, in IRS civil and criminal examinations.
Every Member of Congress gets complaints about the IRS regularly. Constituents complain about IRS abuses of power, IRS misconduct, erroneous applications of law, and hardship. This data is not saved. Those constituent complaints are not archived into any kind of a database to provide IRS transparency to provide helpful information about the IRS to this Committee. The complaint traffic to the NTA is also not saved into a national data base of IRS issues and problems. There is a need for a national database for IRS complaints. The IRS will be hesitant to be overly aggressive on a tax matter, or to engage in the counterproductive practices I have described, if IRS actions were more “transparent” to the public, to the media, and to Congress.
The Subcommittee on Oversight will be able to execute its oversight function over the IRS more effectively if it has access to a national database reflecting IRS interactions with taxpayers. Taxpayers throughout the U.S. voluntarily voice their IRS experiences constantly to all Members of Congress as well as to the members of this Subcommittee. That empirical data is available but it is neither organized nor saved. There is also no platform to upload that data to a combined database. A national database of taxpayer and constituent experiences, if collected, organized by issue and analyzed would give this Committee and its Oversight Subcommittee the IRS transparency that is presently lacking.
The IRS Forum as a Vehicle to Provide IRS Transparency and Oversight
The IRS Forum, www.irsforum.org, has been approved by the IRS as a 501(c)(3) educational organization. The IRS Forum presence on the internet encourages the uploading of taxpayers’ experiences with the IRS. The sole purpose of this is to provide a national data base of taxpayer experiences with the IRS. This “transparency” facilitates oversight of the IRS because the data is openly available for all to see and evaluate.
Using tax liens as an example, if a Member gets a complaint from a constituent that a profitable business was closed and jobs lost attributable to the tax lien, that data is wasted. On the other hand if constituents uploaded 1,000, 10,000 or some other number, in each instance, blaming the business and job losses on abusive conduct of the IRS, that data would eventually hit critical mass and get the attention of the media, the public, educators and Members of this Committee. The data can be analyzed to identify and resolve administrative and legal issues that would provide this Committee with current data about how the IRS is administering the tax law.
Taxpayers can upload data without using their identity at the IRS Forum. The data can be collected by issue (e.g., tax liens, levies, examinations, etc). One constituent complaint to any Member of Congress becomes wasted data but becomes valuable when made a part of a larger database with similar content on similar issues. The only goal and purpose of the IRS Forum is to provide IRS transparency that is presently lacking. With that transparency, the public and this Committee would be a witness to IRS abuses as they occur.
The accumulation of a national database of taxpayer experiences with the IRS is a very simple idea. The IRS Forum is located on the internet to receive and organize taxpayer data as well as maintain a perpetual database about taxpayer experiences with the IRS. The nonpartisan IRS Forum is not a commercial venture. There are no membership fees, and the IRS Forum does not accept advertising. The IRS Forum functions only as a nonprofit educational organization on IRS positions and administrative practices. The immediate goal of the IRS Forum is to provide assistance to the Congress in conducting oversight of the IRS by accumulating and making publicly available data regarding IRS practices. Funding of the IRS Forum is expected to come from voluntary contributions. It is a low maintenance organization. At the present time it exists without any office with just its presence on the internet.
The IRS Forum would be able to create a formidable national database of taxpayer interactions with the IRS, if Members of Congress made constituents aware of that institution. Once constituents and the public are aware of the purpose and function of the IRS Forum to archive a perpetual database of taxpayer experiences with the IRS, it would then be able to reach its potential to provide ongoing IRS transparency. The problems I have identified in this statement could not occur, in my opinion, if the actions of the IRS are transparent to this Committee, the public and the media.
The IRS Forum is available as needed by the Committee to help initiate a national database of taxpayer experiences with the IRS and provide IRS transparency that would otherwise not exist. Ongoing uploads by taxpayers of their IRS experiences will correspondingly assist this Committee in ongoing oversight of the IRS and its administration of the tax law. The IRS Forum is also available to Committee staff to collect taxpayer experiences that will be helpful to staff when looking for data to help draft legislation to correct IRS abuses reported to the IRS Forum in addition to its function to educate the public about the IRS.
As the world’s largest retail trade association, the National Retail Federation’s global membership includes retailers of all sizes, formats and channels of distribution as well as chain restaurants and industry partners from the U.S. and more than 45 countries abroad. In the U.S., NRF represents the breadth and diversity of an industry with more than 1.6 million American companies that employ nearly 25 million workers and generated 2010 sales of $2.4 trillion.
Summary of Comments
Members of NRF believe that the most important aspect of any tax reform measure is its impact on the economy and jobs. The U.S. economy is coming out of the worst recession since the Great Depression, but economists predict that economic growth may continue to be slow because of high unemployment, which will also continue to depress consumer spending. It is vitally important that any tax reform measure do no harm to our economy, which is likely to remain fragile for several years to come.
Consumer spending represents two-thirds of GDP. During the past few years, consumer confidence has hit its lowest levels since records have been kept, and consumer spending has dropped precipitously. One of the most harmful things that could be done to our economy at this time would be to place a direct federal tax on consumption.
NRF believes that a reform of the income tax, by providing a broad base and low rates, will bring the greatest economic efficiency and will not cause the economic dislocations inherent in the transition to a consumption based tax system. Reforms of the income tax could be designed to eliminate some of the major complications in the current Internal Revenue Code and stimulate economic growth, without causing major economic dislocation.
NRF also opposes using tax reform as a guise to fund increases in government spending, as would be true if the United States adopted a value added tax (VAT) in addition to the current income tax system. NRF believes policymakers need to be forced to make choices with respect to how taxpayer dollars are spent, rather than being provided with a money machine to finance entitlements and other government programs.
Reform of the Income Tax
NRF supports income tax reform that would broaden the income tax base and lower the income tax rates. The elimination of many special deductions and credits in exchange for lower rates will bring about a more economically efficient tax system that is simpler for taxpayers and will ease enforcement.
Reform of the corporate tax system is particularly important. The United States has the second highest corporate tax rate in the OECD. In a global economy, higher U.S. corporate tax rates serve as a disincentive for investment in the United States. The U.S. corporate tax rate needs to be lowered to make us more competitive, and the lower rates should be paid for by eliminating various tax preferences in the Internal Revenue Code. Lower tax rates reduce the incentives for entering into tax motivated business strategies. Lower rates combined with the elimination of various tax preferences will cause businesses to structure transactions to their most productive use, rather than spending inordinate amounts of resources on tax planning
Whenever fundamental tax reform is considered, policy debates generally turn to whether the United States should move from its current income-based tax system to a consumption-based tax system or to a hybrid tax system, which would impose a value added tax (VAT) in addition to the income tax, similar to the European model. NRF opposes the adoption of a consumption tax because it would have a chilling effect on our already weak economy.
Consumption taxes can be imposed in various ways including a National Retail Sales Tax (NRST), Value Added Tax (VAT), Flat Tax, and consumed income tax. Economists generally agree that the economic impact of various forms of consumption taxes is similar, although the application of the taxes may differ.
In 2010, Ernst & Young and Tax Policy Advisors conducted a study for NRF on the Macroeconomic Effects of an Add-on VAT enacted for deficit reduction. The study found that following the enactment of a VAT, the economy would lose 850,000 jobs, GDP would decline and retail spending would decline. By contrast, the study found that following the enactment of comparable deficit reduction through a reduction in government spending, the economy would add 250,000 jobs, GDP would increase and there would be a much smaller drop in retail spending. A copy of the NRF study can be found at www.nrf.com/VAT.
An earlier study, prepared for the NRF Foundation by PricewaterhouseCoopers, examined the impacts of replacing the income tax with a consumption tax (either an NRST or a Flat Tax). The study concluded that although replacing the income tax with a consumption tax might bring long-term economic growth, there could be very harmful short-term and mid-term economic results. The study also found that the economic growth that occurred during the ten-year modeling period was relatively modest compared to the disruptions to the economy during the transition years. Specifically, the study found that following the enactment of an NRST, the economy would decline for three years, employment would decline for four years, and consumer spending would decline for eight years. The study found that following the enactment of a Flat Tax, the economy would decline for five years, employment would decline for five years and consumer spending would decline for six years. Given the fragile state of the current economy, the United States cannot afford to see further declines in consumer spending for several more years.
In addition to the overall impact of consumption taxes on the economy, retailers are particularly concerned with the impact of consumption taxes on our customers. Consumption taxes are highly regressive and will raise the tax burden on lower and middle-income Americans. This occurs because lower-income households tend to spend a higher portion of their incomes, so they will pay a higher tax relative to income level under a consumption tax than will upper income households.
Consumption taxes also impose an unfair tax increase on senior citizens. Senior citizens generally live off of previously-taxed earnings that they have saved from their working years. They now are at a stage where they consume far more than they earn. An increase in the tax burden on consumption would be extremely difficult for seniors.
A consumption tax, whether as a replacement to the current income tax system or as an addition to the income tax system, will not meet President Obama’s goal to not impose higher taxes on Americans with less than $250,000 a year of income.
A federal consumption tax will also wreak havoc with state budgets. Forty-five out of fifty states depend on sales taxes as a major source of revenue. In fact, much of the current short fall in state budgets is as a result of the sharp decline in consumer spending, and hence sales tax collections, during this weak economic period. If a consumption tax is added at the federal level, it will be far more difficult for the states to increase sales taxes to address budget short falls.
Enforcement issues are likely to increase if the federal government adopts a consumption tax either in addition to the current income tax or as a replacement to the current income tax. Studies have shown that when the rate of tax on consumption exceeds certain levels, tax evasion grows. The level of tax on consumption that would be imposed if a federal tax were added to state and local sales taxes would probably exceed these levels. They certainly would be exceeded if a federal consumption tax were to replace the income tax.
Adding a bureaucracy within the Internal Revenue Service to enforce a federal consumption tax will necessitate large start up costs, as well as additional ongoing costs to operate.
Adding a federal consumption tax to the income tax will also greatly increase the overall level of complexity of our tax system. Complications will result because of the differences between the federal sales tax base and state and local tax bases. The dual tax system may be particularly burdensome for small businesses, which have enough trouble meeting the burdens of collecting and remitting payroll and income tax withholdings.
We urge the Committee to move forward with corporate income tax reform that will lower tax rates and broaden the tax base. The United States currently has the highest corporate income tax rate in the developed world, which hampers the ability of U.S. companies to compete and deters business investment in the United States. This type of tax reform will simplify administration of the tax system and encourage economic growth without shifting the burden to those that can least afford to pay.
Transitioning to a consumption tax system will lead to a decline in the economy and a loss of jobs for many years. Given the impact that weak consumer spending is having on the ability of the U.S. economy to recover from the Great Recession, we urge the Committee to reject any tax reform measures that would impose a direct tax on consumer spending.
 The IRS Mission: Provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness.
 Section 6321
 IRM 18.104.22.168.1 (10-30-2009).
 § 7811(a)(1)(A) authorizes the NTA to issue Taxpayer Assistance Orders to prevent a significant hardship as the result of the manner in which the internal revenue laws are being administered by the Secretary.
 § 6342(a)(2)(D) states that the IRS shall release the levy if the IRS has determined that such levy is creating an economic hardship du to the financial condition of the taxpayer.
 § 301.6343-1(b)(4).
 Publication 1494 (2011)
 These are statutory exclusions that include wearing apparel, school books, workmen’s compensation and other items specified in this statute.
 Section 13,1,18 of the Internal Revenue Manual deals with administrative positions of the National Taxpayer Advocate in dealing with “hardship” The provisions apply to individuals and not to businesses.
 TD 9007 that published the final OIC regulations on July 23, 2002. TD 9997 states that the economic hardship standard of section 301.6343-1 if the regulations “specifically applies only to individuals.”
 The application for a Taxpayer Assistance order is made on Form 911.
 Reg. § 301.7811-1(a)(4).
 Form 433A for individuals and Form 433B for businesses provide financial statements that can be completed by taxpayer to show significant hardship. Those forms require attachments documenting the relevant financial data. These forms are used for Offers in Compromise, Installment Agreements, and they can also be used to document significant hardship.
 The Senate Finance Committee held IRS abuse hearings in 1997, and the result of those hearings was the IRS Reform and Restructuring Act of 1998, a very pro-taxpayer body of legislation.
PricewaterhouseCoopers LLP, Fundamental Tax Reform: Implications for Retailers, Consumers, and the Economy, April 2000. A copy of the study can be found at: http://nrf.com/modules.php?name=Documents&op=viewlive&sp_id=3965
 The PwC model was developed specifically to analyze tax reform plans. It combined microsimulation models for individual and corporate income taxes with a macro-economic forecasting model, which allowed it to provide short-term trantransition results on an annual basis. Id at p. 119.