INTERNAL REVENUE SERVICE ADVISORY COUNCIL
The Internal Revenue Service Advisory Council (the “IRSAC”) serves as an advisory body to the Commissioner of Internal Revenue. The purpose of the IRSAC is to provide an organized public forum for Internal Revenue Service (the “IRS”) officials and representatives of the public to discuss relevant tax administration issues. The IRSAC reviews existing tax policy and recommends policies regarding both existing and emerging tax administration issues. In addition, the IRSAC suggests operational improvements, conveys the public’s perception of professional standards and best practices for tax professionals and IRS activities, offers constructive observations regarding current or proposed IRS policies, programs, and procedures, and advises the Commissioner and senior IRS executives on substantive tax administration issues.
The IRSAC has 32 members with substantial, disparate experience and diverse backgrounds. The members represent large and small firms from urban and rural settings across all regions of the United States. Members include representatives from the taxpaying public, the tax professional community and small and large businesses. In addition to representing different industries and geographic regions of the United States, members also represent several occupations that interact with the IRS in a variety of ways. Current members include accountants, lawyers, enrolled agents, and academics. Each member has a unique tax policy perspective and is committed to providing meaningful input and feedback to the IRS.
The IRSAC is organized into four subgroups. The Wage and Investment Subgroup, the Small Business/Self-Employed Subgroup, and the Large Business and International Subgroup correspond to three of the IRS’s operating divisions. The fourth subgroup is the Office of Professional Responsibility Subgroup.
The issues included in the annual report are issues that IRSAC members consider especially important. IRSAC members discussed these issues over the past year during working sessions and on conference calls. IRS personnel brought several of these issues to the members’ attention. IRSAC members raised other included issues.
The 2010 Wage and Investment subgroup report explores several pertinent issues. First, the report reviews and makes recommendations on electronic returns that contained employer identification numbers that did not match the name controls used by the IRS in processing business and fiduciary income tax returns. Next, the report examines the 2010 filing season’s savings bond initiative. The report also reviews automated underreporter notices and soft notices and issues surrounding the first-time homebuyer’s credit during the 2008 and 2009 filing seasons.
The Large Business and International (LB&I) subgroup report contains discussions regarding the Industry Issue Focus (or “tiered” issue strategy); the newly released Schedule UTP (Uncertain Tax Position Statement); the Quality Examination Process; workforce integration; centralized responsibility for valuation to provide consistent policies and application; and, the development of guidance addressing standards of care for valuation. The report recommends certain modifications to the Industry Issue Focus, highlights where specific clarification is needed with regard to Schedule UTP, and discusses the roll-out of the new Quality Examination Process for
audits. In addition, the subgroup’s report examines workforce integration with respect to newly hired agents in LB&I, as well as two matters applicable to appraisers and their valuations.
The Small Business/Self-Employed subgroup reviewed several difficult issues. The most significant issue that they addressed is the Report of Foreign Bank and Financial Accounts. Their report proposes simplifying voluntary compliance and addresses the challenges of international tax administration with respect to the Report of Foreign Bank and Financial Accounts. In addition, the Small Business/Self-Employed subgroup report contains recommendations regarding enhancing the effectiveness of collection efforts and cooperative resolution of worker classification uncertainty. In the collection area, suggestions are provided with respect to improving collection standards to reduce installment payment defaults, developing more effective tools for ACS, improving service to taxpayers requesting Lien Certificates, and the application of the Partial Payment Installment Agreement program. In the worker classification area, two proposals are offered: one designed to incentivize businesses to request worker classification status and the other to reduce cooperatively the universe of unresolved worker classification cases.
Finally, the Office of Professionally Responsibility subgroup’s report examines the new tax return preparer registration requirements, specifically focusing upon the definition of a “return preparer.” The subgroup also reviews the proposed provisions of the revised Circular 230, particularly focusing upon the proposed provisions affecting continuing education providers. Additionally, the subgroup proffers their recommended definition of “willful” within Circular 230 and investigates the idea of allowing the Office of Professional Responsibility to issue Private Letter Rulings or some similar other form of precedential guidance. Also, the report comments upon the distinction between Title 26 and Title 31 of the United States Code. Finally, the report proposes revisions to the provision of Circular 230 addressing former Internal Revenue Service employees who wish to automatically be recognized as enrolled agents.
The following issue related to the Work Opportunity Tax Credit (WOTC) was not assigned to a specific IRSAC subgroup. This issue is being presented as a full IRSAC issue due to its broad application and Commissioner Shulman’s agreement to address the issue.
ISSUE: INEFFICIENCIES THAT ERODE A PORTION OF THE INCENTIVE EMPLOYERS REALIZE FROM THE WORK OPPORTUNITY TAX CREDIT
After the release of IRS Announcement 2002-44, many employers automated their job application process in anticipation that state workforce agencies would allow electronic submission of Form 8850. Unfortunately, most state workforce agencies do not accept electronically-submitted Form 8850s and those that do expect employers to retain originally-signed forms. Obtaining originally-signed Form 8850s imposes a significant administrative burden on employers and prevents employers from taking full advantage of the Work Opportunity Tax Credit. To alleviate this administrative burden, IRSAC recommends that the Commissioner of the IRS take prompt action to ensure that the Secretary of Labor, or the Secretary’s appropriate designee, issue guidance mandating that state workforce agencies treat hard copies of electronically-signed Form 8850s as if they were originally-signed Form 8850s.
The Work Opportunity Tax Credit (the “WOTC”), enacted in 1996, provides employers an incentive to hire disadvantaged individuals. Procedurally, employers claim the tax credit by requiring job applicants to complete IRS Form 8850 (Pre-screening Notice and Certification Request for the Work Opportunity Credit). The employer has 28 days from the date the employee begins work to submit Form 8850 to the Department of Labor State Workforce Agency (the “SWA”) in their state for review. The SWA verifies the accuracy of information reported on Form 8850 by crosschecking it with federal and state databases and reviewing accompanying documentation. If the information on Form 8850 is accurate, the SWA issues a certification of WOTC eligibility to the employer. Once the employer receives the WOTC certification from the SWA, the employer may claim the tax credit on their federal income tax return.
In 2002, IRS Announcement 2002-44 (Internal Revenue Bulletin 2002-17) states that the IRS will allow SWA’s to accept Form 8850 electronically if the SWA’s electronic system meets certain requirements. In the eight years since the announcement’s release, a significant number of employers migrated to automated job application processes. Typically, these processes require the job applicant to fill out the job application and related materials on a computer and transfer these materials to the employer electronically. Many employers participating in the WOTC program automated their job application process with the expectation that eventually SWAs would eventually allow electronic submission of Form 8850.
To date, only a few SWAs allow employers to submit Form 8850 electronically; and, where accepted, the SWAs in those states still expect the employer to retain
originally-signed paper copies of Form 8850 for audit purposes. Thus, employers participating in the WOTC must obtain an originally-signed Form 8850 even if they use an automated job application process.
For many employers, Form 8850 is the only required hardcopy form in an otherwise paperless job application process. Obtaining an originally-signed Form 8850 creates a significant administrative burden for employers and causes some employers to opt out of participating in the WOTC program. In addition, delays in receiving and manually processing the signed Form 8850 occasionally causes employers participating in the WOTC program to miss the 28-day deadline for submitting Form 8850 to the SWA, thereby preventing the employer from taking advantage of the tax credit.
Potential problems with the existing process include:
The job applicant must print a hard copy of Form 8850 during the application process. If the applicant cannot locate a printer or experiences problems printing Form 8850 then the WOTC process is delayed. In the alternative, the applicant may forego completing Form 8850 altogether. In that case, the WOTC is no longer available to the employer.
The employer has 28 days from the date the applicant begins work to submit Form 8850 to the SWA. If the job applicant does not mail the signed Form 8850 to the employer in a timely fashion or if the form is lost in the mail, then the employer cannot submit the form to the SWA in time.
The employer must manually process Form 8850 before submitting to the SWA. During this process, the form may be inadvertently placed in a personnel file.
Since the IRS issued Announcement 2002-44, most SWAs have not implemented processes to receive Form 8850 electronically. The SWAs that accept electronically- submitted Form 8850s still expect employers to retain originally signed Form 8850s. The required filing of an originally-signed paper copy of Form 8850 places a significant administrative burden on employers and acts as a barrier to the WOTC filing process.
The IRS may provide guidance for the Department of Labor (DOL) that will allow DOL to issue guidance to the SWAs on this matter. The members of IRSAC believe a solution exists that alleviates the administrative burden of obtaining an originally-signed Form 8850.
The IRSAC proposes that the IRS take whatever steps necessary to promptly ensure that the Department of Labor issue a Training and Employment Guidance Letter (a “TEGL”) mandating that all SWAs treat hard copies of electronically-signed Form 8850s as if they are originally signed Form 8850s. This solution allows employers to completely automate their job application process. In addition, this solution does not change how SWAs perform their duties or impose additional burdens on SWAs.
The proposed solution allows job applicants to complete and sign Form 8850 electronically. After the job applicant electronically submits the completed Form 8850 to the employer, the employer prints a hard copy of the electronically-signed form and mails the form to the SWA. The SWA processes the form and issues a certification or denial to the employer. The employer retains the electronically-signed form under their established record-keeping system.
To facilitate swift action by the Department of Labor, the IRSAC recommends that the IRS take whatever steps necessary to promptly ensure that the Secretary of Labor issue a Training and Employment Letter mandating that all SWAs treat hard copies of electronically-signed Form 8850s as if they are originally-signed Form 8850s.
The IRSAC members are grateful for the opportunity to serve the Internal Revenue Service and taxpayers. Additionally, the IRSAC appreciates the IRS personnel they interacted with during the past year. We enjoyed our discussions on current and emerging tax policy and procedural issues; we hope our comments contribute to solving these complex and engaging problems.