Denver, CO, July 28, 2015
Hello, and welcome to the IRS Nationwide Tax Forum. It’s great to be in Denver, and I’m delighted to see everyone here today.
It’s hard to believe a year has gone by since I last spoke to the Tax Forums. Much has happened over the past year, and much has changed. One thing that hasn’t changed is my admiration for everything tax return preparers do to help maintain our tax system.
The critical role played by return preparers was never more apparent than during this past filing season. Despite many challenges, the processing of tax returns went very smoothly for the vast majority of taxpayers. This was due in no small part to the important work done by everyone in this room to help your clients file their taxes accurately and on time. I’ll have more to say on the filing season, and the problems we had with taxpayer service, in a moment, but for now I want to thank you for all you do, year in and year out, in support of the taxpaying public.
Today, I want to talk about the challenges the IRS faces, now and in the future. As the events of the last couple of months show, the IRS doesn’t lack for challenges. Those include the difficult budget environment, the proliferation of identity theft schemes, and ongoing investigations. And more challenges lie ahead. For example, we are already preparing for what is shaping up to be another complicated filing season in 2016.
At the Tax Forums last year, I spent some time explaining what the IRS was doing to fix problems from the past, especially in the tax-exempt area. In moving the agency forward, we are also working to improve the way we solve problems and manage risks to the agency now and in the future. That doesn’t mean we can eliminate problems. That’s not realistic, since we have about 87,000 employees who deal with 150 million individual taxpayers and administer the world’s most complicated tax code.
But I think it’s important for people to understand that the IRS has a commitment to respond to any issues that are raised about the agency going forward. I can assure you we’re committed to finding problems quickly, fixing them promptly and being transparent in the process. So how are we doing that?
We are working to build a culture within the IRS that is focused on risk management, and that encourages the flow of information up from the front lines through the organization. We encourage every employee to think of themselves as a risk manager, responsible for reporting problems as soon as they see them. I have told our employees that bad news is good news, we don’t shoot messengers, we reward them, and the only problems we can’t fix are the ones we don’t know about.
While it’s important for us to solve the problems of today and meet current challenges, we also need to do more than manage the day-to-day operations and react to issues that arise. I’m convinced that the IRS must take a different approach to tax administration. We need a new and improved way of doing business.
This involves looking at the future in a more comprehensive way, and determining how we can take advantage of the latest technology to move the entire taxpayer experience to a new level – and do it in a way that’s cost-effective for the government. In particular, we are focused on how best to use our limited information technology resources. Our goal is for taxpayers and their preparers to have a more complete online experience for all their transactions with the IRS.
The online experience should give everyone confidence in knowing they can take care of their tax obligations in a fast, secure and consistent manner. This goal is not unrealistic. We’re not trying to go to the moon or Pluto. We’re simply saying people should expect the same level of service when dealing with the IRS in the future as they have now from their financial institution, whether it’s a bank, a brokerage firm, or a mortgage company.
The idea is that taxpayers would have an account at the IRS where they can log in securely, get all the information about their account, and interact with the IRS as needed. Most things that taxpayers need to do to fulfill their obligations could be done virtually, and there would be much less need for in-person help, either by waiting in line at an IRS assistance center or calling the IRS.
Improving service to taxpayers in this way can also help us on the compliance side of the equation. We need to be faster and smarter. With a more modern system, the IRS could identify problems in tax returns when a return is filed – rather than coming back to taxpayers years after the fact while the meter is running on potential interest and penalties. We want to interact with taxpayers as soon as possible so that those issues can be corrected without costly follow-up contact or labor-intensive audits.
I would point out that as we improve the online filing experience, we recognize the responsibility we have to serve the needs of all taxpayers, whatever their age, income, or station in life. Improving service to taxpayers must include special consideration for those who aren’t comfortable in the digital environment, or who can’t afford to conduct their transactions online.
In moving toward this future state, I should also mention that the IRS will continue the extremely valuable partnerships we have with the private sector. These partners run the gamut of the tax industry, from professional return preparers to developers of software and other tax products. They are critical to our ability to run a tax system that helps millions of people each year fulfill their tax obligations, and we will continue to rely on these partnerships as we move forward together.
The need to improve taxpayer service in this way is especially apparent if you look at the miserable experience that taxpayers, and you as preparers, had this past filing season, as a result of our budget constraints. This year we’ve seen what happens to an organization like the IRS after five straight years of budget cuts. The IRS budget level for Fiscal Year 2015 of $10.9 billion is $1.2 billion less than it was in 2010. The IRS is now at its lowest level of funding since 2008. If you adjust for inflation, our budget is now comparable to where we were in 1998. Our workforce has been reduced by more than 13,000 over five years, and that number is likely to reach 16,000 by the end of this fiscal year.
These reductions were very noticeable during the filing season. When I testified before Congress recently, I said the filing season was like the start of a Dickens novel. It was the best of times and the worst of times.
As I mentioned a moment ago, the filing season went very smoothly in terms of tax return processing and the operation of our information technology systems. So in that sense it was the best of times. Things went even better than anticipated, given the challenges we faced beforehand.
Along with our normal preparations, we also had to prepare for tax-related provisions under the Affordable Care Act, as well as the Foreign Account Tax Compliance Act, or FATCA. There was also late tax extender legislation passed in December. Integrating all of these changes into our antiquated IT systems and still opening filing season on schedule on January 20 was a great accomplishment by our experienced and dedicated employees. Return preparers also played a critical role by helping their clients understand the new ACA provisions and accurately file their returns.
Now a word about the worst of times. Return processing went smoothly this year if you were simply filing your return without questions or a need to contact us. But for taxpayers who did need to contact us, it has been a very different story.
Customer service, both on the phone and in person, has been far worse than anyone would want. It’s simply a matter of not having enough people to answer the phones and provide service at our walk-in sites, as a result of the cuts to our budget. Some have questioned whether this was just a matter of priorities. I assure you, if we had the funds to increase our level of customer service, we would. During the fiscal year we were able to identify additional funds for customer service, and with help from Congress we made available about $5.2 million from other sources, but it still was not enough.
We were dismayed by the reports of taxpayers who lined up outside our Taxpayer Assistance Centers hours before they opened, in order to get service. Taxpayers who called us had long wait times on the phones. On bad days, fewer than 40 percent of the calls were able to reach a live assistor– and that was frequently after a 30-minute wait or longer. This was frustrating not just for taxpayers, and those of you in this room, but also for the IRS customer service representatives, who want to have the resources to be able to provide much better customer service.
Along those lines, I have to issue an apology to everyone for the poor operation of the Practitioner Priority Line, which became something of an oxymoron this past filing season. The waits for practitioners on this line began to rival those for the regular taxpayer help lines, which of course is unacceptable to all of us. Tax practitioners interact with the IRS every day, and you need our assistance and expertise to properly represent your clients and help them correctly fulfill their tax obligations.
Given this situation, any decision by Congress to reduce funding levels further in 2016 would make matters even worse. This would result in a further deterioration in taxpayer service, less tax enforcement and fewer information technology resources. The Administration's Fiscal Year 2016 budget request of $12.9 billion is nearly $2 billion above our level of funding for this year. It provides an important path forward to restoring these three areas and providing critical needs for the nation's tax system.
For example, the administration’s budget calls for adding nearly 3,000 employees to help answer taxpayer questions on our phone lines, which would allow us to answer 80 percent of incoming calls. Besides adding important taxpayer services, we would be able to take steps to restore enforcement efforts, expanding our efforts to pursue criminals as well as adding audit and collection resources. The additional enforcement funding would more than pay for itself, with billions of dollars being collected. For every dollar invested in these programs, there can be returns ranging from 6-to-1 and even up to 20-to-1 in some initiatives.
Congress is still working to determine what our budget for next year will be. The House would cut our budget another $838 million, which would bring us down to $10.1 billion in 2016. The Senate is proposing a smaller, though still significant, cut of $470 million in our funding. Although we don’t yet know the final outcome of the budget negotiations, it should be clear to everyone that even holding us constant at the Fiscal 2015 level of $10.9 billion for another year would mean further degradation of our ability to function effectively, since we must absorb a number of inflationary costs. We will certainly continue to play the hand we’re dealt as we’ve always done, but the number of cards in our hand is getting fewer and fewer.
In the end, our ability to improve both online and traditional channels of taxpayer service will depend on future levels of agency funding. But even within our budget constraints, we are going to continue to look for funds to support the efforts I just described to build toward the future, even at the expense of other areas of our activities. Otherwise, if we just wage a guerilla-style fight every year through the continuing funding challenges, focusing only on the present, we’ll wake up in five years and be no further ahead than where we are today – in fact, we’ll be five years further behind.
The budget isn’t the only challenge we face in building toward the future. In developing an improved online experience for taxpayers, we must make sure we are protecting them. No priority is higher for the IRS than making sure that our systems are secure and that taxpayers and their data are safeguarded.
Even with our constrained resources over the past few years, we have devoted as much time and attention to this challenge as possible. At the same time, it is clear that criminals have been able to gather increasing amounts of personal data outside the tax system as the result of ongoing data breaches, in both government and the private sector, so that protecting taxpayers is becoming more challenging and difficult.
A good illustration of this is the unauthorized attempts to gain access to our Get Transcript application earlier this year. There, the criminals had already accumulated significant amounts of stolen taxpayer information from other sources, which allowed them, in some cases, to access individuals’ prior-year tax returns. We shut down the Get Transcript application, and it will remain disabled until we make modifications and further strengthen security for this application.
The use of personal data by criminal elements has manifested itself at the IRS in the form of stolen identity refund fraud. The problem exploded in the period from 2010 to 2012, and for a time overwhelmed law enforcement and the IRS. Since then, the IRS has been making steady progress, both in terms of protecting against fraudulent returns and helping to prosecute those who engage in this crime.
Thanks to the work of our Criminal Investigation division, we have succeeded over the last few years in helping to obtain convictions of about 2,000 individuals in connection with stolen identity refund fraud. The average prison sentence grew to 43 months in Fiscal 2014 from 38 months in 2013, with the longest sentence being 27 years.
We’ve also improved our efforts at stopping fraudulent refunds from going out the door. During Calendar Year 2014, the IRS protected more than $15 billion in refunds, including those related to identity theft. In addition, our processing filters have improved, allowing us this year to suspend about 3 million suspicious returns and hold them for further review, an increase of over 700,000 from the year before.
But while we have stopped many individuals from participating in these crimes, we find that the type of criminal we are dealing with has changed. This problem has become something more than just random individuals stealing personal information, with each one filing a few dozen or maybe a few hundred false tax returns at a time. We are dealing more and more with organized crime syndicates here and in other countries.
For that reason, we held an unprecedented sit-down meeting in March with the leaders of the electronic tax industry, the software industry and the states. We agreed to build on our cooperative efforts of the past and find new ways to leverage this public-private partnership to help battle stolen identity refund fraud. Motivating us was the understanding that no single organization can go it alone in the fight against this type of fraud. None of us has a silver bullet to defeat this enemy.
We spent 12 weeks studying what needed to be done, and last month we announced new steps to provide stronger protections for taxpayers and the nation’s tax system. The steps we agreed to take together represent a new era of cooperation and collaboration between the IRS, the states and our industry partners.
The critical thing for taxpayers and practitioners to know is that new protections will be in place by the time they have to file tax returns in 2016. We and our partners will all be making substantive changes through the summer and fall to be ready for the next tax season. The threat from those who perpetrate this fraud is complex and evolving, but our combined efforts here will better prepare all of us for the 2016 tax season and beyond.
For example, we’ve asked every company that helps taxpayers file returns to step up their layers of security and authentication practices. It won’t surprise you to know that systems managed by tax preparers are an attractive target for criminal syndicates. Just as with our “Get Transcript” application, access to your records and files gives criminals even better information with which to file fraudulent returns. We’ve also made clear that companies need to let the IRS know if they detect any suspicious activity or refund fraud patterns in their processes.
This means that the federal government, states and private industry will stop more fraud related to identity theft up front. We will catch more fraud in the IRS security filters during tax processing. And for those fraudulent returns that do get through, we will have better post-filing analytics to determine ways to adjust our security filters. And it also means better ways to track down the criminals, and add to those 2,000 people I mentioned who are already serving jail time for tax-related identity theft.
Everyone needs to understand that our collaborative efforts won’t end with the actions we’re taking to get ready for the upcoming filing season. The IRS and its partners will continue to work together to address longer-term issues facing the tax community and taxpayers in the efforts against stolen identity refund fraud. We want to ensure that we make lasting changes. These changes are being built into the DNA of the entire tax system.
One issue we will continue working on is the need to find stronger ways to authenticate taxpayers’ identities when they file their returns, while maintaining taxpayer rights. We will also improve information sharing between the public and private sectors on what works and what doesn’t against refund fraud. This is key to making sure that criminals do not have safe havens in the private sector where they can avoid increased analytic review.
As we worked through the spring with our partners on this problem, we came to an important conclusion. Even with these cooperative efforts, which are substantial, the IRS, the industry and the states cannot solve this problem by ourselves. We need help. Congress has an important role to play. Adequate funding to the IRS is critical.
Just as important, Congress can help in the fight against refund fraud and identity theft by passing several legislative proposals. One of the most critical of these would accelerate the due dates of third-party information returns, such as W-2s. This would allow us to match these documents against income tax returns earlier in the tax filing process – and help us more quickly spot errors and potential fraud.
So that’s where we are on identity theft. Before leaving this subject, I think it’s especially important for this group to know that the IRS and its partners also agreed on the need to increase public awareness of what everyone should do to protect their personal information and keep it away from identity thieves.
This is where the return preparer community can help, by encouraging your clients to make sure they are protecting themselves from the many scams that are out there. We continue to see an increase in phone scams in particular. Callers pretend to be from the IRS in hopes of stealing money or identities from victims. There are a lot of variations – the caller may say you’re entitled to a huge refund, or make some kind of threat to induce you to give them bank account numbers or other personal information.
It’s important for taxpayers to understand how to tell the scammers from the IRS. The IRS will not make angry calls to demand immediate payment, nor will the agency call about taxes owed without first having mailed out a bill. We will not demand that someone pay taxes without giving them the opportunity to question or appeal the amount owed. And we won’t ask for credit or debit card numbers over the phone. We also will never threaten to bring in local police or other law-enforcement groups to have someone arrested for not paying.
As we look ahead to the upcoming filing season, I want to mention our ongoing efforts to ensure that preparers of individual tax returns have a minimum level of competency and adhere to professional standards. Taxpayers need to be confident that the preparer they hire knows enough about taxes to help them with their federal income tax returns.
That’s especially important now, because we have a very complex tax code, as everyone in this room knows. Also, the majority of taxpayers in this country use the help of a paid return preparer to do their taxes each year. So ensuring the know-how and filing season readiness of paid return preparers continues to be a top priority for the IRS.
For that reason, we launched our Annual Filing Season Program this past January. The program is aimed at preparers who have a valid Preparer Tax Identification Number, or PTIN, but who are not CPAs, attorneys or enrolled agents. This program generally involves voluntarily taking 18 hours of continuing education courses. This includes taking and passing a tax refresher course and the related test. I would add that anyone here who is in the program is getting a good start on their continuing education requirement by attending this Tax Forum.
Those who complete the course work receive a Record of Completion that’s good for the filing season. To participate in the program, each year preparers will have to complete the federal tax refresher course and other required continuing education. Last filing season, approximately 44,000 people participated in the program and received a Record of Completion.
One major policy change happening at the end of this year in relation to the program involves the ability to represent clients before the IRS. The change does not affect any preparer who is an attorney, a CPA or an enrolled agent. They continue to have full representation rights before the IRS.
Return preparers who are not in one of the categories I just mentioned have limited representation rights currently. They can represent a client on a basic account issue, or before Exam on an audit, or on an issue before the Taxpayer Advocate’s office, if they prepared and signed the return in question. After this year, those preparers will be able to maintain their limited representation rights only if they have a current Record of Completion from the Annual Filing Season Program.
The Director of our Return Preparer Office, Carol Campbell, will be making presentations during the Forum this week. I encourage you to attend one of those sessions and get more details on the Annual Filing Season Program and on our new policy regarding representation before the IRS.
I want to remind everyone that this voluntary program is only an interim step and does not get us where we want to go. We would much prefer to see Congress explicitly authorize the IRS to require minimum qualifications for all tax return preparers. This would benefit all of tax administration.
Another action we took in January to help taxpayers was to launch a new Directory of Federal Tax Return Preparers. This is a database on IRS.gov designed to help taxpayers verify credentials and qualifications of tax professionals in their area. The database can be sorted by type of preparer, including CPAs, attorneys, enrolled agents and others, including those who have participated in the Annual Filing Season Program. We believe taxpayers who decide to hire a professional to prepare their taxes should make sure to select that person carefully. This database will help them do that. If your only qualification is that you have a PTIN, you will not appear in the database.
Another important issue the IRS is addressing in advance of the next tax filing season is the Affordable Care Act. We are again preparing our systems for additional ACA changes that took effect this year. These provisions include those that generally apply to so-called applicable large employers, defined as those with 50 or more full-time and full-time equivalent employees and to health coverage providers.
Applicable large employers and health coverage providers will need to comply with an annual reporting requirement in early 2016. Applicable large employers have to provide information returns to the IRS and their full-time employees concerning what, if any, health insurance they offered in 2015 to those employees. Health coverage providers have to provide information returns to the IRS and to the individuals they cover.
Also taking effect for 2015 is the employer shared responsibility provision. Applicable large employers will be liable for a shared responsibility payment if they do not offer adequate, affordable coverage to their full-time employees and at least one of those employees receives the premium tax credit. The requirement is being phased in. For 2015 it will only apply to businesses with 100 or more full-time employees. It will be extended to businesses with 50 or more full-time employees in 2016.
Calculating the number of employees is especially important for employers that have close to 50 full-time employees or those whose workforce fluctuates throughout the year. If you or your clients need help with these calculations, or with anything in regard to the new requirements I’ve described, visit IRS.gov. There you will find a wealth of information on our special section devoted to the ACA.
I would also ask the tax preparer community to help us get the word out to business clients about the new reporting requirement. In addition, you will undoubtedly receive questions from individual clients who receive these forms from their employer or their health coverage provider. For preparers who want more detail on this, members of our ACA team will be making presentations on this and other ACA subjects during the Forum, so I encourage you to attend one of those sessions.
One important lesson we learned from our experience this past filing season was the value of providing as much information as possible ahead of time so that people would understand the ACA provisions at tax time. One good example of our efforts is our special section on IRS.gov devoted to the ACA that I mentioned a moment ago. This page had more than 5.6 million visits during the 2015 filing season, and the information on it helped individual taxpayers navigate provisions like the premium tax credit. We are making the same efforts to provide information this year to businesses, so that they understand and can comply with the new requirements for employers.
On the subject of the ACA, I want to talk a minute about the premium tax credit and the individual shared responsibility provision. As I’ve noted, we owe a debt to preparers who helped their clients understand what they needed to do this past filing season in regard to both provisions.
Although we now have one filing season under our belt, these provisions are still relatively new, and some taxpayers may still need some help with them when filing returns next year.
For example, some filers may be claiming exemptions from coverage or claiming the premium tax credit for the first time. Tax professionals will be able to help guide taxpayers through what they need to do in these circumstances. Commercial software programs will be able to help, too.
We also want to remind people receiving advance payments of the premium tax credit that they should contact their Health Insurance Marketplace if they have a change in circumstances in 2015. Any such change during the year can make a big difference between the Marketplace’s initial estimate of how much credit a person qualifies for and the final credit amount. By “change in circumstances,” I mean an increase or decrease in household income during the year, or anything that could change family size, such as marriage, divorce, birth or adoption.
So we strongly recommend that anyone with a change in circumstances during the year notify the Marketplace as soon as possible, so their information can be updated and the amount of their advance credit payments adjusted. That way, the total amount paid for the year will more closely match the final credit amount on the person’s tax return. We hope that tax preparers will help us advise their clients about the importance of updating the Marketplace about any changes as soon as possible.
Before leaving this subject, I also want to mention that we are continuing our efforts to ensure that individuals who received advance payments of the premium tax credit in 2014 meet the requirement to reconcile those payments on their tax return. The IRS is sending letters to remind taxpayers who received those payments but have not yet filed a return for 2014 that they should file as soon as possible this summer. That will ensure they can timely receive advance payments from their Marketplace going forward.
Another thing we’re concerned about for the upcoming filing season is the possibility that Congress will again enact a package of tax extender provisions late in the year.
Like last year, we will need to adjust our forms and systems for any tax provisions that Congress decides to extend, so I hope that any extender package will be passed as soon as possible, to give us maximum lead time to prepare for these changes. As the months tick by, we are continuing to keep a close eye on this situation. If it looks like we will have last-minute tax legislation again, we will keep you informed about the impact that may have on the upcoming filing season.
That wraps up what I wanted to tell you today. As you can see, we have many challenges ahead of us, not only for the upcoming filing season, but in the long term. The IRS will continue working with stakeholders, including the return preparer community, to meet those challenges and ensure we maintain a strong tax system and one that is truly fair for all taxpayers.
Thank you again for being here today, and thank you for your service to taxpayers and the nation. Please take some time to go to the exhibit hall and meet with the folks down there. I hope you enjoy the rest of your tax forum.