TE/GE Council Provides Comments on Taxpayer First Act

TAXPAYER FIRST ACT PLANNING PLACEMENT

COMPREHENSIVE TAXPAYER EXPERIENCE STRATEGY

How can we think more holistically about serving taxpayers, practitioners and other entities through all of their interactions with IRS (service, enforcement and other needs).

The IRS can serve taxpayers, practitioners, and tax-exempt entities more holistically by adopting a set of values that reconcile the apparent conflict between tax collection and tax exemption that currently impairs the IRS's efforts.

The central dilemma the IRS confronts in administering the internal revenue laws with respect to the nonprofit sector is that its mandate to collect revenue on behalf of the US federal government in a fair and uniform manner is at odds with its task of supervising legal compliance of organizations that do not pay tax.

The conflict arises from the Constitution itself as the 16th Amendment directive to collect “all income from whatever source” is in tension with the Bill of Rights guarantee of civil liberties, including the freedom of association, speech, religion, which are most actively manifested in the nonprofit sector. Should the IRS “go get the money” or should it “leave us alone”?

Neither. Focusing solely on revenue collection entails over-enforcement of certain rules — such as UBIT, worker classification, foreign withholding, etc. — and under-enforcement of other, more important rules like private inurement and private benefit. At the same time, a policy of passivity and neglect is perilous in the long run because unwholesome practices may become entrenched and more difficult to undo later.

The resolution of the Constitution's mixed messages is to adopt a deeper set of values — those arising from the Preamble, which invokes the powers of “we the people” to establish the government based on mutual interest. Just as the federal tax system is premised on self-enforcement, so the tax-exempt sector is premised on self-governance. These twin civic values derive from the same source — the people — and should therefore form the basis of the IRS's value system.

The IRS's role should be that of a coach, teacher, and referee with respect to these civic values, assisting taxpayers to fulfill their mutual promise to share the burden of federal government fairly and not to intrude on one another's civil liberties.

A successful IRS administers the tax system with a high degree of voluntary compliance and the nonprofit sector with a high degree of self-governance. The IRS should craft regulations consistently with these civic values. Wherever possible, regulations should adopt broad principles that encourage nonprofits to establish and adhere to community standards, and they should avoid prescribing narrow rules that are too complex for self enforcement and necessitate intrusive compliance systems. The IRS should focus its disciplinary actions on free riders who eschew these civic values, thereby corrupting the system.

For many years, the IRS Statistics on Income Division has studied giving, volunteerism, and other indicators of civic engagement. This has been a largely academic exercise; however, these data can and should be used to monitor and evaluate the IRS's own success as administrator of the nonprofit sector.

Investing in the promotion of civic values makes sense as a prudent use of IRS resources because voluntary tax compliance and improved self governance should lead to greater revenue collection and reduced enforcement expense.

What are some key barriers to receiving service that tax practitioners and/or taxpayers encounter? Please provide possible solutions/improvements for these problems.

The key barriers to receiving service are the small number of IRS employees who understand the rules applicable to tax-exempt organizations, and how difficult it is to access even those individuals.

The telephone help line has extremely long hold times, and the individuals who answer it have little expertise or power to fix problems. Answers are often inconsistent from one call to the next. There should be more agents answering calls; they should have more training; and they should have a greater ability to fix problems. Also, the power of attorney on Form 2848 should be more accessible to agents so that it is not necessary to fax it every time one wishes to speak with an agent. If a 2848 is rejected for some technical reason, that should be determined at the outset rather than after waiting on hold for hours to speak to an agent. It would be great if taxpayers and their advisors could send documents to the IRS via a secure file portal rather than having to rely on fax and mail, particularly for taxpayers under audit. It would also be very helpful if taxpayer representatives could discuss more than one client per phone call.

The knowledge maintained at IRS Chief Counsel's EEE division is too expensive for most nonprofits to access because private rulings cost $30,000 in filing fees alone. The fee should be significantly reduced to encourage more questions of a specific nature, which will help organizations to comply with the law.

The Internal Revenue Manual is available on line for free and provides detailed information; however, it is aimed at IRS personnel rather than the general public and is difficult to use as a result. The CPE texts of yesteryear were great, but have been discontinued.

The best vehicle for disseminating knowledge at present is the “wiki,” a content-based management system familiar to those who use Wikipedia and the like. (“Wiki” is a Hawaiian word meaning “fast” or “ quick,” and it is used to refer to open source software that enables collaborative editing in a web browser.) The IRS should consider establishing and moderating a wiki for informal guidance so that users can help one another with solutions to specific tax and governance topics by creating and editing open source project pages. This would vastly expand the utility of the current “KNET” system which is too general to provide helpful advice for most situations. IRS employees and other non-IRS government employees with knowledge of the nonprofit rules and regulations (e.g. JCT, CRS, Treasury, Dept. Ed, Dept. Labor, etc.), as well as experienced practitioners and academics should have administrator privileges with respect to the wiki to prevent misinformation and vandalism. EEE attorneys should be allowed to contribute and edit the wiki anonymously without it being treated as written IRS guidance and without the extensive internal review written guidance necessitates because any edit to the wiki can be undone by another edit, whether from the IRS or the field (unless the subsequent edit is vandalism). Much to the surprise of its detractors, Wikipedia has been an effective means of disseminating knowledge — the IRS should give it a go.

How can the IRS do a better job of providing services to taxpayer groups such as Limited English Proficient (LEP), or low income taxpayers?

First, we urge the IRS to encourage Limited English Proficient and low-income taxpayers to form, fund, and operate nonprofit organizations because it is just as important for these individuals to participate in civil society as it is for native English speakers and the wealthy. These individuals need to understand that they too have the power to pursue the common good according to their own vision, and to help their communities in a thoughtful manner. Also, without their participation, civil society risks becoming too narrow and out of step with the majority of Americans, which bodes ill for its longevity.

Just as the IRS supports the VITA program, so too should it support the formation of nonprofits and volunteers who focus on assisting other nonprofits to form, fund, and operate in a compliant and well governed manner. The norm of self-reliance and volunteerism should be the means by which the IRS reaches LEP and low-income taxpayers.

The IRS can also help by explaining to all taxpayers why it is necessary to establish an entity to conduct such activities and to collect grants and contributions, how to establish and operate such an organization, and the IRS can use its trove of data in the business master file and Form 1023 applications to help organizations that serve such populations partner with organizations that fund such operations.

Well written and simple explanatory texts are much easier for LEP taxpayers to understand and translate into their own language, with the help of software, volunteers, and, indeed, other civil society organizations. As long as the information is available, accurate, and free, its propagation through the Internet should be less of a challenge. Wikipedia, for example, is published in more than 300 languages and is available to anyone with an Internet connection.

Lastly, the Form 990 and Form 1023 should be revised so that the interrogatories communicate not just the information the IRS is seeking but why the IRS is seeking the information. We recognize that this will make the questions longer, but space should be less of an issue now that the forms are electronic. The problem is that unless one knows the IRS's intent in asking a question, the question becomes a trap for the unwary, especially for under advised, LEP, and low-income taxpayers. For example, “Do you have a conflict of interest policy, yes or no?” seems innocuous enough, but if the consequences of not having one are not included in the question, it can be a bewildering choice. Even questions like “ Do you have a website?” are fraught – should I have a website? If I do, will the IRS look at it? What if it's not ready yet? Then there are the complicated questions, like “Are you a private foundation?” Far too many public charities mark “yes,” with disastrous consequences.

IRS RESTRUCTURING/TRAINING

How might we modernize the IRS organizational structure to better serve taxpayers and/or practitioners?

The problem isn't the IRS 's organizational structure; rather, the problem is that the IRS's sphere of influence on the nonprofit sector is too narrow and insufficiently holistic. All tax rules affecting nonprofit organizations are, effectively, governance rules; however, all governance rules are not tax rules. As a result, the IRS does not have all the tools it needs to be an effective regulator.

The IRS should work with Congress to enact a statute that enables nonprofit organizations to incorporate under federal law. This would not be a preemptive federal statute, and it would not entitle the federally incorporated organization to status or powers as a federal instrumentality. Organizations could still incorporate under state law if they choose, but the federal option would be especially helpful for small organizations seeking a one-stop-shop to incorporate and apply for tax-exempt status. This would help resolve the problem of organizations that file the Form 1023-EZ without understanding or observing basic governance principles. It would give the IRS greater and more nuanced oversight powers with respect to them, for example, the power to replace a nonfunctioning board or resuscitate an organization that lost its charitable path.

Perhaps more importantly, a federal nonprofit incorporation statute would allow the IRS to influence and stimulate the governance and regulatory oversight of states by publishing best in class materials. Publication of regulations under the federal nonprofit incorporation statute may well have a salutary effect on state regulations as well because states could simply reference federal solutions to common governance problems. This additional avenue for non-tax, governance regulation could give the IRS an expanded toolbox for addressing compliance issues that would otherwise be outside its powers and for catalyzing enhanced self-governance throughout the sector.

How could the IRS better train its employees to address taxpayers and tax practitioners' concerns? Please provide specifics and whether your organization would be willing to share best practices.

TEGE Council is happy to invite IRS practitioners to its educational seminars, both as participants and as panelists. We broadcast our events via live webinar and could add locations wherever it is convenient for IRS employees to gather.

The Taxpayer First Act represents a major step forward with respect to transparency, efficiency, and understanding of the tax-exempt sector. Through mandatory electronic filing of tax-exempt returns and the release of this information by the IRS in a machine-readable format, nonprofit information will be more accessible than ever before, creating a wealth of knowledge for nonprofit organizations themselves, regulators, donors and the general public. Such information has the potential, in turn, to greatly improve compliance and government oversight, while providing the public with tools to detect and locate potential problems.

In 2016, the IRS took the historic step of releasing open, machine-readable e-filed Form 990 data on Amazon Web Services (AWS). Even this limited source of open 990 data has proven to be invaluable as the public is now mining previously inaccessible data to shed light on many aspects of tax-exempt operations. However, as the IRS works to implement the Taxpayer First Act and expand electronic filing, it is recommended that it address several communications gaps so that the full potential of these data can be realized.

The steps, outlined below, would vastly improve the overall 990/AWS ecosystem and advance the accessibility of information to the public:

• Improve Communication to the Public: Create a Regular 990/AWS Release Schedule and Web page. A lack of communication has left many tax-exempt stakeholders in the dark when it comes to the regularity and timing of the release of electronically-filed 990s to AWS. The creation of a 990 data release schedule would allow the public to plan ahead. In addition to a release schedule, the IRS should consider using the format of the Exempt Organizations Business Master File page on the IRS website to create a page pertaining to the e-filed 990s. This page would recap the particulars of releases. such as record counts and posting dates, provide contact information for communications, and serve other communications functions.

• Appoint a 990/AWS Liaison within the IRS. The public would benefit from an IRS point person, or mechanism, for handling questions regarding the Form 990 data on AWS. Currently, there is no procedure, or contact, for addressing questions as they arise. This is not only inefficient and frustrating for tax-exempt stakeholders, but it deprives the Service of a feedback loop that could be used to make upgrades and corrections that are particularly important during the early stages of this new undertaking.

• Make Corrections to AWS Dataset, Including Posting Form 990 “schema.” The Extensible Markup Language (XML) files on AWS have proved to be a challenge for even high-level data scientists, who have encountered such problems as multiple versions of the forms and the lack of documentation or “metadata.” In fact, the Aspen Institute has been convening a group of data scientists who are working collaboratively to address some of these challenges. One concern, for example, is the inaccessibility of the IRS Form 990 XML schema, which are necessary for the understanding and interpretation of the underlying 990 data. Unfortunately, the schema were moved to an IRS Secure Object Repository (SOR) that requires individuals to engage in a complex registration process prior to accessing them. This process — essentially registering as an authorized e-file provider for the IRS — requires applicants to make available their Social Security Number and Adjusted Gross Income, as well as pass a detailed “suitability check.” The whole process appears to take months to complete.

• Given that the Form 990 is a public document, there is concern that a registration process that involves sensitive information will have a chilling effect on the use of 990 data by the public. Communication between the IRS and the nonprofit data community on such issues as improving public access to Form 990 schema is imperative.

• Addressing the communications gaps outlined above will increase the availability, quality, and utility of the Form 990 series. More importantly, it will build stronger avenues for dialogue between the IRS and the tax-exempt sector

EXTERNAL COMMUNICATIONS

What ideas do you have for improving the IRS communication channels it uses to connect with tax practitioners/tax professionals?

The IRS should adopt collaborative, open source, Internet-based information and document management system that serves as an interactive forum for informal guidance and as a repository for formal guidance, including statutes, regulations, and published guidance. All information relevant to the sector, including the business master file, determination letters, Forms 990 and other public/non-6103 protected information should be presented in a format that enables users to interact with the IRS and one another to encourage compliance, best practices, and self governance.

On another note, the IRS should improve its user experience with respect to fill-in forms. The Form 1023 takes so long to complete, it must be designed so that it can be saved for further editing. Printing it not a sufficient solution. Also, there is no tech support for problems that one might encounter if experiencing problems with IRS technology.

The IRS website needs to present information in a more thoughtful manner so that the “news” is up to date and the important issues are highlighted first. For example, organizations want to know how they are going to get a refund of the transportation tax and there is nothing on the website.