On behalf of my colleagues with National Taxpayers Union (NTU) and NTU’s supporters across the nation, I am honored by the opportunity to meet and discuss implementation issues surrounding the Tax Cuts and Jobs Act (TCJA) as well as general tax administration matters.
NTU was founded in 1969 to work for less burdensome taxes, more efficient, accountable government, and stronger rights for all taxpayers. One of NTU’s greatest privileges was having its then-Executive Vice President David Keating named to the National Commission on Restructuring the Internal Revenue Service in 1997, a federal panel whose recommendations later became the basis for the most extensive Internal Revenue Service (IRS) overhaul in a generation – the IRS Restructuring and Reform Act of 1998 (RRA ’98). More recently, NTU was a leading organization in the community of taxpayer advocacy organizations working toward enactment of TCJA. More about our work as a non-profit grassroots organization, and the thousands of members we represent, is available at www.ntu.org.
Although we have sought many structural changes to the tax system, from the comprehensive to the incremental, one common aspect on which NTU often specifically focuses is the administrability of such proposals. As policymakers define the rates, bases, deductions, credits, and other features of a tax system, what will the practical impact be on taxpayers’ economic lives and their rights? This question remains highly pertinent to the success of TCJA.
Form and Instruction Design Is Now Critical
As our research affiliate’s annual publication on tax complexity has tracked, more than 90 percent of tax filers now rely on software or a paid professional to prepare their returns. Given this massive proportion, it would be tempting to believe that the IRS’s own role in designing government tax forms and instructions (as opposed to IRS guidance the private sector incorporates into its own tax preparation services) is relatively unimportant. In our experience, this is definitely not the case. Even with the most sophisticated “do it yourself” tax software,completed IRS forms will still be the end product of whatever other steps the computer might recommend to the user. Furthermore, tax professionals may rely on government forms and instructions, along with proprietary software, to provide the best possible advice to their clients. The designers of that commercial software must, in turn, be able to easily discern the flow of change in the government’s public-facing tax products so as to design processes for their own customers that are intuitive. Finally, the 10 percent of taxpayers who “go it alone” still amount to some 15 million filing units who not only rely on government publications to comply with tax system requirements, but are also likelier to be part of an underserved population.
TCJA provides both opportunities to simplify forms and instructions as well as challenges to translate new, complex provisions with a minimum of additional paperwork burdens. In NTU’s opinion, the IRS should focus most on the following items:
- Communicating and Promulgating Advice on the Expanded Standard Deduction. No one area of TCJA offers greater promise of a reduction in compliance burdens than properly explaining to taxpayers the benefit using a new 1040A form rather than continuing to file the so-called “long form.” If the number of itemizers were to drop from approximately 30 percent of filers today to 8 percent, as TCJA proponents have predicted, NTU estimates that Americans would save 210 million hours and $13 billion in filing costs. Creating a prominent section with a simplified worksheet in 1040 series booklets (and online) explaining this benefit is key to realizing those time and monetary savings.
IRS budgets for publication redesign, as well as public service announcements, may be limited, but we would contend that in this case they are an excellent investment of resources. More returns claiming the standard deduction will eventually mean less strain on the agency’s examination process and DIF system.
- Communicating New Individual Alternative Minimum Tax (AMT) and Estate Tax Exemptions, and Repeal of the Pease Limit on Itemized Deductions. Although the large expansion of AMT thresholds could easily reduce the number of filers subject to paying the tax by half or more, an equally important effect will be the reduction in those no longer condemned to planning for it. Prior to passage of TCJA, the IRS was planning on retiring its online AMT Assistant after the 2018 filing season. Nonetheless, the worksheet for determining whether a filer needs to prepare Form 6251 will still exist. The worksheet (and to a lesser extent Form 6251) can not only reflect the new AMT thresholds and exemptions, it can also reflect TCJA changes that affect tax preferences for AMT purposes. The IRS also has a role in reporting the good news that the process for calculating Pease limitations, as well as itemized deduction planning for many individuals, no longer applies to them.
At the same time, family business owners would benefit from aggressive outreach on the part of public and private agencies about changes to death tax exemptions. Here again, while the number of estates liable to pay death tax will be even smaller due to TCJA, arguably the more vital impact will be appreciated among business owners who will see diminished demand for estate planning in order to stay on the “right side” of the taxable threshold.
- Communicating Streamlined Section 179 Expensing Rules. As you know, TCJA raises not only the amount and phase-out threshold for Section 179 small business expensing, it also expands the definition of property qualifying for this tax treatment (see Section 13101 of the bill). The Tax Complexity Analysis accompanying TCJA notes in connection with these provisions: “While taxpayers purchasing Section 179 property will still be required to complete and file Form 4562, Depreciation and Amortization … significantly less detail is required to be included on such form. Accordingly the compliance burden of many taxpayers will be reduced.”
Although this Complexity Analysis is flawed in other respects (see below), the new Section 179 rules provide an excellent occasion to redesign form 4562 and its instructions to make them more comprehensible to both taxpayers and preparers.
- Communicating More Complex Small Business Deduction Procedures. In NTU’s opinion, none of the parts of TCJA affecting small business will present more compliance challenges than Section 11011, creating a temporary deduction for qualified business income. The Tax Complexity Analysis for TCJA stated that “The IRS will need to add to the individual income tax forms package a new worksheet so that taxpayers can calculate their qualified business income, as well as phaseins.” The Analysis also concluded, however, that “It is not anticipated that individuals will need to keep additional records due to the provision. It should not result in an increase in disputes with the IRS, nor will regulatory guidance be necessary to implement this provision.” NTU begs to differ with this assessment, as do many members of the tax preparation and small business communities. As Ken Berry, a nationally syndicated tax columnist who wrote for NTU’s former advisory publication Tax Savings Report recently observed:
Obviously, the rules [associated with Section 11011] are designed to curb abuses, such as having business owners who do substantial work artificially reclassifying wages as QBI [Qualified Business Income] eligible for the deduction.Nevertheless, taxpayers may be tempted to establish themselves as independent contractors, further increasing the number of conflicts with the IRS on this issue. Independent contractor status has already been a point of contention in recent years.
Berry is but one of numerous tax professionals who are expecting IRS clarification regarding Section 11011. As with publicizing the expanded standard deduction, the quality of IRS forms, instructions, and other advice for small business in the near term will determine the extent of longer-term workloads on the IRS’s customer service and examination personnel.
- Stressing Outreach to Estimated Taxpayers. To its great credit, the IRS swiftly updated and released 2018 withholding tables that are widely acknowledged to be as accurate as possible. As you know, the vast majority of tax filers over withhold, resulting in average refunds that were approaching $3,000 even prior to enactment of TCJA. We have also publicly praised the Service's commitment to making further modifications to the online withholding calculator and other tools to reflect additional changes in TCJA, such as the doubled child tax credit.
During our media interviews and other public outreach over TCJA, however, we have encountered many questions from taxpayers who have self-employment income on how they should adjust their estimated tax payments. We understand that some of the IRS’s public service campaign over TCJA will address Americans paying estimated tax, but our purpose here is to encourage you to devote the maximum resources available toward communicating with this audience as soon as possible.
Tens of millions of filers, many of whom operate on thin cash-flow margins, must meticulously plan their estimated tax payments to maintain financial viability. While they tend to rely on software or preparers to assist with their annual returns, many self-employed individuals may have little in the way of time or resources to obtain additional professional consultation during the course of the year on other tax matters. Therefore the IRS’s public-facing products on estimated tax can be especially important.
While these and other form and instruction matters will not be readily apparent to consumers until the 2019 filing season, now is the time for the IRS to aggressively plan for them. Moreover, NTU would call your attention to a persistent problem the IRS National Taxpayer Advocate has raised. Despite a major improvement effort launched in 2010, the content of IRS instructions, forms, and correspondence is still often indecipherable to significant percentages of recipients – a basic shortcoming that can have serious consequences in successive interactions. In September 2017 testimony submitted to the House Ways and Means Committee’s Oversight Subcommittee, I cited tax litigation expert Dan Pilla’s observation that “Citizens commonly mistake the Revenue Agent’s Report [issued with a post-audit ‘30-day letter’] for a bill, which it is not. They do not understand that it is merely a proposed change, which they can appeal.”
These are but a few examples of how improvements to the way the agency communicates can pay dividends to taxpayers and to the IRS itself. Your leadership in stressing the critical nature of such improvements could make a major difference at a vital decision-making point.
Implementing TCJA Would Benefit from Consistent IRS Rulemaking
The IRS’s processes for issuing guidance and inviting input have often been met with concerns among tax professionals and citizens alike. There has never been a better time to address these concerns by establishing more transparent, reliable rulemaking.
Even before passage of TCJA, recent judicial decisions lent credence to the need for such action. At the 2017 International Conference on Taxpayer Rights, Professor Kristin Hickman presented on the issue of “Administrative Law’s Growing Influence on U.S. Tax Administration.” Her abstract pointed out that in the 2011 Mayo Foundation decision, the U.S. Supreme Court “declared its reluctance ‘to carve out an approach to administrative review good for tax law only.’ [This and other] cases … aim ultimately to require Treasury and the IRS to do a better job of complying with APA [Administrative Procedure Act] requirements and explaining their actions at the time they undertake them – and thereby provide for greater transparency and accountability for Treasury and the IRS.”
Aside from hewing more closely to APA’s safeguards, the IRS can and should begin winding back the doctrines that have built a wall of exemption between the tax agency and the accountability mechanisms contained in the Regulatory Flexibility Act, White House review pursuant to Executive Order 12866, and the Congressional Review Act.
Earlier this month our colleagues at the Cause of Action Institute released an exhaustive report outlining the origins of the IRS’s detour from the checks and balances that normally govern and provide review for regulatory acts within the Executive Branch. The tax agency has gradually asserted the position that its rulemakings, in and of themselves, have no economic impact beyond what the underlying statute would dictate, and therefore are not subject to the precepts of the Regulatory Flexibility Act (RFA). The Small Business Administration and the Government Accountability Office disagree with this interpretation, since RFA specifically included IRS rules within its purview. In theory at least, all rulemakings must first derive their authority from an underlying statute, making the IRS’s view tantamount to shredding the RFA for any federal agency action. Other leaps of logic have given the IRS cause to vault past Office of Information and Regulatory Affairs (OIRA) scrutiny as well as the Congressional Review Act.
In our experience, this position is self-evidently untenable. Even those rules whose issuance did occur under the public eye have carried with them either new costs that Congress had not strictly envisioned or underestimated costs that Congress had not adequately considered. Just one of numerous examples was IRS REG–108060–15 regarding Section 385 earnings stripping (whose documentation rules were delayed prior to passage of TCJA). In its own estimate of private-sector compliance costs, the government apparently assumed that the compensation for employees who would need to advise companies on compliance with the 385 rule would amount to $18 per hour – an absurdly low figure.
With flaws such as these in publicized cost estimates of tax rules, how can taxpayers have confidence in IRS pronouncements over rules which it considers exempt from discussion? As Cause of Action concludes:
The combination of the IRS assertion that its rules do not create an economic impact and a 1983 memorandum of understanding between the White the House and the Department of the Treasury has created a moral hazard that allows the IRS to determine which rules it sends to the White House for pre-publication review as required under Executive Order 12866 and its progeny.
The remedy to this situation is straightforward in concept, though more difficult in practice. We would respectfully advise that as Acting Commissioner, you order a review of those sections of the Internal Revenue Manual where the IRS details its interpretative outlook on the RFA and the Congressional Review Act so that they may be clarified and brought into compliance with the intent of laws. Your support for reevaluating the Treasury OMB memorandum of 1983 that effectively exempted the IRS from OIRA review would likewise help to prompt an examination of IRS policies. A robust public discussion of the IRS’s position, as TCJA is being implemented, would help to create confidence that the new law’s real-world impacts will be thoughtfully and systematically analyzed with stakeholder input.
To Reduce IRS Administration Burdens, Mind What We Measure
In comments last August to Treasury Secretary Mnuchin pursuant to TREAS-DO-2017-0012, NTU recommended a reassessment of how IRS and Treasury compile estimates of taxpayer compliance burdens. With the passage of TCJA, the need for doing so has become more urgent.
For many years the IRS considered the only measurable tax compliance burden to be associated with filling out the tax form, until the Paperwork Reduction Act prompted the tax agency to commission a study by Arthur D. Little in 1983. This analysis utilized advanced questionnaires of actual business and individual taxpayers in the IRS’s database, and developed solid data on tax compliance, measured in hours. Subsequent models by Joel Slemrod (with colleagues), the Tax Foundation, Donald DeLuca, and a study by Quantria Strategies for the Small Business Administration (SBA) have all improved upon the Little approach, by refining survey techniques, monetizing the value of time spent completing returns, and aggregating data for business structure, size, and industry.
Yet, the need to constantly refine these methodologies remains vital. For example, however sophisticated the techniques may be for surveying taxpayers in developing time-to-completion estimates for forms, inaccuracies in self-reporting are a constant challenge. In his book, Costly Returns: The Burdens of the U.S. Tax System (ICS Press, 1993), Professor James L. Payne explains the potential “tendency to overlook many types of tax compliance activities when they take place in small, undramatic ways.”
Payne also noted how other discrepancies in the Little study (sometimes applicable to its successors) could lead to underestimated compliance burdens. Respondents were told to not report recordkeeping hours for financial profit and loss statements, though many small business owners told researchers that a primary reason for preparing such information was for tax compliance. Even the act of learning about tax-law requirements isn’t always confined to studying IRS instructions or commercial products prior to filing a form; numerous additional hours are spent in classrooms, or in personal discussions among professionals and laypeople alike.
For more than 15 years, NTU’s research affiliate has analyzed such matters through an annual study that tracks trends in tax system complexity and filing burdens. Unfortunately, the results of our latest analysis from April of 2017 provide a stark reminder that reducing the costs of regulations on the economy will require major effort. According to the Office of Management and Budget’s Information collection budget from 2015, citizens spent 6.989 billion hours complying with Treasury forms and record-keeping requirements, most of it related to the Internal Revenue Service. The IRS’s approved collection inventory will push this figure past 8.148 billion hours. Using standard Bureau of Labor Statistics’ data for average hourly compensation, plus other data for out-of-pocket expenses, we estimate that the total cost associated with this massive burden would exceed $300 billion.
The original Little study was developed and incorporated into measuring processes within a few years of the Tax Reform Act of 1986. The IRS has undertaken compliance burden measurement revisions since then, but a generation later, the advent of TCJA provides a useful “pause point” for more comprehensive exploration. As Acting Commissioner, you could prove to be the catalysts that will direct IRS staff, in cooperation with SBA and other relevant agencies and private-sector experts, to undertake new research initiatives that will measure the true burden of the current tax system (and TCJA’s revisions) on individuals and small businesses. This basic information is key to identifying problem areas and developing fitting solutions.
Provide Early IRS Input into Tax Proposals
TCJA will certainly not mark the end of any significant tax legislation from this Congress, let alone future Congresses. For this reason, guidance that NTU offered to the Treasury Transition team in late 2016 (as well as Secretary Mnuchin last year) on improving IRS consultation with Congress remains highly relevant.
NTU can offer numerous perspectives in fostering this consultation, but two suggestions come foremost to mind. Section 4022 (a) of the IRS Restructuring and Reform Act of 1998 (PL 105-206) required the IRS to produce an annual report to Congress on sources of complexity in the administration of the federal tax laws.
According to the National Taxpayer Advocate of the Internal Revenue Service, the tax agency has issued just two annual reports compliant with the 1998 statute, but in both instances, “Congress adopted legislation to address each area of complexity referenced in the reports, and the IRS addressed the administrative problems they uncovered. Thus, the IRS’s decision to discontinue the reports has likely contributed to tax complexity.” The last report was published in 2002.
IRS staff members told the Taxpayer Advocate’s office that since 2002, “resources gradually were transferred to focus on innovative analytics and away from the reports; and more and more of the statistics reported in the complexity report were made available in other ways.” The Taxpayer Advocate disagrees with the implications of this statement, and NTU would disagree as well. The purpose of the annual report was to provide a single, working document that would serve as a basis of staff-level exchanges of views – perspectives that could inform tax policymaking going forward. Furthermore, the lack of an annual report deprives outside stakeholder organizations of a valuable reference tool they could use to discuss potential improvements in administration with elected and appointed officials.
In addition, Section 4021 in RRA ’98 contains an important, specific expression of intent: “that the tax-writing committees should hear from front-line technical experts at the IRS during the legislative process with respect to the administrability of pending amendments to the Internal Revenue Code.” This is a direct result of the National Commission on Restructuring the IRS’s policy work from 1997. The Commission’s final report determined that even though the Treasury Department closely follows “interactions and communications between the IRS and Congress” and clearly articulates policy, Congress does not receive “an uncensored view of the administrability of all tax legislative proposals.”
Agency officials have told the Taxpayer Advocate that the IRS Office of Legislative Affairs “reaches out to the Legislative Liaisons (LLs) of the various business units when Congress asks for comments on pending legislation. In responding to these inquiries, the LLs solicit input from various levels of IRS, including technical experts. … Legislative Affairs reviews all comments received from the various business units and provides the response to Congress. This procedure, while convenient for coordination purposes, also has the effect of preventing the type of responsive, unfiltered opinions that the Commission and Section 4021 of RRA ’98 envisioned.
NTU concurs with the Taxpayer Advocate’s recommendation that “the IRS establish a process to automatically provide the tax writing committee staff with a list of specific front-line technical experts who can discuss the administrability of pending (or existing) legislation directly with the tax-writing committees, as provided by RRA 98.”
Had this procedure been in place since 1998, we believe that the administrative quality of tax laws would have improved, and the need for subsequent technical corrections would have diminished. The most important results, however, would be in budgetary savings to the IRS and reduced private-sector compliance costs – a win-win situation for taxpayers.
As of last year, NTU was unaware of progress at the IRS toward full cooperation with Sections 4021 and 4022; we would be delighted to be proven otherwise. We believe it is entirely within your purview as Acting Commissioner to marshal appropriate internal resources to comply with the spirit of RRA ’98. Few other gestures could help to establish the new and constructive relationship you undoubtedly wish to have with Congress.
The Commissioner’s Voice Can Speak Out for Taxpayers
IRS Commissioners have traditionally been judicious in expressing their opinions on legislation before Congress, mostly limiting their remarks to major bills affecting tax administration. Yet with the Service at a budgetary and managerial crossroads, we believe that your timely, publicly stated views on a select number of proposals and plans would be most helpful to informing discussions currently underway regarding the IRS’s internal culture, its external image, and the tax system as a whole. We therefore commend your attention to the following:
- The use of the designated summons power, the authority to designate cases for litigation, and retention of outside counsel for certain technical matters are all important tools the IRS can wield in tax examinations. Like any tools, however, they must be properly employed, and in recent years we have noticed the agency’s increased reliance upon them, particularly with audits in the Large Business and International Division. NTU has expressed concerns in testimony before Congress that these three prerogatives should be more carefully proscribed, especially given the fact that expansive interpretations of power in one IRS division tend to “spill over” into others (e.g., to the Small Business and Self-Employed Division).
HR 3220, sponsored by Reps. Smith (R-MO) and Sewell (D-AL) would achieve the important ends not only of clarifying designated summons, designation for litigation, and outside counsel powers, but also codifying more emphatically every taxpayer’s right to appeal an audit determination. Indeed, on this very day of our meeting, the House Ways and Means Committee’s Oversight Subcommittee held a hearing for Members to discuss their tax administration reform proposals, including HR 3220.
Every IRS Commissioner is under pressure to defend the managerial procedures of his or her predecessors and to preserve the agency’s discretion to exercise authority. In this case, however, your support for HR 3220 would reaffirm the IRS’s dedication to a better working relationship between the agency and the taxpayer during examinations – a goal that serves both parties.
- One of the most successful public-private partnerships at the federal level is the IRS’s Free File initiative, which has delivered vital e-filing and other services to taxpayers at less cost to them as well as the government. The Senate’s version of the Tax Cuts and Jobs Act made the Free File program permanent, but this provision was stripped out of the conference version of the legislation. Your support for legislation to achieve this important goal (e.g., H.R. 4938 sponsored by Reps. Roskam (R-IL) and Kind (D-WI)) would therefore give an important boost to continuing this program. Conversely, we would urge caution over resurrecting previous Commissioners’ attempts to implement a “Return Free” scheme that would embed government more firmly in the business of tax return preparation. Return Free, along with excessive regulations on private tax preparers, would tear down a “firewall” between tax collector and tax preparer that has functioned reasonably well in our tax system. In our opinion, rather than pursuing Return Free, the IRS will experience greater administrative benefits through outreach efforts over Free File and through effectively communicating the simplification benefits of TCJA.
- As mentioned earlier, NTU testified at a Ways and Means Oversight Subcommittee hearing late last year on tax dispute resolution procedures. Our September 2017 testimony, which is provided with this correspondence, discussed at length potential ways to expand the IRS’s existing Alternative Dispute Resolution (ADR) programs. Based on international and state-level experience, we believe this course has great promise to make the examination and collection process more efficient, especially for cases involving smaller amounts of tax. NTU would be pleased to work with you and your staff in exploring how the IRS could facilitate greater use of ADR.
- As a general principle, NTU supports allowing the private sector to perform public sector functions where it can demonstrate greater efficiency than government entities can. Alas, several attempts to contract out the collection of delinquent tax debts have experienced difficulties. Revelations this month from the National Taxpayer Advocate that the current debt-collection program may have been ill-targeted and cost-ineffective should prompt immediate corrective action to get efforts back on track.
- As a member of the IRS Oversight Board, the Commissioner deserves a say in the future of this entity, which leading tax-writers in Congress and the Administration have called for abolishing. If that is the final outcome for the Oversight Board, we would offer the observation that there is still an urgent need for an entity that can provide independent guidance on the IRS’s strategic plans and its treatment of taxpayers. Our September 2017 testimony, our 2017 comments to Secretary Mnuchin, and our 2016 remarks to the Treasury Transition Team, provide additional analysis and commentary on this topic.
There are numerous other aspects surrounding TCJA’s implementation we could discuss; some of them are within the IRS’s core responsibilities, others may be shared exercises. Perhaps the most prominent instance of this is ensuring a cogent Executive Branch response to a few states’ efforts at undermining the intent of TCJA. A bill in the California Legislature would, through truly contorted means, attempt to cloak state and local tax payments in the mantel of charitable contributions so as to evade new federal limits on deductions for those payments. Shortly after enactment of TCJA, the IRS helpfully clarified that prepayments of taxes on real property were only deductible on 2017 returns if such taxes were formally assessed before December 31. The IRS, in conjunction with Treasury, could render further guidance, in this case on the propriety of creating a charitable carve-out for payments that heretofore have been obligatory. Other exotic strategies by the states to thwart federal itemized deduction simplifications – which amount to abdicating responsibility for “home-grown” high taxes – could be addressed by the IRS and Treasury in a similar manner.
Acting Commissioner Kautter, we consider it our highest duty to provide constructive, actionable guidance to Treasury and the IRS on a wide range of tax administration matters. Once you and your staff have been able to review these comments and the other documents I have provided, we would welcome the chance to discuss how we may be of further assistance to you. I am truly grateful for your time and consideration.