This week the NTA released its annual report to Congress. In this post, I will provide some brief background, set out useful links, and offer some initial thoughts on the NTA’s identification of problems relating to the administration of the EITC.
Volume 1 of the report includes the listing of Most Serious Problems, Most Litigated Issues and Legislative Recommendations.
Volume Two of the report contains Research and Related Studies, including studies looking at the Hispanic taxpaying population, the impact of audits on future compliance, the relatively new 501(c)(3) application procedures and collectability issues.
Brief Thematic Background
The executive summary to the report itself offers both a positive view of IRS and Congress’ adopting taxpayer rights, but citing to Keith and his usage of the term concierge services for those who can afford to pay for service warns of the future class divisions as a result of IRS planned changes:
[T]he IRS has undertaken a multi-year exercise to develop a concept of operations (CONOPS) or “future state vision .” This exercise is long overdue and I commend the IRS for undertaking it . Not surprisingly, the IRS future state now under internal discussion proposes changes in agency operations that assume a constrained funding environment and therefore minimizes agency costs . As a result, these proposed changes have serious ramifications for taxpayers and taxpayer rights . Most significantly, the IRS future state vision redefines tax administration into a class system, where only taxpayers who are the most noncompliant or who can “pay to play” will receive concierge-level service or personal attention. The compliant or trying-to-comply taxpayers will be left either struggling for themselves or paying for assistance they formerly received for free from the IRS.
The summary also provides a useful touchstone on first principles of tax administration:
Simply put, taxation involves taking money from one person and applying that taking to the greater good of many, if not all . That is an extraordinary thing to ask of people . A tax system depends on taxpayers being willing to offer up their hard-earned or saved dollars and let their money be applied to everyone’s — or someone else’s — benefit .
So the central question in tax administration is: How do we promote that willingness? What does the tax administrator need to do to maintain and expand taxpayers’ willingness to pay their taxes? Stated another way, how should the tax administrator behave so it doesn’t undermine or lose taxpayers’ willingness to comply with the tax laws? The answers to these questions should drive both the current and future state of the IRS.
The summary notes the need for the IRS to understand and act on both the needs and the characteristics of the taxpayers it administers. With Congress giving IRS a wide range of programs to administer, each with unique challenges, the one-size fits all approach to administration is not a possibility. Even within particular programs where the IRS has shown a sensitivity to the challenges of the public and preparer community so that there needs to be specific compliance and educational approaches, IRS has lots of room for improvement.
EITC: Initial Thoughts
For example, while the report is extensive, I started reading the most serious problems in an area where I have an intense interest, the IRS’s administration of the EITC which is categorized under IRS’s Most Serious Problems (problems 22-24). There is much to digest, but at first read I was surprised to learn that the unit at IRS charged with developing and applying the IRS’s Return Preparer Strategy for EITC returns does not have much of a relationship with TAS (which has a deep knowledge of the taxpaying and preparer community in this space). With respect to preparer letters (an issue I commented on the other day in discussing how research shows that tax administrator letters may have a big impact on compliance), the NTA notes that there is no comprehensive strategy on the use of education or compliance letters, little effective follow up on preparers who may have dropped out of the system following the issuance of the letters, and little in the way of information to gauge the effectiveness of the strategy:
A TAS review of unpublished EITC Return Preparer Strategy reports shows that the Strategy does conduct reviews that cover distinct issues related to various letters. However, TAS has not been able to locate a year-to-year review of the effectiveness of all letters, or any analysis of whether single letters or a sequence of letters are more or less effective in improving EITC compliance. Without such an analysis, it is impossible to determine the effectiveness of the IRS’s EITC letter strategy.
In past research, I have been a strong advocate of the IRS using principles of responsive regulation when it comes to working with the preparer community. Under that approach, an agency calibrates between education and compliance, saving severe sanctions for egregious conduct but using its knowledge and power in a way to encourage compliance through education before resorting to sanctions. For example in my Stanford Law and Policy Review article Refund Anticipation Loans and the Tax Gap I suggested that IRS should more carefully consider and tailor both an education and compliance approach with preparers:
A prerequisite for this type of approach, however, is that the IRS must have sufficient information regarding who the good and who the bad actors are in the return preparation industry. There is a deep need for the IRS to collect information by type of preparer, and have a nuanced understanding of error rates by preparer and by issue, with comparisons made between returns associated with RALs and those that are not. Encouraging good behavior must start with the IRS knowing and acting on information about how certain preparers are interacting with taxpayers. Changing preparer conduct through audits, or even heightened penalties or due diligence rules, should come only after the IRS encourages more positive steps, and only after the IRS directs disapproval with what it perceives to be improper preparer conduct. For example, rather than default to audit when faced with information about likely errors associated with a geographic region of a national chain, one approach would involve the IRS visiting preparers to discuss best practices and reveal that there is information suggesting impermissible error rates associated with those The IRS could ask that the preparer report back on its internal quality control measures, review corporate culture and education, and encourage self- regulation before the IRS diverts to resource-intensive exercise of audits, and potential use of civil penalties and injunctions. The compliance stick would come at the tail end of government interaction.
I wrote my article in 2009. Since then, while refund anticipation loans are mostly history, other challenges exist and IRS has learned a great deal about preparers through PTIN registration, expanded due diligence and thousands of outreach visits and letters. The NTA suggests that IRS is not fully using its knowledge, nor is it releasing information so that the public has confidence that the IRS is on the right track. What is frustrating is that there is a great deal of potential in the IRS’s multi-faceted approach to preparers. From the NTA Report, however, I do not have confidence that the IRS will be able to realize the potential to materially improve preparer and taxpayer behaviour.
Over the next week or so I will read the full report. As in past years, much of the report’s discussion and many of the issues that the NTA flags become part of what we in PT discuss. I am grateful that our tax system provides the opportunity for TAS, which has an insider’s perspective on what the IRS does and does not do well, and the skills to offer recommendations for the agency, Congress and the public to consider as part of an ongoing discussion.