Prepared Remarks of Doug Shulman, Commissioner of Internal Revenue, Before the National Press Club
April 13, 2009
Thank you for that warm introduction and welcome. It’s a great honor to be delivering this speech before such a distinguished audience, including those listening today on National Public Radio.
This National Press Club speech has become a rite of spring for sitting IRS Commissioners.
Mention spring and Washington in the same breath, and for many it will conjure up images of the cherry blossom trees gracing the Tidal Basin.
During the past few weeks, thousands of people came to visit our beautiful city — some to stroll along Tidal Basin where on the south side, the Jefferson Memorial sits.
And on this very day in 1943…on the 200th anniversary of Thomas Jefferson’s birthday…while World War II raged across Europe and the Pacific, Franklin Delano Roosevelt dedicated the Jefferson Memorial, calling it “a shrine to freedom.”
If you ever get the chance to walk past the impressive marble colonnade to the domed interior, you will see some of Jefferson’s most famous writings adorning four separate panels.
You will see the words, “Laws and institutions must go hand in hand with the progress of the human mind…institutions must advance to keep pace with the times."
And today, I want to talk about how one such institution — the Internal Revenue Service — has advanced to keep pace with the time and to meet today’s enormous challenges and those that lay ahead. But first let me lay down the foundation for that discussion.
FDR would have had a great deal of difficulty recognizing today’s IRS. In Roosevelt’s time, it was called the Bureau of Internal Revenue — a name which stood firm until 1953 when it became the Internal Revenue Service.
Prior to World War II, few people interacted with the Bureau, or for that matter the federal government, perhaps with the exception of the Post Office. But in the same year Roosevelt dedicated the Jefferson Memorial, another event took place that few people have chosen to memorialize. But in the annals of taxes, it was historic.
Congress passed the Current Tax Payment Act, establishing income tax withholding. Nothing has been the same since.
The number of individual returns filed swelled from 14 million in 1940 to almost 60 million by 1960 and now stands at 150 million. And as the number of taxpayers grew, so did the IRS’ role and prominence.
Not long ago, I was speaking to a group of our employees who were starting a front-line manager training course. I was telling them how front-line IRS employees are the face of government to more American people than any other agency, and how we interact with people can profoundly affect the way in which the American people view their government. And it’s more than just collecting the $2.7 trillion to keep vital programs up and running.
At the end of the day, everything runs through the IRS …we see the financial statements of every kind of business in this country …we oversee tax exempt organizations, such as hospitals and charities …and our criminal investigation division investigates terrorism, tax evasion and money laundering.
I’m still in awe of the size and scope of the IRS. This year, we’re bracing for over 250 million returns, including over 150 million individual returns. We will serve about 80 million taxpayers over the internet and telephone.
And during peak tax season, the number of Web site visitors to IRS.gov is comparable to those of the largest financial services businesses in the world, and dwarfs other public web sites such as US Social Security online. There were an astonishing 353 million visits to our Web site in 2008.
And more than a hive of activity, the tax filing season is its own stimulus to the economy. It helps kick off the spring shopping season and can help kick start the economy.
We anticipate sending out over $300 billion in refunds this year. In past years the Commerce Department has seen a 12 to 20 percent spike in retail sales in March, April and May as compared to February, partially as a result of the tax season’s refunds.
We also run some of the nation’s largest social benefits programs, including the Earned Income Tax Credit. Last tax year, 24 million of America’s working poor received approximately $48 billion from EITC. In today’s tough times, this extra money can go a long way to putting food on the table or being able to make rent.
In addition, we administer the Health Coverage Tax Credit that helps trade-displaced workers, retirees, and their families pay for their health insurance premiums so they don’t join the growing ranks of America’s uninsured.
And IRS’ portfolio only continues to grow as it takes on new and important roles and responsibilities in America’s recovery and rebuilding effort.
Early in January, then President-elect Obama spoke eloquently about how “only government can break the vicious cycles that are crippling our economy.” And Treasury Secretary Geithner added a few weeks later that “in the world we confront today, Treasury has to be a source of initiative, not just a reminder of the constraints of reality.”
From the IRS’ perspective, this means we will continually strive to improve our operations and services. I often tell our employees that we need to walk in the taxpayers shoes, to try to see things from their perspective and be attuned to their situation…taking each taxpayer as they come and ensuring that we’re treating people fairly and compassionately in these difficult times.
Granted, this is a very fine line. On the one hand, we need to raise the funds to run the government. And we also have to be tough on those who flout the law and won’t pay what they owe. The American people who play by the rules every day expect us to go after those taxpayers who don’t pay their taxes, and, we are vigorously enforcing the tax law.
But we also want to provide tangible relief to taxpayers in distress while also helping others from straying across the line into non-compliance. The bottom line is that we need to be flexible, principled and empower our employees to use their judgment when dealing with taxpayers.
During these difficult economic times, we must also respond to many different types of taxpayers. It’s not just individual taxpayers who may be in dire straits. It could be a small business or a corporation hanging by a thread and seeking help too. And we’re responding in real time with real relief. We’re making an impact. We’re getting real money into people’s pocketbooks
A good example is implementation of the American Recovery and Reinvestment Act — President Obama’s plan for rebuilding America… whose positive effects will be felt by generations of American’s to come. But the President also knew that Americans needed relief…and they needed it now.
So a mere four days after President Barack Obama signed ARRA into law, the Treasury Department and the IRS swung into action in record time, developing new withholding tables to ensure money would get into American’s pockets through the Make Work Pay Credit.
The Recovery and Reinvestment Act didn’t forget America’s businesses struggling in the distressed economy. Just last month, IRS announced that businesses with deductions exceeding their income in 2008 can use a new net operating loss tax provision to get an expedited refund of taxes paid in prior years.
This provision could throw a lifeline to struggling businesses, providing them with a quick infusion of cash. And we’re making it as easy as possible for businesses large and small to take advantage of these benefits.
We also shifted resources to deal with the expected growth of bankruptcies and business workouts. And we worked with the Treasury Department on a number of regulations that clarified rules, or removed friction, as we did our part to unclog the credit markets.
On the individual front, we’ve taken a two-pronged approach. First, through a series of massive outreach efforts, we want to make sure that taxpayers are aware of every credit, deduction and exclusion for which they qualify, including several new benefits this year. One of these outreach events was aptly called “Super Saturday.”
On Saturday, March 21st, the IRS, its community partners such as the Volunteers in Tax Administration and the AARP opened their doors across the nation to help people who needed free tax preparation, a questioned answered or payment schedule arranged.
Our message to taxpayers was that we’re going the extra mile to help those of you in economic distress. We want to get you your refunds as quickly as possible. And if you think you can’t pay, please come in and let’s talk about it. There are steps we can take to help.
Here are a couple of true stories from that Super Saturday. First, an IRS executive in Kentucky sent in this account:
A single mother of a 2-year old worked full time as a hairdresser but, due to this winter’s severe ice storms in Kentucky, was unable to work for several weeks. She did not have enough money to pay to have her return prepared. She heard about the volunteer tax assistance program and went to a site. She not only saved several hundred dollars in preparation fees, but was eligible for a very large refund. When she saw how much she would be receiving, she cried and said that the volunteers were angels.
An IRS director who volunteered his Saturday to work at a tax preparation site in New York City sent this story:
One of the people that I talked to worked for a delivery company. He receives minimum wage and has a dependent son. The company was laying off people, but he wasn’t worried about his job. For 14 years, he always showed up for work even if he didn't feel well. This was his first visit to a volunteer tax assistance site and I talked to him about his situation, looked at his income and told him that he would be entitled to the EITC. He got up off his chair shook my hand and said, “Thank you, Mr. Congressman.” My employee goes on to note that he quickly explained who he was — an IRS employee, not a Congressman!
This year there are a variety of new benefits and credits which the IRS is administering that can also help energize the economy and generate much needed jobs.
Since we are at the National Press Club, I thought it fitting that I also share some relevant anecdotes that we picked up from newspapers across the country.
Let’s start with the up-to-$1,500 tax credit for installing energy efficient windows. The Minneapolis Star Tribune.com reported that three top window manufacturers are seeing an increase in business that they attribute in part to the tax credit. And more business translates into more jobs.
Anderson Windows of Bayport, Minnesota has now recalled 180 of the 560 workers it laid off in January. And Simonton Windows in Parkersburg, West Virginia announced that it was recalling 110 employees in its West Virginia and Illinois plants and is looking to hire at its Oklahoma facility. And by-the-way, all of the companies are using the tax credits in their marketing campaigns.
And shortly after the Recovery Act passed, the chief executive of Conservation Services Group ordered his staff to, “Get the résumés together.” He told the Boston Globe that because of the bill and several new contracts, he plans to add 200 more jobs this year.
The housing market has been a drag on the economy of late, but tax credits for first-time homebuyers may help buoy home sales. The Greensboro News & Record reported that 25-year old Margaret Winslow wanted to buy a home but couldn’t – that is until the Recovery Act’s $8,000 tax credit became available for buyers like her. Winslow said, “The current market situation and certainly the potential for $8,000 in my pocket is a motivating factor.”
The Recovery Act also included provisions to allow state and local governments to issue bonds, the Build America Bonds, to help finance public projects that will benefit the local communities in many ways, including job creation. Earlier this month, the IRS issued the legal guidance that potential issuers need to issue these bonds.
And the American Opportunity Tax Credit provides as much as $2,500 a year for the cost of a college education. Darin Lang told the Terre Haute TribStar, “For our family, a college degree means more opportunities later in life, but it isn’t easy. Tuition costs have skyrocketed making it more difficult to pay for college…This is important and meaningful tax relief for our family.”
Taken together, all of these tax credits, benefits and assistance to distressed taxpayers paint a much bigger picture. They demonstrate what Thomas Jefferson said…. “institutions must advance to keep pace with the times” — even when the times are as unsettling as they are today.
And that’s not all. In today’s world, we must not just keep pace with the times, we must stay one step ahead of it.
As President Kennedy said, “Change is the law of life. And those who look only to the past or the present are certain to miss the future.”
The IRS must be flexible, agile and nimble enough to detect and adapt to emerging trends — or emergencies, such as the economic crisis. We must be ready for whatever the future may hold.
It wasn’t all that long ago that we had a fairly predictable taxpayer base. That rotary phone era was a simpler time from a tax administration point of view.
The overwhelming majority of taxpayers were wage earners who had their taxes withheld at the source. Entrepreneur sounded like a French pastry and a 401K a new cereal. Small businesses dotted Main Streets across America and corporations were largely domestic with only a few of the largest names doing business on a truly global scale.
Even the way we prepared our tax returns was different. Popular culture from the 1950s and ‘60s created the image of a family sitting at the kitchen table, strewn with receipts, broken pencils, erasers and an ancient adding machine, struggling to complete the family’s 1040 before midnight, April 15th.
Fast forward to the 21st century. Big business is only getting bigger and more complex. From 1995 to 2006, filings by businesses with more than $250 million in assets increased by 85 percent.
So called S Corporations — they get their name from Subchapter S of the Tax Code — and partnerships grew by 52 percent and 57 percent in the past eight years.
Globalization not only became a popular catchphrase; it literally reshaped the world’s economy as businesses were no longer defined by national borders drawn up centuries ago.
Multinational enterprises increased from 3,000 in 1990 to more than 63,000 in 2007. And from just 2000 to 2007, the value of foreign tax credits claimed by corporations increased by more than 70 percent.
And cross-border activities are no longer exclusively conducted by large corporations. Small to mid-sized businesses, as well as numerous wealthy individuals, are increasingly global in the scope of their income-generating activities. Individual foreign tax credits jumped by 170 percent from 2000-2007.
What these enormous transformational shifts mean is that many of the ways that the IRS has traditionally done business must change. Old operating models have gone the way of 8-track tapes and floppy discs. We have to evolve to operate in this new environment. And we have to confront it strategically. A starting point — the fulcrum for this change — is information.
The IRS is an information intensive organization. Data is our lifeblood. It informs all of our activities — from service to enforcement. But with an explosion of data and information brought about by the IT revolution, it’s not just about getting the data but rather analyzing and making the best use of it.
But first the “getting.” Taxpayers and the IRS share a lot of information. It could be a W-2 with wages and taxes withheld by your employer, a 1099 form showing other sources of income such as from a bank, or mutual fund or a K-1 from a limited partnership reporting each owner's share of income and certain expense items. Through this sharing, the IRS gets the same information as you do. We also get it in the same format, thereby greatly reducing opportunities for confusion and miscommunication. There are other tangible benefits.
We know that those taxpayers who have their taxes withheld and reported to the IRS through these third parties are the most compliant. On the other end of the scale, those operating without are the least compliant.
What’s the lesson here? Simple — better information reporting can benefit the entire spectrum of taxpayers and boost compliance. And we’ve been given some new information reporting tools recently. For example, last year, Congress passed new legislation that applies to businesses that accept credit and debit cards. Starting in January 2012, at the end of the year, the bank will send an information report on credit and debit card sales to the business and to the IRS.
Brokerage firms will also have to file with the IRS annual information returns showing a customer’s cost basis in securities transactions which will go a long to reducing misreported capital gains.
Better interpretation of data also means better service to taxpayers. We can learn which taxpayers prefer which IRS channel of service and how they prepare their returns.
For example, younger taxpayers who are at ease with technology prefer our electronic and self-serve options and tend to file their return electronically. On the other hand, older taxpayers and those with limited English proficiency may prefer meeting with an IRS representative in person and send in a paper return.
By better mining and interpreting this information, we can tailor services to taxpayers and address concerns.
We also have to address one of the big transformational shifts I touched upon earlier: tax preparation. Today 84 percent of taxpayers are using a paid tax preparer or software to complete their returns. And we know the reasons. Tax law complexity. Tax laws that constantly change. And tax returns that take too long to fill out.
So more and more of us collect our information returns and receipts, maybe fill out a questionnaire and make the annual trip to the accountant’s or paid tax preparer’s office.
But I am convinced that the IRS can do more to make good use of what has become an integral part of our tax administration system. After all, these tax professionals play a key role in both tax education and compliance. Just as a doctor can advise a patient about the importance of prevention to a healthy life, so can a tax preparer educate his or her clients about the importance of tax compliance to long-term financial health, such as a good credit rating.
I believe the IRS has to do a better job working with the tax preparer community and making them part of our overall compliance strategy. They can be our first line of defense against non-compliance and stop a small problem from becoming a big one.
I have saved the biggest challenge for last. International Tax Administration. I have made international issues a major focus for the IRS, and it’s not just because the business world around us has become more international.
In today’s economic environment, it’s more important than ever that the American public feels confident that individuals and corporations are playing by the rules and paying the taxes that they owe.
With so many of our friends and neighbors feeling deep financial pressures as they struggle to stay in their homes and pay for the most basic necessities in life, there’s little tolerance for those who have the means to pay their taxes, but shirk their responsibilities.
The IRS has been turning up the pressure on offshore financial institutions that help U.S. citizens conceal taxable income. We are breaking down the much vaunted veil of secrecy.
We have framed an aggressive, proactive and balanced agenda to lead the IRS into a new era of global tax administration. Harkening back to Thomas Jefferson, “institutions must advance to keep pace with the times.” President Obama and Treasury Secretary Geithner are committed to confronting international tax evasion and have promised a robust IRS enforcement budget and a set of legislative initiatives to support our efforts to curb international tax evasion.
We will confront areas of complexity where there are opportunities for some to push the envelope, yet remain firmly grounded in the reality that our system of taxation is one of many critical components of a vibrant, global economy.
There is no “silver bullet” or one strategy that will alone solve the problems of offshore tax avoidance. Rather, an integrated approach is needed, made up of separate but complementary programs that will tighten the net around those not paying what they owe.
We have already increased the number of audits in this area and prioritized stepped-up hiring of international experts and investigators. We are also looking for ways to improve the information we receive from foreign banks and also through access to wire transfers.
And because this is a global problem, it will require a closely coordinated strategy among nations dedicated to ending this abuse that deprives our country of precious resources and erodes confidence in the fairness of our tax administration system. It’s time to get it right … and we are committed to doing so.
Thomas Jefferson also wrote that speeches measured by the hour will die with the hour, so let me wrap up. In his dedication speech on April 13, 1943, Roosevelt also said that Jefferson “thought in terms of the morrow as well as the day.” And I can think of no better direction for the IRS: casting an eye towards tomorrow’s challenges and opportunities while meeting full well the needs of the day. Thank you.