Transcript Available of IRS Hearing on Enrolled Agent Exam Fee

For IRS:

I'm going to start off by introducing the panel members gathered here today. My name is Jonathan Black. I'm the attorney with the Office of Chief Counsel, Procedure & Administration, who drafted the Regulations

I'll allow the other panelists to introduce themselves.

MR. TRICE: I'm Ashton Trice. I'm with the Office of Associate Chief Counsel, Procedure & Administration.

MR. O'DELL: Brendan O'Dell, Office of Tax Policy, Treasury.

MR. BLACK: We are here today to accept comments regarding Proposed Regulations. Only Robert Kerr of the NAEA submitted a request to speak prior to the comment deadline. However, if there is anyone here who would like to speak you will have 10 minutes to present after the conclusion of Mr. Kerr's testimony.

There is a timer at the podium here that will count down 10 minutes to alert the speakers to how much time remains. The panel members may then pose questions to the speaker, but we will not generally be responding to comments at this time. We take all comments seriously and we will use them to improve the regulation.

Mr. Kerr?

MR. KERR: Good morning. I note that we have a rather large room for a rather intimate gathering. Thank you for hosting, thank you for the opportunity to testify before you this morning.

My name is Bob Kerr and I have the privilege of serving the National Association of Enrolled Agents as Senior Director of Government Relations. NAEA represents the interest of 50,000 enrolled agents. Our organization is entirely EA focused. We have worked for many years with the Agency to advance the IRS's highest credential to distinguish Circular 30 practitioners from those who lack true credentials and to protect the rights of taxpayers worldwide. The organization is uniquely positioned to comment on the increased user fees.

I stand before you for the second time this year offering NAEA's concerns with the proposed SEE oversight user fee. Many of my remarks will echo the concerns my organization expressed in February because our concerns have not changed in the intervening 10 months.

Before I offer our concerns, however, I thank the Agency for publishing Proposed Regulations which are for comment before the Agency changed its fees, rather than temporary Regulations which would have increased the fees, then asked for comment. The order matters a lot.

I also thank the Agency for two changes responsive to concerns we raised in February in the new Proposed Regulations. One is including the user fee calculations with the Re-Proposed Regs, and two is reducing the user fee from $99 per part to $81 per part. We urge the Service going forward to include calculations on any and all proposed user fee actions.

We have submitted separate formal comments for the record in which we provide detailed concerns. I will limit my comments this morning to the Agency's interpretation of OMB Circular No. A-25 and to the size of the increase. Speaking simply, we're troubled by how the Agency interprets government wide user fee requirements and we cannot see how IRS arrived at what is still, viewed through any prism, an enormous fee increase.

Circular No. A-25 establishes federal policy regarding fees assessed for government services. The general policy statement is that a user fee will be assessed against each identifiable recipient for special benefits derived from federal activities beyond those received by the general public. Of note, Circular No. A-25 requires the Agency in question to determine when special benefits exist and also instructs the provisions of the Circular cover all federal activities that convey special benefits to recipients beyond those accruing to the general public.

We enter this conversation at a disadvantage because we don't know how IRS assesses user fees consistent with the two aforementioned Circular No. A-25 requirements. But here's what we do know, we know that the Agency assesses fees for 18 services, we know in its recent installment agreement of final rags the Agency suggested that the special benefits hurdle is -- what I call the seafarer standard -- that is providing specific services to specific individuals, and we also know that the Agency provides services for which it does not assess a user fee.

So are we to conclude that all other Agency activities do not fall within the ambit of conveying special benefits? That would be surprising given the range of services on which IRS doesn't charge a user fee. It doesn't charge taxpayers for toll free telephone services or for continuing education webinars or for walk-in service or for placing a taxpayer into CNC status, or for a variety of examination services, for instance, a CP2000 Notice, or most notably for the annual filing season program record of completion. The Service has not articulated its user fee standards, most fundamentally whether it believes it may charge user fees for special services or whether it believes it must charge user fees for special services. Prospective enrolled agents have a right to know, and taxpayers who ultimately foot the bill also have a right to know.

And if we step away from the consistency challenges, we are also left with the question of how the Agency determines when special benefits occur in the exigent case. IRS attempts to clear this hurdle in both the initial Proposed Regulation and the Re-Proposed Regulation, which identically assert the IRS confers a benefit on individuals who take the SEE beyond those that accrue to the general public by providing an opportunity to demonstrate special competence in tax matters by passing a written examination, and therefore satisfying one of the requirements for becoming an enrolled agent under Circular No. 230, and that's it. We don't find this assertion particularly compelling, particularly given that we questioned in February how the Agency determined a special benefit with respect to SEE oversight. And we don't know why IRS chose not to avail itself of one of the exceptions to the general OMB user fee policy.

Leaving aside our significant macro issues with IRS's assessment of user fees, we're also troubled by the size of the fee increase and how the Agency calculated the proposed user fee increase. The present $11 per part oversight fee is 11.2 percent of the $98 per part fee assessed by the private sector contractor who designs, ensures psychometric validity, processes payment, and administers the test worldwide. In contrast, the proposed $81 per part oversight fee is 82.7 percent of the $98 per part fee that the private sector testing expert charges. The sevenfold increase will increase the total cost of taking the SEE by 64 percent. If a candidate passes each of the three parts on her first attempt, and that is far from assured, she will spend nearly $550, 55 percent of that going to the organization that develops and administers the test in a network of thousands of secure test centers in more than 160 countries, and 45 percent of that going to IRS for oversight. These are enormous costs regardless of whether one measures it as an increase or as a proportion of the cost of the test the Agency is overseeing. Even taking into account IRS claims that it needs to cover three increased costs and five tasks it didn't include in the original 2006 cost estimate. Further, the back of the envelope math is not discernibly better than it was in February. The increase in costs is $70 per part, that is the $81 proposed fees less $11 current fee. IRS calculated the cost of its oversight based on 67,245 parts administered over a 3 year period. The total increase in revenue to the Agency is roughly $1,569,750 annually. Assuming the background check increase of $289,000 is simply pass-through fees, we're left with an additional $1,280,750 in revenue annually, or an additional 10 full-time equivalent GS-12 employees with their $77,500 salaries, fully loaded for overhead. To suggest that the three additional costs and five additional tasks equate to ten full-time civil servants is to strain credulity.

For instance, how much staff time could possibly be involved in reviewing surveys of existing EAs or in setting the annual cut score? We are left with the concern that no one actually looked at the result of the mathematical exercise and asked if it made any sense at all.

Further, and this is not trivial, if IRS increased the number of SEE parts administered in any given year, then all things being equal, the Agency's user fee per part would decrease. The only thing that drove down the cost in the Re-Proposed Regulations was the Agency's decision to spread its calculated fix costs over the last three years of SEE volume rather than project forward three years at lower volumes.

The Agency has in its hands a tremendous asset that it could and should leverage. We live in a world in which taxpayers desperately need some assurance that the person they are hiring to prepare their returns is at least minimally competent. Those who pass all three parts of the SEE well exceed that hurdle. We are left to wonder why IRS doesn't charge a user fee to some 62,000 annual filing season program record of completion participants, yet has given those participants the right to limited practice without any requirement whatsoever to demonstrate representation skills.

We note IRS can double the number of exams administered annually, but only a third of the program participants took just one part of the SEE.

In conclusion, IRS should articulate a clear, consistent, and transparent policy with respect to user fee assessment, one that is consistent with the IOAA and Circular No. A-25. The Agency also needs to consider seriously the broad benefits that enrolled agents provide the tax administration system and taxpayers, and a public policy exception for assessing the user fee. We simply cannot understand how the Agency requires somewhere in the neighborhood of a dozen staff years to provide oversight to a private sector firm that provides gold standard testing services.

We urge the Agency to withdraw the Proposed Regulations until it is better able to articulate how it applies user fee requirements enterprise wide in a consistent fashion, and why it requires a dozen or so staff years to oversee the SEE, and until public policy questions of significant price increase raises are addressed.

I thank you once again for taking under advisement NAEA's user fee concerns. This concludes my testimony.

MR. O'DELL: In your comments you suggest that the IRS could do more to increase the number of test takers taking the SEE exam, which would, you know, increase the denominator and drive down the total cost in the costing analysis. What other suggestions does the NAEA have specifically for the IRS that they could do or should do to help bring more people into the EAC exam group?

MR. KERR: I think that would require protracted conversation that we would be please to sit down with IRS and -- RPO rather, to have -- we note that the Agency has spent some significant amount of time and effort on this annual filing season program record of completion in the wake of the unfortunate Loving decisions. And we believe since the onset that the Agency could have spent that time advancing and promoting its existing senior credential and it hasn't.

MR. TRICE: I don't have any.

MR. BLACK: You didn't speak about it today, but in your written comments you raised the issue that the increased fee may act as a deterrent to individuals becoming enrolled agents, thereby not only harming the industry but also harming tax administration in general. Do you have any -- not to discount suggestion -- but do you have any hard evidence to suggest that the user fees influence individual's decisions to become enrolled agents?

MR. KERR: I'd make a couple of observations there. The first of which is that, in my experience, tax professionals are surprisingly cost sensitive. So I'd put that out there as observation one. The second broad observation is that the higher the price is for anything the lower the demand is for it, unless it's some, you know, some sort of special product. And we're not selling Teslas here.

MR. BLACK: Thank you.

MR. KERR: Absolutely.

MR. O'DELL: I have one more question about your written comments and the oral comments. I was hoping you could clarify something that you said. You said that after talking about the costing analysis you asked maybe nobody looked at it and asked whether the math made sense. I guess I'm trying to understand whether you are suggesting the math is incorrect in the preamble, or some other suggestion?

MR. KERR: We are hard pressed to see how the three additional fees, really which are -- the one is the $289,000 up from $270,000 in February, which again when we do our math we just carve those out, you know, when you do the -- so the net dollars -- and convert them into staff years. One is a decrease in the overall volume. And I don't -- I'd have to look here, I don't know what the third one is -- similar number of parts and -- oh, IRS's costs of verifying contractors' compliance with IT. So you have those and you have five new tasks. And we cannot see how that bucket of things nets out to 10 staff years. In and of itself it doesn't make sense. So that's an absolute exercise. And then you have this relative exercise of should oversight cost 82 percent of the product being overseen? And that's really more where we're going with did somebody just sort of look at that and go well, gosh, that doesn't make a lot of sense. And then it begins to beg some management questions, candidly.

That's it? All right. Gentleman, thank you so much.

MR. BLACK: Thank you for your comments. Is there anyone else present who would like to give testimony today?

All right. Well, thank you, Mr. Kerr. We very much appreciate your testimony. Certainly, as you can see from the last time we did this we do take what you say into consideration and we will work on using it to improve the regulation.

Thank you everyone for attending and the hearing is now concluded.