September 23, 1997

September 23, 1997 | Testimony on Taxes

Prepared testimony of Robert L. Goldstein, CPA and James A. Woehlke, CPA, LL.M.,  Enrolled Agent, representing the New York State Society of Certified Public Accountants

Testimony before the Senate Finance Committee

The New York State Society of Certified Public Accountants (hereinafter "Society" or "NYSSCPA") is the nation's largest and oldest state CPA professional associations, serving over 32,000 members. (We are celebrating our centennial this year.) Our members practice locally, regionally, nationally, and internationally as primary tax advisers to millions of individual and business taxpayers. It is our belief that the Congress, the Internal Revenue Service ("IRS") and we have a common constituency: The American Taxpayer. It is from this unique vantage point that we appear here today.

We are supportive of the basic mission of the IRS and are not among those calling for its abolition or the substantial weakening of its role. Though we have occasionally criticized and disagree with the IRS, the Service plays a vital role in our self- assessment tax system. Through local liaison groups, we have been able to discuss our disagreements with the Service, point out systemic problems, which come to our attention, and resolve certain issues before they become major points of contention. For example, we recently were able to alert the Brookhaven Service Center to a problem concerning the IRS computer module for Federal Unemployment Insurance for household employees. Through this cooperation, the IRS was able to quickly correct the module and we were able to alert our members to the problem and the suggested manner in which to deal with it.

We do, however, believe that the Congress' and the public's confidence in the Service's ability to carry out its mission has deteriorated. One has only to follow the newspaper and magazine articles and news broadcasts over the past several years, to read about billions spent on computer systems that do not meet their specifications or about "economic reality audits" (now called financial status audits) designed to "persecute" the American taxpayer. Even allowing for the excessive amount of hyperbole, the criticism has been intense. The IRS, more than almost any other government agency, must maintain Congressional and public trust. It must be viewed as fair, effective, and impartial. The Service cannot audit taxpayers and be unable itself to be audited. The IRS should only engender fear in those who flout the tax laws and thereby place an undue burden on their fellow citizens.

As tax practitioners, we are in a unique position to testify both about the many IRS employees who perform their tasks admirably and those instances where the Service demonstrates an inability to carry out its mission. Taxpayer Representation and Tax Law Complexity

Taxpayers primarily choose to use a tax professional to prepare their tax returns and represent them before the IRS (in the eventuality that such representation is required) because of the complexity of the tax law. From 1986 to 1997, there have been eight years with significant changes to the tax laws (1986, 1987, 1988, 1989, 1990, 1993, 1996 and 1997). The TaxpayerRelief Act of l997 alone contains:

  • 36 retroactive changes
  • 114 changes effective August 5,1997
  • 69 changes effective January 1,1998 and 5 changes effective thereafter
  • 285 new sections and 824 Internal Revenue Code amendments.

This new law even makes estimated tax requirements for individuals more complicated by changing the safe harbor provision for individuals with adjusted gross income of more than $150,000 from 110% of last year's liability to:

  • 100% of last year's liability for years beginning in 1998;
  • 105% of last year's liability for years beginning in 1999,2000, and 2001; and
  • 112% of last year's liability for years beginning in 2002.

While the complexity of the tax law is not at the root of controversies between the IRS and the practitioner community and taxpayers, it does serve to exacerbate the Service's challenges in administering the tax system and the taxpayers' responsibilities in meeting their tax obligations.

It should be noted that there is a very large backlog of Treasury Regulations. The IRS needs to issue regulations and other guidance so that taxpayers and representatives know the Service's position on issues to make compliance both more likely and consistent. Such complexity probably leads to inadvertent noncompliance and the creation of an adversarial atmosphere between the taxpayer and the Service. Over the past decade, the CPA and legal professions have submitted numerous, meaningful simplification proposals to the Congress. The AICPA developed a "complexity index" for use by policy makers in designing tax laws. Proposed tax law changes should not be enacted without Congress first securing from the IRS a draft of the tax form changes, which would be required. This procedure could help avoid complexity for both IRS administration and taxpayer compliance. The professional staffs of the Congress should consult with practitioner organizations, on a regular basis, in connection with writing of new tax legislation so that the compliance effect of dealing with such new legislation will be clearer to members of the staff. We suggest that such issues and procedures be revisited.

Responsibilities of Taxpayer Representatives and of IRS Personnel Treasury Department Circular 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, and Appraisers before the Service, sets out ethical and procedural matters governing tax practitioners. Of most immediate interest to practitioners is subpart B, which outlines, (1) information to be furnished to the IRS (Section 10.20(a)), (2) knowledge of client's omissions (Section 10.21), (3) diligence a.,; to accuracy (Section 10.22), and (4) the prompt disposition of pending matters (Section 10.23). The professional organizations that govern those practitioners listed in the title of Circular 230 each have their own additional ethical rules (for example, the AICPA has its Code of Professional Conduct and Statements on Responsibilities in Tax Practice). The National Commission on the Restructuring of the IRS ("National Commission") stated that the workforce of the IRS should be of the highest quality and that the U.S. taxpayer deserves the highest- quality, courteous service from the Internal Revenue Service. Former Commissioner Richardson identified the IRS Mission for the National Commission as follows:

To collect the proper amount of tax revenue at the least cost; serve the public by continually improving the quality of outproduces and services; and perform in a manner warranting the highest degree of public confidence in our integrity, efficiency and fairness.

While there appears no conflict between what practitioners and Service personnel should expect from one another, problems arise when the Service misconceives its own mission and role. Two recent examples are the testimony before the National Commission by the Deputy Chief, Taxpayer Service who said, the IRS is in the "law enforcement business ... combating financial crime" and the Deputy Assistant Secretary (Departmental Finance and Management) who testified that as "(a) law enforcement agency at heart, the IRS has been protected from improper influence on how it does its job. While such insulation is appropriate, the down side is that it can foster an inwardly focused culture .... "

It is clear from these examples that the IRS believes its primary role is law enforcement rather than the "taxpayer service." We recognize that there is an important element of law enforcement in the role of the Service, but to view that as its primary function creates a level of insularity and heavy-handedness, which often makes it difficult to achieve its core customer service objectives. The success of the Problems Resolution Program offers an example of how different attitudes by IRS personnel and taxpayers (and their representatives) emerge when the customer-service model is used. Our profession commended the work of Former Commissioners Gibbs, Goldberg, and Peterson to alter the IRS's culture by viewing the taxpayer as a "customer" and not a "tax cheat" An example of this enforcement mentality exists in the increasing use of by-pass actions wherein the IRS examiner contacts the taxpayer in spite of the fact that a representative bas been appointed pursuant to a power of attorney on file. We do recognize that, in certain circumstances, there are legitimate reasons for the use of by-pass letters, telephone calls or visits to taxpayers, such as undue delay in the process by the practitioner or failure of the practitioner to supply requested information in a reasonable amount of time. However, the bypass action is drastic, considering what should be a cooperative atmosphere between IRS examiners and representatives, and should be structured to apply when there are demonstrable circumstances of neglect.

Training Issues

We understand that in the past, entry-level personnel were subjected to an examination and that this policy has been abandoned. While we understand that the IRS budget is stretched thin, we reject the thinking a reduced budget should lower the standards for hiring. Without an adequate number of properly skilled and highly trained employees, the success of the IRS's customer service mission will be impossible.

An example of inappropriate training is the Financial Status(formerly Economic Reality) auditing program. Agents in this program were trained to use highly intrusive auditing techniques. Agents were indoctrinated using role-playing and game-training techniques that impugned the honesty of the average taxpayer. Tile tax law is taught to the professional practitioners by educators, including practicing CPAs and attorneys and other professional instructors. The IRS should reach out to universities, foundations, and professional organizations to assist in the development anti teaching of continuing education programs.

In those instances where the IRS has reached out to the practitioner community in its educational efforts, such as practitioner forums and workshops planned with collaboration between the IRS and practitioner groups, there has been tremendous benefit to all parties concerned. These programs unfailingly promote dialogue and increased understanding by each group of the other's positions and problems. These joint efforts go a long way toward dispelling the perception. and in some 'instances the reality, of insular paranoia attributed to the Service. Tile Problems Resolution Program has been a resounding success, winning plaudits from' professional groups all over the country. It should Ix: used as a model for training other IRS personnel. The very success of this program points to failures in the normal process. The IRS, then, is succeeding the second time around, With improved training and a customer service orientation, might it be possible to get it right the first time and avoid this duplication of effort?

The examination and collection issues that we are going to discuss below may appear to be merely mechanical issues; however, they are symptomatic of the problems that exist within the service. For example, some of the issues indicate lack of devotion of proper resources or establishment of the proper attitudes to bring matters to a speedy and efficient conclusion. Addressing these issues will reduce the amount of redundant time required by both Service personnel and practitioners in dispatching taxpayer concerns.

Examination Issues

Too much time is still required to complete audits. For example:

  • An "S" corporation audit took in excess of 24 months, resulting in a minimal adjustment.
  • An "S" corporation audit has taken in excess of 18 months from the initial audit notice to the issuance of the 30-day letter.
  • An individual audit covering a period of two tax years has endured over 20 months and has just been taken into the Problems Resolution Program.
  • An examination was put on hold pending the decision in a test case involving prior years. The IRS waited thirteen years after the test case was decided before it contacted the taxpayer to conclude the examination.

IRS personnel participating in FlexiPlace, the program wherein certain IRS personnel work at home for part of the workweek, cannot be reached by telephone while they are working at home. Often their office phones go unanswered. A modern voice mail system should be installed and personnel working at home should be required to monitor the voice mail several times a day. If such employees are out of the office for a significant time, provision should be made for them to receive their mail. (In this way, documents forwarded by a practitioner will not sit on a desk.) Netting of multi-year deficiencies and overpayments, for purposes of interest calculation, is almost never done on the initial processing. This then requires complicated corrections after the fact.

Collection Issues

IRS personnel often refuse to deal with a problem (tangential or related period) which is not officially on their desk, despite the fact that the adjustments to such year are a direct product of the case settlement involving a year which is on that IRS agent's desk.

The automated collection system (ACS) is particularly frustrating. When dealing with ACS, the practitioner rarely gets the same person on the telephone more than once. Each time that the practitioner needs to speak to the IRS to either impart requested information or to request the status of the matter, the practitioner must wait for the agent to read what the previous agent has entered into the computer and often the same ground must be covered again. If the ACS person responding is from a different area than the one with whom the practitioner previously dealt, communications may be even more difficult. This procedure is hardly an efficient use of either IRS personnel or practitioner time.

Suggestion Box

Address, with all due speed, the issues raised by the National Commission. The National Commission's extensive hearings and deliberations resulted, in the main, in a well-reasoned report identifying a number of serious issues at the IRS. You should not permit the fine effort of the Commission, its witnesses, and staff go for naught.

Interim extensions (July 15, for partnerships and trusts and August 15, for individuals) should be eliminated and the initial extensions should be for 6 months. There is already only one six- month extension for corporations. This change would have no cash flow effect to the government, as any tax due for trusts or individuals is paid with the initial extension. Second extensions create no pressure for early filing, as the practitioner can sign them and they are routinely granted. These second extensions must be signed and mailed by the practitioner, received by the IRS, posted to the system, stamped approved, and mailed back to the taxpayer or the representative. This entire process is a complete waste of time and cost for both the IRS and the practitioner. The elimination of these extensions would also be consistent with the Paperwork Reduction Act.

Powers of Attorney are a perennial source of irritation in relations between the Service and the practitioner community. We recognize the absolute right of every taxpayer to privacy and confidentiality, as well as the great care the Service must give to these issues. These issues are problems nonetheless. Consideration should be given to a "check the box" power of attorney or "tax information authorization," whereby the taxpayer can check a box on the tax return at the time of filing giving the IRS permission to discuss the contents of the tax return with the preparer who has signed the tax return. In the event that the taxpayer changes accountants and such communications are required, a standard power of attorney can be filed superseding the one on the tax return.

We thank the committee for allowing the NYSSCPA to present the views and suggestions of our members. We are prepared to assist you in any way that you deem relevant to reform the IRS into a true taxpayer service agency.

Related Issues: Taxes