David Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This is part two of Tax Notes senior reporter William Hoffman's interview with former National Taxpayer Advocate Nina Olson. Bill, what did you talk about in this part of the interview?
William Hoffman: We spoke about the new adjusted memorandum of understanding with the Free File Alliance and the IRS and the removal of the prohibition on the IRS developing free fillable forms for general use by the taxpaying public. We also talked about leftover Tax Cuts and Jobs Act problems for taxpayers and practitioners, including the new form 1040-SR for seniors and lingering problems with the 1023-EZ for exempt organizations. We spoke about the status of the Taxpayer Bill of Rights, both at the IRS and Congress, and their wider application, perhaps for other situations in other countries. And then we also talked about her upcoming International Conference on Taxpayer Rights scheduled later this year in South Africa.
David Stewart: Alright, let's go to that interview.
William Hoffman: We spoke last week about the Free File memorandum, of understanding, the revised memorandum, and the removal, especially of the fillable forms prohibition. You surprised me a bit in that you didn't seem to be as enthusiastic for the idea of the IRS taking on this role as maybe I'd gotten the impression in the past. Has your feelings about that changed? Or did I misinterpret?
Nina Olson: No, I don't think it's a matter of lack of enthusiasm. I want to see how that's rolled out.
William Hoffman: How what is rolled out?
Nina Olson: If the IRS is going to do something in that field--
William Hoffman: Which they have said so far they are not.
Nina Olson: Right. You know what I have always advocated -- I mean, it may be that taking that language out, they arrived at some agreement that said the Free File Alliance will stand back and not seek that legislation. And the IRS won't intervene in this if they'll just take out that language from the agreement. And everyone will go, "Oh, boy, the IRS will get in this area." Then they never get in this area. I mean, my concern about the IRS--
William Hoffman: That's something we should know about isn't it?
Nina Olson: Well, one should think so. I don't know whether that-- I don't have any communication with people.
What I do know is that the IRS is incredibly challenged with IT. And that was at the very beginning of Free File when the White House in 2000 and 2001, I was there, with this decision wanted to have a free electronic filing and a free fillable 1040 on whitehouse.gov. So taxpayers would go to whitehouse.gov to file their taxes. And Charles Rossotti felt that he was in charge of the big lift. They'd just come out of a total blowup about IT and it was just like, "We don't have the bandwidth to do that." And that is when the Free File Alliance sort of stepped in and said, "Well, we'll do it." Because the big guys were already providing free electronic filing on their own websites. And the alliance came up because there were anti-competition and monopoly concerns that everybody had to play in this field. And that's why no one entity can serve more than X percent of the eligible taxpayers.
Over the years, IRS, basically with my fussing every year in the annual report to Congress, Free File created these free fillable forms, which was my point. What the government's obligation is is to create a free electronic analog. A digital replacement for paper forms that you're sitting at your desk with a paper 1040, paper instructions, paper publications. And we should use the electronic advances like do the math, carry the number from one page to another, click immediately to the instructions for that topic in the instructions. If the instructions cite a pub, click to that pub. If the instructions have a worksheet, fill out the worksheet. Put the number into the form so people don't make transcription errors or typing errors. That's it. That's what I think the government should do.
Free fillable forms came about in response to my fussing. It's pretty far along to where I want. And so if the IRS really wanted to do something in this field, it could put out a request for proposals on something like free fillable forms and just contract that. It doesn't have the people to design a software program. It doesn't do software. It has some programmers, but for any major thing it's putting out contracts. It's contractors, the private sector, that is doing any build in the IRS, including the online account.
William Hoffman: Has anybody looked into the cost of building out free fillable forms to the extent that it does the things you're describing? Because I talked with a number of people from my story last week. They were all over the place. You were making the case that it was something that would take a lift, but it was doable. There were other people I talked to who said there's no way fillable forms is ready for that.
Nina Olson: Well, have any of those people ever used free fillable forms?
William Hoffman: I don't know.
Nina Olson: Well, I use it to file my returns and have for the last five or six years, ever since it was started, because I do not want to pay anyone for the privilege of preparing my taxes and paying my taxes. And so I use it. And there are things that are clunky about it, but it is very far along, and it would take some additional stuff to do. And the second component of free fillable forms, which is not just for free fillable forms but for anybody, and this is the big lift, is making the tax data we do have available to taxpayers to download whether it's into their own software product, their preparer's software product, just to print out a list that they can give to their preparers or work off of or fill it in to free fillable forms. And that would take the heavy lift because you've got security, you've got concerns. But all of that security's already built into free fillable forms or it wouldn't be opened.
It's not as hard as people talk about. I have watched it like a hawk over the years. Maybe, they're saying, because only 3 million or so people use it. I don't know that more than 3 million or 5 million people would use it, even if they enhanced it. Because people like the software products that give them bells and whistles. They like the ones that hook to their accounting system, that hook to their payroll system, that hook to their investment accounts so that it feeds into their Schedule Ds, that feeds into their Schedule Ss. That's what the private sector fills. I am baffled by the sense that the IRS would be competing with the private sector. But I do think that the IRS has an obligation to provide to its taxpayers a free electronic version of a 1040.
William Hoffman: How many years have you been using free fillable forms?
Nina Olson: Since it started, and I can't remember what year it was. So maybe more than five. I can't remember.
William Hoffman: Have you been successful in being able to file that and either pay your taxes or get a refund? Or has it ever come back on you with "We've got an error. Now you're under audit or exam?"
Nina Olson: No, I have had audits because I was an IRS employee, and periodically you have audits.
William Hoffman: But not because of your experience?
Nina Olson: No, and what has happened sometimes there are glitches. And so for the first few years I would call up Context and Intuit because I think they're the ones who designed it, saying, "You know, it doesn't do this." It turns out I had a higher model of a Mac and they didn't have the driver for the printer or something like that. People tell me you can save a PDF of your form onto your own personal computer, but I've never been able to do that. So I print it out and then I go to irs.gov and I type in to their fillable 1040, that you can't file electronically, the numbers. So I have a pretty little form to give to people if they need to see it. And that maybe me not knowing how to do it because others say they have been able to do it. But I don't know. I'll study that this year now that I'm retired, sort of.
William Hoffman: Well, moving on, you're coming up on the new filing season, of course, here in about a week. And it is going to debut the form 1040-SR. Didn't you have something to do with that?
Nina Olson: I never recommended the SR. That came up-- I think that the first time that it went around was 2005. And that was important because the IRS was running out of returns on the 1040. And they actually had a model, and I want to call it, it was a 1040 something. I can't remember.
William Hoffman: Before we go any further, I guess we should explain what the 1040-SR is.
Nina Olson: This is for seniors, which I am now. Apparently, I'm a senior. I'm not ready to be a senior. But anyway, you know, sort of designed around the elements that a senior taxpayer would have, like pensions, Social Security, etc. And maybe keep the wage income. But you're really designing it so that they could just file a simple form and poof you're in and not have to deal with all the other lines on the 1040. The 1040-A didn't have some of those lines in the 1040-EZ certainly didn't.
William Hoffman: All of which are now gone.
Nina Olson: Yes, they're gone. So back in 2005 there was a conversation about having a senior form. There was also an actual prototype for a form that simplified the 1040 and had a separate schedule. I want to say it was 1040-O or something like that. That was a schedule where you took things like pension, some of the items that the IRS knew had low usage that was on the 1040 front page and they moved them onto the Schedule O so that the vast majority of Americans would have larger type, more space for the 1040. And if you had these other items, you just had to fill out one schedule. Now we have six schedules that are half page, three quarters of sometimes. They--
William Hoffman: They cut it down to three.
Nina Olson: Have they cut it down? See, I've been out of that. But that's good, because I think they got a lot of fussing as a result of it. The postcard thing was not anything the IRS wanted to do. That was completely driven by Treasury. And I know many people in the IRS, really, in the year that TCJA, they were implementing that, to have to do this form was an incredible heavy lift. And it is just to the credit of the people in wage and investment and forms and pubs. Well, that's in wage and investment. That they pulled that off. And I'm glad that there was the response back so that sort of a little bit more sanity has ruled from those silly six forms.
William Hoffman: Are there any other leftover aspects of Tax Cuts and Jobs Act that you think are going to either help or bedevil taxpayers and practitioners in the coming filing season?
Nina Olson: Oh, I really want to see what happens with 199A. I want to see who's filing it. I want to see the results of it. I want to see what kind of compliance the IRS is doing in it. They have not done very many sole proprietorship audits, and they keep trying to do sole proprietorship audits like correspondence exam, which is the most ineffective way to do self-employed audits. And there's no way you can uncover cash when in a correspondence exam.
And so it'll be very interesting to see what they do with 199A and whether they intend to do them as correspondents exams. Or do they want to send out these freshly minted revenue agents out into the field? What kind of training are they going to have? I really don't know. And it'll be also interesting to see how some of the unregulated return preparers deal with 199A. People who haven't been getting the continuing education-- what they're going to see this as "Oh, 20 percent. Have we got a deal for you." Well, how does that show up on the returns and who's going to be targeted for audits based on some of those initiatives?
William Hoffman: We've also noticed, especially in some oversight reports and some reporting in recent years about questions regarding 1023-EZ, which is of course the EZ form for registering your nonprofit tax exempt. And I'm wondering if you have any thoughts on where that might be going or what maybe we in the tax community should be looking for in that particular corner of exempt?
Nina Olson: Well, first, I went through the whole 1023 process to get the determination ruling on the Center for Taxpayer Rights. So, you know, that took some significant amount of work. But it also meant that I had to articulate what the purpose was of the organization and address various concerns that might come up based on the questions that they were asking. And I always viewed the 1023, even when I was in private practice, and the Community Tax Law Project had an initiative where we counseled nonprofits and prepared 1023 for nonprofits who served the low-income population, the same population we were serving. And we really forced them, before we even began preparing the 1023, this is before the 1023-EZ, to articulate, to write their narrative statement, a long narrative statement, to explain what they saw themselves doing. And if they couldn't articulate that, then they weren't ready to be an entity with all the responsibilities.
What the IRS has done with the 1023-EZ is dumb it down to such a level that you see the results that show up in the taxpayer advocate's report. When I was the taxpayer advocate, I think we did two or three studies. This year they were doing another study, and I read that as soon as report came out and it's no better. Something like almost half of the nonprofits in the states that you can get access to their filings online, free access, didn't meet the organizational test. That means you either didn't describe an exempt purpose or you didn't have the clauses that the IRS puts in the instructions like, "Put these words in your articles of incorporation" and they couldn't even do that.
Just the examples in the report about one person saying, "I'm going to use this basically to pay for myself to run for political office." Like, excuse me? That entity has a 1023 determination letter. That's robbing all of us, and the IRS is just facilitating that. And I don't understand why they aren't checking the articles when they're getting the applications. And we timed it. It takes at the most seven minutes per 1023 up. And that versus decades of being able to get a write-off and tax exemption for something you're not exempt for is just a scandal. And I don't know why Congress isn't more on that case.
William Hoffman: One of your most passionate areas of commitment was to the Taxpayer Bill of Rights. I know that it seems like over the years we've gone through several phases where the IRS adopts a taxpayer bill of rights at some level, but it doesn't seem to be the kind of commitment that you were looking for. Congress got into the act a few years ago. Give us the status on this. I mean, are taxpayer rights being taken seriously in any of the, I think it was 10 areas that you labeled as taxpayer rights. Are there areas where the behavior of the IRS has met your standards and other areas where it hasn't?
Nina Olson: Well, I have to say that my goal was first to get either Congress to enact a taxpayer bill of rights or IRS to adopt it if Congress wasn't going to enact it. And IRS chose to adopt it, and kudos to Commissioner Koskinen, who saw that as a very positive thing, as something to begin to restore taxpayer trust in the IRS. And the IRS did a serious effort working with the Taxpayer Advocate Service after June 2014 to do some publicity about the Taxpayer Bill of Rights. Send out messages. We did think that they hadn't done enough training on it. Incorporating the Taxpayer Bill of Rights into their training and not just repeating it like, "Taxpayers have the right to quality service." But what does that mean when you're a revenue agent? What does that mean when you're on the phone as an ACS employee? The right to quality service. What does it mean that you have a right to pay no more than the correct amount of tax if you are on correspondence exam? How does that change how you approach the taxpayer's issue that they're bringing you?
And we wanted to see in the training and in the IRMs really specific examples how this language and the description of the language that the IRS has adopted, and that was heavily negotiated between myself and the senior leadership team of the IRS, what that meant to the frontline employee. Now, as time goes on, and it's no longer like you need it as the PR thing in the aftermath of the 501(c)(4) outbreak, is that it sort of gets just repeated, repeated, repeated as a checklist. Sort of like Publication 1 is when you have an appointment with the revenue officer or the revenue agent, and they hand you this thing. And then they say in their quality review, "I've advised them of their rights." Some revenue officers take it very seriously, and they read them through their rights. Others just hand them it and they've met their quality stand for that case.
So in my view, every time you talk about enforcement, you need to talk about the rights that accrue to the taxpayer in the context of that enforcement. And you start with a broad statement of the right, and then you bring it down to what that specifically means in the context of an exam or context of collection. Context of third-party contacts. And that's how you get people in the IRS to really see it every day of their lives. That takes dedication. That takes consistency. And I don't see that when I hear people saying "Yes, and we recognize this right." It's a throwaway line. And then they spend the rest of the time talking about enforcement. And that sends a very clear message to the employees. So I'm listening carefully when I'm in the audience and listening to IRS people speak. And I will critique those presentations from a taxpayer rights perspective.
William Hoffman: It seems like it'd be a very difficult thing to measure, to quantify, to say the IRS is consistently addressing and respecting taxpayer rights on a one to five scale. Is there any way to do that?
Nina Olson: Well, that's why we tried on several most serious problems to actually take their training materials and look at where do you bring up concrete examples where you relate a specific right to what's happening in this case? And how would it drive your action? Or that you give employees case studies and then talk through both the legal steps that you need to take and take a financial statement, all of that, and how do you read the financial statement? But then, where do rights come in? The right to privacy, the action should be no more intrusive than necessary. Well, maybe that leads you to an offer and compromise rather than saying, "Pay it now." How do you apply that?
And so we were really looking at the training and you can look at the IRM and go, "They're putting this in there, and this is what IRS employees live by." So if it's in there at some point, somebody's going to have to confront it, or a representative can say, "Wait a minute, look at this provision. This is how you're supposed to apply it." And so that's what we were trying to do where the functions putting that kind of stuff in their training materials, in their IRMs, the instructions to staff, so key. And then we're looking at how are they rating the cases and, you know, again advise the taxpayer of their rights. Well, are you looking at the case history to see what really happened there? And on your case reviews you could pick that somebody took an action that did not comport with no more intrusive than necessary. And so when you do a case review, you can say, "You didn't meet that standard."
And we do that in the Taxpayer Advocate Service. We did that in doing our case reviews. Our statistically representative sample of our cases that we looked at every single month for every single office. So without having a score of one to five, you can put into place processes without having it be a report card. Because the end result is not that you passed the mark, but that you want people to understand and think through issues from a taxpayer rights perspective. And I keep saying to IRS compliance employees: thinking about it through a taxpayer rights perspective does not lessen your tools to enforce the law. You still have all of those. It just makes sure that you use them in an appropriate way and in a legitimate way, and that itself will encourage taxpayer compliance.
William Hoffman: I guess we want a little bit more about your International Taxpayer Rights Conference. This is the one scheduled for South Africa. Interesting choice of venue. Why South Africa?
Nina Olson: The first thing is early on I decided that it was an international conference, so it just couldn't be United States weighted. We did the first one in 2015 in the U.S. because we were making this up out of whole cloth. It was just easy to do it in Washington, D. C. And then the second one we had an offer from Vienna, one of the universities there, to host it. And we thought, "Well, this is great, you know. This will make it international in its second year." And then we had an offer from the Netherlands to host it and then I thought, "Well, you know, that's getting European centric, too. So we need to be like in the United States for one year, in Europe somewhere for one year, and then somewhere else, whether it's India, Brazil, Australia, Africa." And I'd wanted to do it in Africa for a really long time. And I had some contacts there and I thought, "The African countries, the developing countries, are, really, they're working on human rights. They're struggling, they're developing countries. They have a very small tax base. They have been former colonies so often they don't have infrastructure. They have issues with corruption." And so this would be a challenge. How do you implement taxpayer rights in a developing country? And that brings up the issues of human rights.
And so that's the theme of the conference. You know, taxpayer rights as human rights. Issues for developing countries. It's at the University of Pretoria in South Africa, and the African Tax Institute is the host, and the Human Rights Center will also be a player in this. And we will have the opening panel on taxpayer rights as human rights. What does that mean? You know, really, in the United States, we don't have a strong tradition of human rights like European countries do with the European Court of Human Rights and things like that. We look at the Constitution, but thinking about these things in that perspective really opens your eyes to some things.
Then the panels sort of go from there, including what is digitalization of taxation mean in developing countries where you don't have an infrastructure necessarily and the other side of that digitalization, information sharing and intellectual property. It's like who owns this stuff? Who benefits from this? And that's coming up a lot in the larger discussion about pillar 1 and pillar 2 center from OECD. So there are a lot of different topics. And we have a lot of people from different African countries, from some other developing countries, and then some Europeans and then some Americans. The panels are very diverse, and we have a couple of revenue commissioners coming from Greece, from South Africa. Some deputy revenue commissioners from Ghana, Uganda, the chief judge of the United States Tax Court, a retired judge from South African courts. I'm just really looking forward to what's coming up. It's going to be probably the best conference we've given.
William Hoffman: Sounds like quite an agenda. I wonder about the concept of taxpayer rights in the international arena because the experience of taxpayers with their governments collecting taxes is so different around world. In the United States, we call it voluntary compliance. Whatever you call it, you still got over 90 percent compliance and for the most part it takes place without violence. Whereas there are countries in Africa, Asia, South America, around the world, where basically they come and take your property one way or another, and where the compliance rates are low. And I'm just curious how you reconcile the concept of taxpayer rights in a world where most taxpayers don't think of themselves as having rights.
Nina Olson: Well, I think that's part of the discussion. And I think the thing that has been my credo is that I don't judge. I come in and I listen. And I've spent a lot of time in other countries over the years, one talking to their tax administrations and listening to the challenges of tax administrations in countries that don't have infrastructure or have different cultures, I suppose, to ours. And where I think as much as people hate taxes, what I have observed over the years of meeting with other countries is that the United States taxpayer is generally law abiding. They hate paying taxes. They may distrust the government, but they are law abiding, and that's part of their credo.
And that's not necessarily true in some other countries because the laws have been either oppressive, put on them by other countries, not their own people, or the laws apply to some, but not to others in the case of corruption. Or they don't get public goods from the government. The government is for somebody else, not for me. And I think there it's just having a conversation. Coming in and not saying, "This is the way we do it and you should do it that way." You cannot translate across cultures. What you can do is have a conversation. You can look at how their tax system is designed and what they're trying to achieve with their tax system. And learn from that and share with people and respond to what they're saying are their challenges. And the first thing that you may want to do is not give them a taxpayer advocate. They may need something much more rudimentary.
Remember somebody who worked in a country, and I won't say which one it was, on an IMF project. And the country's tax agency, they had heard all about this exchange of information agreements, and they wanted one of those. And he went out to some of the local tax offices where it was the monsoon season and there was basically 12 inches of water in an office and the tax returns and the files were on the floors. What they needed were metal filing cabinets on a box above the water level. They didn't need an information exchange agreement. And it's that kind of thing to get at the root of things in the conversations and then build on that. And these exchanges, people take away ideas. And they take what is possible for them at that moment instead of me coming in or anybody else coming in and saying, "This is what you need to do." Listen to them.
William Hoffman: I wondered if the linkage you were making between taxpayer rights and human rights was kind of the bridge to this. Because while we may have wildly different understandings of what taxpayer rights are human rights. Because of the last 40 years since Jimmy Carter made it front and center of his presidency, every president has at least paid lip service to it. Then we have a pretty general understanding of what human rights are, and maybe by linking that into taxpayer right, somehow --
Nina Olson: Well, you know, I don't know whether people the United States have a pretty good understanding of what human rights are. We throw that word around. But if you really look at the law, it has to do with human dignity. That is the underpinning of it. And that's the point of taxpayer rights, that you treat taxpayers right. And you recognize that as humans, which is a fairly new recognition if you think about it, for whole groups of humans, that they are rational actors that can make decisions. And that is what human rights is based on. So human dignity.
And what I've learned through talking in Africa with people is that what they're struggling with is basically providing the public goods that give humans dignity. Housing, shelter, health care, education and those what the United Nations call sustainable development goals. How do you get them? You can get them through state-owned enterprises. But if you have corruption, if that's how the government raises money, by owning electricity, by owning mines, or whatever. And then you use that revenue to provide public goods to your people, which recognizes their dignity, that's great. Unless you have corruption which peels that money off and you never get those public goods out to the people. And what some of the African countries are coming to is realizing that they can't just depend on international donors. They don't want to depend on colonial powers or former colonial powers. State-owned enterprises are tainted. And so taxation is where it is. Is the vehicle to get public goods.
If I stopped a person on the street in the United States and asked them, "What do you think is the point of taxation?" Most people would say, "It's just to take the money and build up Washington, D.C." They would not say, "To give me back the roads. To help fund research in hospitals. To cure cancer. To provide grants to local schools for education." They would not talk about public goods. That's part of what I want to talk about in the United States and our education program through the center. But the work that I'm doing internationally is raising my awareness of this. And where the United States is really behind the developing countries is in a recognition of what taxation is about.
William Hoffman: Well, Nina Olson, executive director of the Center for Taxpayer Rights. Thank you very much for joining us.
Nina Olson: Thank you.
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