[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]
REFORMING HOW THE IRS RESOLVES
TAXPAYER DISPUTES
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HEARING
BEFORE THE
SUBCOMMITTEE ON OVERSIGHT
OF THE
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTEENTH CONGRESS
FIRST SESSION
__________
SEPTEMBER 13, 2017
__________
Serial No. 115-OS07
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Printed for the use of the Committee on Ways and Means
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
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U.S. GOVERNMENT PUBLISHING OFFICE
33-617 WASHINGTON : 2019
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COMMITTEE ON WAYS AND MEANS
KEVIN BRADY, Texas, Chairman
SAM JOHNSON, Texas RICHARD E. NEAL, Massachusetts
DEVIN NUNES, California SANDER M. LEVIN, Michigan
PATRICK J. TIBERI, Ohio JOHN LEWIS, Georgia
DAVID G. REICHERT, Washington LLOYD DOGGETT, Texas
PETER J. ROSKAM, Illinois MIKE THOMPSON, California
VERN BUCHANAN, Florida JOHN B. LARSON, Connecticut
ADRIAN SMITH, Nebraska EARL BLUMENAUER, Oregon
LYNN JENKINS, Kansas RON KIND, Wisconsin
ERIK PAULSEN, Minnesota BILL PASCRELL, JR., New Jersey
KENNY MARCHANT, Texas JOSEPH CROWLEY, New York
DIANE BLACK, Tennessee DANNY DAVIS, Illinois
TOM REED, New York LINDA SANCHEZ, California
MIKE KELLY, Pennsylvania BRIAN HIGGINS, New York
JIM RENACCI, Ohio TERRI SEWELL, Alabama
PAT MEEHAN, Pennsylvania SUZAN DELBENE, Washington
KRISTI NOEM, South Dakota JUDY CHU, California
GEORGE HOLDING, North Carolina
JASON SMITH, Missouri
TOM RICE, South Carolina
DAVID SCHWEIKERT, Arizona
JACKIE WALORSKI, Indiana
CARLOS CURBELO, Florida
MIKE BISHOP, Michigan
David Stewart, Staff Director
Brandon Casey, Minority Chief Counsel
______
SUBCOMMITTEE ON OVERSIGHT
VERN BUCHANAN, Florida, Chairman
DAVID SCHWEIKERT, Arizona JOHN LEWIS, Georgia
JACKIE WALORSKI, Indiana JOSEPH CROWLEY, New York
CARLOS CURBELO, Florida SUZAN DELBENE, Washington
MIKE BISHOP, Michigan EARL BLUMENAUER, Oregon
PAT MEEHAN, Pennsylvania
GEORGE HOLDING, North Carolina
C O N T E N T S
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Page
Advisory of September 13, 2017 announcing the hearing............ 2
WITNESSES
Ms. Kathy Petronchak, Director of IRS Practice & Procedures,
alliantgroup, LP............................................... 6
Mr. Pete Sepp, President, National Taxpayers Union & NTU
Foundation..................................................... 19
Mr. Byron Shinn, Founder and Managing Partner, Shinn & Co........ 41
Ms. Chastity Wilson, Principal, National Tax Office,
CliftonLarsonAllen LLP......................................... 48
PUBLIC SUBMISSIONS FOR THE RECORD
Coalition for Effective and Efficient Tax Administration (CEETA). 74
Fitzgerald Kit Trucks & Sales LLC................................ 79
Taxpayer Confidentiality Disclosure Waiver..................... 82
John Klotsche.................................................... 83
National Association of Enrolled Agents.......................... 85
Software Finance & Tax Executives Council (SOFTEC)............... 90
Chief Judge L. Paige Marvel, United States Tax Court............. 94
IRS REFORM: RESOLVING TAXPAYER DISPUTES
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WEDNESDAY, SEPTEMBER 13, 2017
U.S. House of Representatives,
Committee on Ways and Means,
Subcommittee on Oversight,
Washington, DC.
The Subcommittee met, pursuant to call, at 2:10 p.m., in
Room 1100, Longworth House Office Building, Hon. Vern Buchanan
[Chairman of the Subcommittee] presiding.
[The advisory announcing the hearing follows:]
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Chairman BUCHANAN. The Subcommittee will come to order.
Welcome to the Ways and Means Oversight Subcommittee
hearing on ``IRS Reform: Resolving Taxpayer Disputes.''
Before I begin my official statement, I would like to
recognize the extraordinary effort of two of our witnesses
today who made it up here from Florida.
I think you drove from Orlando. So that is pretty
impressive.
Both Mr. Shinn and Ms. Wilson came from the great state of
Florida. Thank you very much for your determination to be here.
I know it wasn't easy.
And let me pause for a moment to thank all our first
responders, local government officials, and community members
who stepped up and responded to Hurricane Irma in my home state
of Florida. It is impressive to see everyone working together.
I am confident that we will continue to work together in the
aftermath of the storm as well.
Today's hearing is another important step in the process of
considering reforms to the IRS. I have stated previously I do
not view this effort as an opportunity to degrade or discredit
the good work being done by IRS employees.
However, I am a big believer in continuous improvement.
That has been my philosophy in business. We can always be
better. In government, like business, we should always be
looking for ways to improve.
In a system of voluntary tax compliance, even with the
simplest of tax codes--and ours is currently not one of those--
there are bound to be disputes between taxpayers and the IRS.
What we hope to learn today is about the experience of those
taxpayers.
These are folks that have been in the trenches working with
a lot of those taxpayers involved in resolving disputes with
the IRS. And whether there are ways to improve the current
process, I believe there will be.
Nearly 20 years ago, the last time significant reforms were
made to the IRS, one of the key legislative priorities for
Congress was the creation of an independent appeals function.
As recently as two years ago, Congress reaffirmed the
importance of an independent forum when the right to appeal to
such a forum was included in the Taxpayer Bill of Rights and
codified as a responsibility of the Commissioner. Ensuring the
independence and the availability of administrative review
process for taxpayer disputes remains a top priority of this
Subcommittee.
In addition to being independent, dispute resolution
options need to be accessible and efficient. The process is
failing if only large businesses with deep pockets feel
equipped to dispute a determination made by the IRS.
Individuals and small businesses should not have to weigh the
cost of hiring outside help against paying the assessment.
For most taxpayers, their only interaction with the IRS is
when they file their taxes once a year. But when the taxpayers
find themselves in a dispute with the agency, they deserve a
fair and prompt process.
I look forward to working with the Ranking Member on these
issues and to hearing from our witnesses as we continue our
efforts to examine reforms to the IRS.
I now yield to the distinguished Ranking Member from
Georgia, Mr. Lewis, for the purposes of an opening statement.
Mr. LEWIS. Well, thank you, Mr. Chairman, for holding this
hearing on resolving taxpayers' disputes with the Internal
Revenue Service.
I welcome you back to Washington, Mr. Chairman. And on
behalf of the citizens of Georgia, and especially the citizens
of the Fifth District, we were able to welcome hundreds and
thousands of people from Florida.
I went into a parking lot in downtown Atlanta on Saturday,
and there were so many cars from Florida. And people had their
dogs, walking their dogs through the parks, from Florida. We
are neighbors.
And I want to, in particular, welcome Ms. Wilson and Mr.
Shinn. I have relatives that live in Fort Lauderdale, and the
only thing we had happen in my district was some, for the most
part, pine trees coming down. I want to thank you for being
here today.
Before we begin, Mr. Chairman, I would like to take a
moment to extend my condolences to you and the millions of
Americans who were impacted by the recent hurricanes in the
Caribbean and the Southern States.
As you know, the hurricane damaged homes, downed trees,
closed roads, and left about 1 million residents without power
in my home State of Georgia. Now our citizens, our people,
begin the difficult process of rebuilding their homes, their
communities, and their lives. And I hope this committee will
work together to do all we can to assist the recovery efforts.
Mr. Chairman, I have said it before and I will say it
again: We must approach this effort to reform and improve the
IRS with a great deal of care and thoughtfulness. I hope we
will take our time to develop bipartisan solutions that serve
the best interests of both taxpayers and the agency.
For many years, I have cautioned that we cannot get blood
from a turnip. As you know, Congress cut the IRS budget by
almost $1 billion since 2010. Over the last 3 years, the budget
for the IRS Appeals Office dropped 11 percent, and there are
about 24 percent fewer hearing officers.
Today, we will learn more about how these deep budget cuts
have affected the ability of the agency to resolve disputes
with taxpayers. Our citizens expect and deserve timely and
efficient services. Simply said, Mr. Chairman, taxpayers will
not get the level of service that they expect and deserve until
we provide adequate funding to this agency.
As you know, this is the Subcommittee's fourth hearing to
explore how we can improve the IRS. We have remained bipartisan
and explored a good governance path to examine how the IRS
operates and to identify possible improvement.
I hope and pray that our work product will be a model for
our colleagues. This afternoon, we will also explore how to
improve what can be a long and complicated appeals process.
Together, we will listen and learn about possible remedies.
Some may suggest expanding the number of States that have
permanent hearing officers, ensuring the independence of
taxpayer conferences, and allowing taxpayers to request face-
to-face conferences throughout the appeals process. Above all,
Mr. Chairman, I hope we will continue to work together, as we
have all year, to explore and address these issues.
In closing, Mr. Chairman, I look forward to hearing from
our witnesses and learning more about their experiences with
the agency. Again, Mr. Chairman, I want to thank you, my
friend, for holding this hearing.
Chairman BUCHANAN. Thank you, Mr. Lewis. And I want to
thank you for your thoughts and prayers. We do have a lot of
our family and people who went to Georgia and other states, and
I appreciate your thoughts on that.
And you know you have my commitment to work together on a
bipartisan basis. We want to improve this together. There is a
lot of work to be done. So I look forward to working with you.
Without objection, other Members' opening statements will
be made part of the record.
Today's witness panel includes four experts: Kathy
Petronchak, director of the IRS Practice & Procedures at the
alliantgroup; Pete Sepp, president of the National Taxpayers
Union; Byron Shinn, in our district--we are excited to have him
and his lovely wife here today--he is the founder and managing
partner of Shinn & Co., and I think he probably has 35 years of
experience dealing with dispute resolution with the IRS;
Chastity Wilson, principal of the National Tax Office of
CliftonLarsonAllen, from Orlando, and a member of the AICPA.
The Subcommittee will receive your written statements, and
they will be made part of the formal record. Each of you has 5
minutes to deliver your oral remarks. We will begin with Ms.
Petronchak.
You may begin when you are ready.
STATEMENT OF KATHY PETRONCHAK, DIRECTOR OF IRS PRACTICE &
PROCEDURES, ALLIANTGROUP, LP
Ms. PETRONCHAK. Chairman Buchanan, Ranking Member Lewis,
and Members of the Subcommittee, thank you for inviting me to
testify. It is an honor to provide comments today.
I interact with small and medium-sized businesses in my
work with alliantgroup. I also spent 29 years at the IRS and
feel this gives me a unique perspective into the Examination
and appeals process. My testimony focuses on challenges that
taxpayers face when dealing with the IRS and what IRS can do to
improve the examination and appeals process.
I raise six issues in my written testimony, and I would
like to highlight two of those issues. The first issue is the
appeals process. Before heading to court, the final
administrative step a taxpayer can take to contest an adverse
determination by a revenue agent is through appeals.
Appeals is important for so many businesses seeking a fair
review of their tax issues without having to incur additional
costs to go to court. Taxpayers are appreciative of the
opportunity to attend the Appeals conference in person.
They are not thrilled about the recent change by Appeals,
indicating that they may not be granted an in-person meeting.
Appeals has made telephone and virtual conferences first
options for an appeal, only granting in-person conferences in
limited circumstances.
We believe that not granting taxpayers an opportunity to
have an in-person meeting would be highly prejudicial to
taxpayers, restrict the ability of Appeals officers to
adequately judge the credibility of witnesses, and make the
conference more difficult in situations where the appeal is of
highly technical and highly evidentiary-focused cases.
While we have seen Appeals officers flexible in granting
in-person conferences, we believe that taxpayers should have a
fundamental right to meet Appeals face to face. This in-person
conference may be the only way a taxpayer believes there is an
impartial resolution with a full understanding of the facts
involved.
Another issue emerging in Appeals is the increased
involvement of IRS Compliance employees in Appeals meetings.
This change has created a perception for taxpayers that they
may not get an independent hearing and decision as afforded by
the Taxpayer Bill of Rights.
We believe the only involvement Exams should have at
Appeals is in a preconference meeting. At a preconference, the
originating function can attend an Appeals conference to
present their views on the issues, the taxpayer's protest and
assessment of litigating hazards in accordance with ex parte
communication rules.
In a preconference setting, Exam would leave after their
presentation. But as of late, rather than leaving at this
point, Exam has been invited by Appeals to stay for the
taxpayer's presentation. When this happens, the entire appeals
atmosphere is altered, and there are opportunities for this to
turn into an extension of the examination process for a
taxpayer.
The independence of Appeals is hindered when Exam plays too
great of a role in the appeals process. A representative
recently described a situation where, in a preconference, it
became clear that Exam had not fully addressed the position the
taxpayer had brought forward in its response to the Exam team.
After hearing the taxpayer orally present their position at the
Appeals meeting, the Exam team made another 24-page submission
to Appeals to attempt further support for their position on the
issue, taking an alternative approach. It seems patently unfair
that Exam can attempt to continue their process when the case
is assigned to an independent forum to make a decision.
We disagree with Appeals having unilateral decisionmaking
over Exam participation in a conference. Taxpayers who feel as
if they have already been through a grueling process with Exam
should be able to have the peace of mind that their case is
being given a fresh look by Appeals and that the examination is
over.
Today's comments on the issue of alternative dispute
resolution focus on the IRS Fast Track Settlement program. This
program was created to provide an expedited dispute resolution
option for taxpayers to mediate their disputes during an
examination with an Appeals official acting as a mediator. The
use of Fast Track has the potential to be a highly effective
tool when both parties come to the table willing to reach an
agreement. Taxpayers and their representatives welcome the
opportunity to resolve as many issues as possible at the lowest
level in a cooperative manner. This same sense of urgency
should be felt by the IRS.
In closing, I commend the committee for its work and
oversight in ensuring that taxpayers receive fair treatment and
good service from the IRS. Alliantgroup looks forward to
working with the committee to further improve tax
administration, and I would be glad to take your questions.
[The prepared statement of Ms. Petronchak follows:]
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Chairman BUCHANAN. Thank you.
Mr. Sepp, you are recognized.
STATEMENT OF PETE SEPP, PRESIDENT, NATIONAL TAXPAYERS UNION &
NTU FOUNDATION
Mr. SEPP. Mr. Chairman, Mr. Ranking Member, Members of the
Committee, a number of my predecessors have actually testified
in this very room on taxpayer rights issues, so I am
particularly honored that you would ask me here to follow in
their footsteps.
And we need to follow in the footsteps of all of our
predecessors in developing a bipartisan solution to many of the
problems that have cropped up since enactment of the IRS
Restructuring and Reform Act of 1998.
One of my predecessors, Bob Kamman, put it this way: He
called it taxpayers triage. What you need are a number of
steps, a number of options, in resolving problems between the
agency and taxpayers that provide a range of responses.
One of them is prevention, of course. We can simplify the
tax system. We can educate taxpayers about their rights in
advance so they know going into the process of interacting with
the IRS what to expect, and perhaps problems can be resolved at
that level, the preconference level, for example.
Then there is basic care. What we have now is the appeals
process and a very nascent alternative dispute resolution
process. We are going to hear a lot from the witnesses today
about some of the malfunctioning systems within Appeals, and
especially with the recent evolution in the large business and
international division of strategies, like designating cases
for litigation, that can be very harmful to the audit process.
I hope we can discuss that in further detail later.
But the rise of alternative dispute resolution mechanisms
around the world and its relatively flat usage here in the
United States--actually declining at the Appeals level right
now--suggests that we need very serious reforms if we are going
to make that process workable in the future.
The third level of triage really is intensive care. That is
when taxpayers and the IRS have to litigate an issue. And
there, taxpayers' access to the courts beyond the tax court
level is still highly problematic. Everything from the Anti-
Injunction Act to the Declaratory Relief Act essentially
prevents taxpayers from enforcing their rights in court in a
meaningful manner. Largely, their choices are confined to
litigating for damages after the acts have already been
committed by the agency that have deprived a taxpayer of his or
her income or right to earn.
The fourth level is essentially post-op observation, as I
would call it, oversight. Now, current plans in several of the
tax reform options being discussed would do away with the IRS
Oversight Board. There are flaws in the Oversight Board
certainly, but I would urge this committee to very carefully
consider alternatives to the current IRS Oversight Board, which
is essentially paralyzed due to a lack of a quorum.
We really need to establish and maintain that kind of
consistent oversight in some manner. Specifically, I would make
a few recommendations, and, again, we can further discuss these
in detail.
The foundation for another taxpayer rights package really
ought to be based on H.R. 3220, the Preserving Taxpayers'
Rights Act. It is a bipartisan bill. It codifies the right to
appeal, and it establishes a more business-like working
relationship between the IRS and taxpayers in audits.
This will apply to large businesses, small businesses,
individuals across the board. Section 3 of that bill, which
essentially directs the Secretary to begin developing more
dispute resolution procedures at Appeals, would pave the way
for more effective use of Alternative Dispute Resolution (ADR)
in a number of situations.
There are many, many other suggestions I could make that we
should look at. The Taxpayer Bill of Rights Enhancement Act
just introduced in the Senate yesterday, S. 1793, which would
expand some of the assistance in the Volunteer Income Tax
Assistance program, expanding low-income taxpayer clinics. All
of these things need to be put into a package to work together
to enhance the progress we have made in Taxpayer Bill of Rights
I, T II, and the IRS Restructuring and Reform Act. And this is
the committee where it all starts.
Every single piece of important IRS reform legislation
began with Members of this Committee, your predecessors, and
you now, such as with the RESPECT Act that just passed, coming
together in a bipartisan fashion to do better for taxpayers. We
can do it. We must do it.
I thank you for your leadership.
[The prepared statement of Mr. Sepp follows:]
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Chairman BUCHANAN. Thank you.
Mr. Shinn, you are recognized.
STATEMENT OF BYRON SHINN, FOUNDER AND MANAGING PARTNER, SHINN &
CO.
Mr. SHINN. Thank you, Chairman Buchanan, Ranking Member
Lewis, and Members of the Subcommittee. Thank you for the
opportunity to discuss reforming how the IRS resolves taxpayer
disputes.
As a practicing accountant for over 38 years and a Florida
CPA, I have seen a lot of change.
Chairman BUCHANAN. Could you speak up a little bit more in
the mike so everybody can hear?
Mr. SHINN. In my opinion, our focus should be taxpayer
service first, improve tone with access, consistent controls,
and require Fast Track steps.
I have a unique perspective as I have been involved in
oversight of the Florida CPAs as a member of the Board of
Accountancy's Probable Cause Panel for well over a decade. And
most practitioners work hard to get it right. It is the handful
of marginal practitioners and aggressive taxpayers that try to
push the envelope. These are the practitioners and taxpayers
that need to be reviewed.
First, I would like to discuss correspondence audits. They
have been expanded in lieu of field exams for many individual
returns. These exams require responses in a specific period of
time. However, the IRS responses are taking considerably more
time than the taxpayer is given.
These exams have a high probability of no change once the
IRS receives the submitted responses. In several instances, the
taxpayer's rights have been ignored by the issuance of 15-day
letters and then, shortly thereafter, 90-day notice of
deficiencies, thereby ignoring the 30-day letter and which
grants the rights of the taxpayer for an administrative hearing
and appeals, and that also breaks their Taxpayer Bill of
Rights.
This also prevents the Fast Track Settlement opportunity.
Therefore, I believe a standard, that it should exist, that the
process must be maintained, and the Service, when it jumps over
process, should lose the right to pursue additional revenue:
Follow the rules or lose the adjustment. We also should require
Fast Track to prevent the circumstances that are existing
today.
I next want to speak about field exams. The process has
been very taxpayer-unfriendly with a litigious and enforcement
tone. Over my 38 years, we have reached a new low regarding the
respect that the taxpayers and their professionals have with
the Service. It is as if the taxpayer is guilty and has to
prove the IRS wrong. The agents are doing several audits at the
same time, and they tend to start and stop during the audit,
many of them taking much more than 12 months. This just is not
right.
We have new rules that are also killing the system. An
example is the new partnership exam rules that have brought the
process to a state of total chaos. In order to close issues and
reduce the time necessary, we talk about the call centers and
the local office access. Unfortunately, the wait time on the
call centers is extremely long.
Overall, my experience is it has been good once you get to
a qualified person. This shows how the Service needs to open up
access. The Service should increase the call center available
hours, making them earlier, later, and on weekends.
The Service has a very good e-service process. However,
this has been reduced due to budget cuts. This needs to be
expanded back in a much broader sense.
The local offices no longer allow walk-ins. This is just
not--sorry. It is not taxpayer right. It is just not taxpayer
first. They need to have reasonable access.
Another area of concern is foreign disclosure exams. We are
seeing a situation growing with the continued disclosure of
foreign assets and bank accounts going to Appeals, and the
Appeals officers feel that they cannot settle, so the issue
goes on to offshore technical advisers. Then it ends up all or
nothing. We need to give them guidance on settlement.
Tax law complexity has created opportunities for debate.
The Code in its current state remains the number one problem
facing both the Service and the taxpayers. Since most of our
career has been with small and medium-sized business, I can
talk specifically about the challenges in compliance.
Identity theft. Since many ID thefts were in Florida, I was
also a victim. We should require all taxpayers to have PIN
numbers. My information was stolen through e-services on a data
dump, and that shouldn't happen. If we had all taxpayers with
PINs, that wouldn't happen.
And, lastly, I think that I would like to recommend a
separate task force that answers to you, Congress, to assist
the National Taxpayer Advocate in developing change in the
business structure and processes.
Thank you very much.
[The prepared statement of Mr. Shinn follows:]
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Chairman BUCHANAN. Thank you.
Ms. Wilson, you are recognized.
STATEMENT OF CHASTITY WILSON, PRINCIPAL, NATIONAL TAX OFFICE,
CLIFTONLARSONALLEN LLP
Ms. WILSON. Chairman Buchanan, Ranking Member Lewis, and
other Members of the Subcommittee, thank you for the
opportunity to testify.
The AICPA applauds your efforts to address the importance
of the IRS resolving taxpayer disputes in a timely, efficient,
and cost-effective manner. Today, I would like to share our
thoughts on refining the independence and efficiency within the
IRS dispute resolution process.
I will also address the importance for the IRS to
understand the taxpayer's perspective and deliver customer-
focused service.
First, let's start with penalties. Upon receipt of an IRS
notice, taxpayers or their representatives may determine a
reporting error was made. However, if the taxpayer made the
effort to comply with the reporting requirements, the taxpayer
may request relief from penalties.
Frequently, the initial IRS response is a routine denial.
This process is currently handled independently within each of
the primary IRS divisions. We recommend that the IRS undertake
a review of this process across the agency to identify
necessary training to ensure a consistent and fair treatment of
all taxpayer disputes.
Next, let's discuss Appeals. Appeals is the primary forum
for taxpayers' disputes. Their mission is to resolve tax
controversies without litigation on a fair and impartial basis.
We appreciate them holding conferences which provide a
meaningful and unique opportunity for taxpayers to present
their positions.
In October of 2016, Appeals made several changes to its
conference procedures, which arguably impact the ability or
perception to independently and objectively help taxpayers. We
recommend that, one, the IRS limit settlement conferences to
the appropriate Appeals personnel; and two, they provide
taxpayers with the option of a face-to-face conference.
In one settlement conference, the Appeals officer openly
asked the Exam team what they thought was a fair settlement. My
client asked, how is it possible for Appeals to maintain their
independence when they are seeking the opinion of the same IRS
employee who examined them?
Although, in reality, IRS employees may or may not have
influence over the appeals process, it is hard to view them as
objective when other IRS employees are involved. We suggest
that, once the taxpayer's presentation to Appeals begins, they
should limit the meeting participants to the appropriate
Appeals personnel and the taxpayer.
In another Appeals case, payroll obligations were not met
until my client discovered the error. The Appeals officer said
it took him a whole 5 minutes to determine there was no
reasonable cause and asked not to discuss it.
In this particular situation, a conversation, much less a
face-to-face conference, was considered unnecessary from his
perspective. However, from the client's perspective, he was not
heard. He was unfairly denied the right to present his case.
While it is possible to resolve some issues over the telephone,
we think it is important that taxpayers have the option of a
face-to-face conference.
For larger tax disputes, cases are assigned a team of IRS
Appeals officers and a case leader who is designated settlement
authority. In these situations, we urge the IRS to provide
truly independent settlement authority to these case leaders
and eliminate the approval process that was recently added.
Finally, a customer-focused service approach should extend
to all IRS services. It will help reduce disputes in the first
place. For example, the IRS should create a new dedicated,
executive-level practitioner services unit that would
centralize and modernize its approach.
With a mindset of understanding the taxpayers' perspective,
the Service will enhance voluntary compliance and increase the
public's confidence in the integrity of the Service.
We appreciate the opportunity to testify. I will be happy
to answer any questions.
[The prepared statement of Ms. Wilson follows:]
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
Chairman BUCHANAN. Thank you, all of you, for your
excellent testimony.
I will now proceed to the question and answer session. In
keeping with past precedent, I will hold my questions until the
end.
I now recognize the gentleman from Michigan, Mr. Bishop.
Mr. BISHOP. Thank you, Mr. Chairman.
And thank you to the panel for your time and expertise. I
appreciate it. Lots of questions. So little time.
Is it Ms. Petronchak? Pretty good? Close? Okay. Good. You
indicated in your written testimony--I know you didn't have
much time today, but you indicated in your written testimony
that there were procedures in place by the IRS during an audit
that would give larger businesses an advantage over smaller
businesses, specifically having to do with transparency.
Can you elaborate on that? And can you tell us, is this
something that the IRS is doing as a result of the Code, or is
this an arbitrary kind of application of the rules?
Ms. PETRONCHAK. So, with regards to that, Congressman
Bishop, in my testimony, in the Large Business and
International Division, they have put out procedures in a
publication and indicated that, when you are issuing
information document requests to taxpayers, that you have a
discussion. You identify what the issue is, and you talk about
what documents you are going to request so that the taxpayer
has an opportunity to have a discussion with the agent and say:
Well, maybe I don't have those kinds of records; these might be
more pertinent. But they understand what the IRS is looking at
and where they plan on going with their examination.
In the Small Business Division, that just doesn't happen.
What happens is you will get, you know, a letter saying, you
are under exam. And then here is a 4-page document request with
everything but the kitchen sink pretty much on the initial
document request.
And then, instead of, as in Large Business Division, when
that response is made to that document request, it is expected
in Large Business that they would review that response and then
have a discussion with the taxpayer to say, we think it is
complete or it is not complete and it is an ongoing discussion.
In Small Business, you are more likely than not going to
find out the results of their review at the end of an
examination, which is way too late for a taxpayer to be
understanding what issues are in dispute and even have the
opportunity to use alternative dispute resolution.
Mr. BISHOP. Well, it begs a question then: Why are they
treated differently? And, again, is this a result of the Code,
or is this something that the IRS is doing independently at its
discretion?
Ms. PETRONCHAK. Yes. Congressman Bishop, it is an
administrative practice in the Large Business Division. So it
is not required by Code. But certainly, although that
procedure, you know, some would argue could be improved, it is
a drastic change and different from that that is afforded to
small and medium-sized businesses.
Mr. BISHOP. I still don't understand why. You all have done
this before. Does anybody understand why small businesses are
treated differently than large businesses in this area? It just
seems like it is----
Ms. PETRONCHAK. I personally don't see a reason why they
could not integrate some of those procedures into their
examination practices. You know, having the discussion upfront
meets the Taxpayer Bill of Rights to be informed and know what
is going on, so I certainly don't see why it could not become a
part of their work processes.
Mr. SEPP. I would agree that it should. Although, I would
say that there has been some negative feedback, even from folks
who have experienced audits in LB&I that the IDR requests are
often poorly focused. So this might be a problem that is not
only with small businesses but with the procedural latitude
given to the IRS.
Mr. BISHOP. You indicated that the non-in-person exam or
the Appeals Officer, is the expert for the IRS in the room with
the examiner?
Ms. PETRONCHAK. So it is actually an Appeals meeting, and
it is a telephone or they have moved to virtual conferences in
some instances. The Appeals officer is in the room. They may
have a technical specialist. And under the current rules, they
could invite Exam to be on the phone as well. So that is a real
concern, is that, well, who is on the phone. You have got so
many parties. You don't know who is speaking, whose perspective
are you hearing.
Mr. BISHOP. Is there a problem with ex parte communication
in-house?
Ms. PETRONCHAK. That does not violate ex parte
communications because the way ex parte works, if the taxpayer
is invited to attend the conference where Exam or Compliance
will be present, then it is not a violation of ex parte.
Mr. BISHOP. I get that in practice. In theory, you are 100
percent right. But in practice, it seems that that would be an
absolute recurring problem.
Ms. PETRONCHAK. It could be.
Mr. BISHOP. And one other thing, if I might, Mr. Chair, is
the appeal process de novo, or is it a continuing process--does
your appeal take up all the evidence? Do they consider
everything or only that which was considered in the previous
review?
Ms. PETRONCHAK. So, in Appeals, they should be considering
the information that was developed and presented to them by
Exam as well as what the taxpayer submitted and then making an
independent decision.
When they changed--I think Ms. Wilson referenced the IRM
change--they said: We are not going to hear new facts, new
evidence in Appeals. We are only going to rely on what is in
the file to make our decision. So it should be exactly what is
in front of them.
Mr. BISHOP. Thank you very much.
Thank you, Mr. Chair.
Chairman BUCHANAN. Thank you.
I now recognize the Ranking Member, Mr. Lewis, from
Georgia.
Mr. LEWIS. Thank you very much, Mr. Chairman.
Ms. Wilson, thank you for being here today. I understand
that you are the head of the national tax office at your firm.
What type of issues are taxpayers trying to resolve when they
come to your firm?
Ms. WILSON. Great question.
Mr. LEWIS. Small issues? Big issues? Global issues?
Ms. WILSON. That is the unique thing about our firm. I
would say they run the gamut, so they are all the way from
small $1,000 penalty issues up to very large exams. So, you
know, we have a very unique client base, and we target mid-
sized business, which by the nature of that, we have all range
of issues that we see.
You know, recently, the significant issues I see are around
penalties and penalties appeal. We have a lot of clients or
clients in our base that, you know, have been onslaughted with
information return penalties. And so we try to help them manage
through that process.
Mr. LEWIS. In your experience, what are the biggest
challenges you and your clients experience in resolving tax
issues with the agency?
Ms. WILSON. That is a good question. You know, I think the
largest issue is just being heard, making sure that you----
Mr. LEWIS. Do you have a hard time, a difficult time in
sometimes just being heard, just getting a face-to-face
meeting?
Ms. WILSON. Exactly. Exactly. And Appeals, as we discussed,
as I discussed in my testimony, has dramatically changed that
process. I have been doing this for many, many years where I
focus just on IRS----
Mr. LEWIS. You haven't been doing it. You are too young to
be doing it for many, many years, now.
Ms. WILSON. But, you know, face-to-face was the--that was
the one time you got to sit down and face the IRS and really
talk about the issues. And from a client's perspective, they
felt like they were being heard because they sat across the
table from that Appeals officer, and they could see them
listening. They could see the head nodding.
And so, even if it didn't come in their favor, they felt
like they were being heard. When you turn to these telephone
conferences, which are now the standard practice, you know, you
remove that.
And they question whether the Appeals officer--my clients
do--are even listening, because you get to the end of the
conference and--and I am not saying in every case, because a
lot of times this process does work well. But in some cases,
the client just walks away and says: I don't even think they
were listening; in fact, I heard keystrokes on the computer,
right.
And so, you know, I think, from the AICPA, that is one of
our recommendations, is you really need to look at this new
procedure. It is administrative. But you really need to look at
it and say: What are we doing to taxpayers' services here? Are
our taxpayers really feeling like they are being heard, because
this is their last opportunity, Ranking Member? When they get
to Appeals, their next option is litigation. And I can tell
you, in my client base, 99 percent of them are not going to
want to take it to litigation because, again, maybe the dollar
amount isn't high enough, or they are just frightened by the
whole concept of having to go to tax court.
Mr. LEWIS. Are you suggesting or recommending that we need
to do more to humanize the IRS and not make it so distant, this
unbelievable agency at someplace? How do we go about doing
that? What are your recommendations? What are you suggesting?
Yes, Mr. Shinn.
Mr. SHINN. Ranking Member, that is why I got so choked up
about doing it in person. You know, there are people that can
afford to go to an enrolled agent or a CPA, but there are a lot
of taxpayers out there that don't have that access. And having
the opportunity to walk in and talk at the local agent office
level is so important. And having that face-to-face humanizes
the circumstances and the facts in the situation, and you
actually feel what is going on.
Now, granted, we all understand that there are some States
that don't even have an Appeal officer in them, and so Appeal
officers have to come from out of State. So, like in Alabama
and Mississippi, they are coming from out of State just to deal
with it. So we have a staffing issue.
But having that conversation with the Appeals officer is a
real opportunity to solve. And having the process, the process
that you talked about with the small business audits, it is
very much behind a dark curtain, and it is a very scary
proposition.
When those taxpayers get those letters and those long, 4-
page requests, it is intense and a very scary moment. And we
don't get the chance, like with a large business audit, to have
a face-to-face with the team.
And then, not being able to pick up the phone and call, we
have situations where you will go on hold for over an hour, and
it will be at the end of the day. And at 4:30, they will pick
up the phone and put it back down again, and you restart the
next day. That is not taxpayer-friendly.
Mr. LEWIS. Thank you.
Thank you, Mr. Chairman. I yield back.
Chairman BUCHANAN. Thank you.
The gentleman from Pennsylvania, Mr. Meehan, you are
recognized.
Mr. MEEHAN. Thank you, Mr. Chairman.
And I thank each of the panelists for your service and
dedication, because it is clear that you are here as voices for
people who feel that they have--if they are not abiding by the
rules, they wonder sometimes what is the technicality. They are
not people who are out there deliberately trying to skirt the
rules or beat the system.
There is a place for those who are deliberately
recalcitrant, but so many of us are just caught in the melee.
So I have some questions about trying to get your
interpretations to make this a little better. It just seems so
much of it is tied to a personal relationship, a sense that
somebody is actually listening to me, and let's just resolve
this thing while we are here.
I have a couple of questions. One had to do--and I think
Mr. Shinn, it was you who was saying that there were--or, Ms.
Wilson, it was you, according to my notes--that there were
recording errors, penalty situations where there would be
appeals, and they were just getting to be routine noes.
Now, when I was a prosecutor and you had a case, you might
do a declination or you would do a prosecution memo, but
whenever there was a decision point, it was justified. Even
though it was all internal in the--should we be requiring that
if there is an original inquiry and there is a routine ``no''
set out, that there is a justification that you can know that
somebody has actually analyzed the file and has said that there
is a reason why we are just saying no right now?
Ms. WILSON. I would absolutely agree with you that there
should be a requirement to, you know, document what the
justification for denial was. And, again, you know, there is
many a time where we do get the denial, and it does appear
somebody has reviewed it because they have put specific facts
in there.
Mr. MEEHAN. But you are comfortable with that because at
least you know you can counsel your client: Here is what it
is----
Ms. WILSON. Exactly. But there have been instances where
clearly it wasn't read because they articulated--you know the
way--and maybe Ms. Petronchak can speak to this, but they will
take paragraphs. They have got modelled paragraphs that they
can pull from a system to do a notice to a specific taxpayer.
And it has been obvious that they just pulled those paragraphs
and are dumping them into this letter----
Mr. MEEHAN. Pro forma.
Ms. WILSON [continuing]. And it is very irrelevant to what
was even discussed.
Mr. MEEHAN. So what is the effect on the taxpayer? It just
draws it out even further. Have penalties and fines been waived
during this period, or is there further accumulation during the
period in time that you are appealing this process?
Ms. WILSON. So, yeah, interest continues to accrue while we
are going through this process.
Mr. MEEHAN. So the clock is ticking against the person who
is appealing?
Ms. WILSON. Yes. And so, you know, that is a discussion you
have to have with your clients. But then, you know, there have
been instances where, you know, your client will come to you
and say: Do I pay now because, you know, I don't want to accrue
all the interest?
But then there is a different process. You have to file a
different form, the form 843, to make a refund claim, and it is
a different process. And you will end up in the same place,
but, you know, there are a lot of considerations to take in
when you are counseling clients of what path to go down.
But, you know, back to your point, I think the impact it
has on my clients is that we are built on a voluntary
compliance system. And, you know, what I have seen in some of
this penalty administration recently just is that clients
become very discouraged because they truly thought they were
being compliant. And then when they get this notice that looks
like they weren't even really looked at, it can be very
discouraging to them.
Now, the positive note I will say is that, once we get to
the appeals process in the penalty arena, a lot of times we do
have success there. But it is that routine--it just seems to be
when you make your initial request, it is just the routine----
Mr. MEEHAN. Well, maybe you can--and that appeals process,
because that would be presuming we get to that point where you
actually have somebody and now you are talking--but I am
intrigued by the concept.
I think, Mr. Shinn, you were talking about it where you
believed that the presence of the examiner also at the appeal
was creating kind of a piling on, and yet I wonder to the
extent that if you are actually trying to get to a resolution,
should there be some capacity for the person that knows the
facts to be able to present them to--I know that the IRS person
is supposed to be independent, so to speak, but I would believe
that if I was doing an appeal I would want to have at my
availability the person who knows the record.
Mr. SHINN. My experience has been the Appeals officers are
extremely experienced and knowledgeable on the issues and if
they weren't, they would assign another person. And so they can
come to their own conclusions based on the facts as presented
that came up. That file is transferred. They get to see the
file.
Mr. MEEHAN. The file, but you don't have the benefit--so
just explain to me the difference. Why is it preferable not to
have that person in the room who knows the record?
Well, maybe for another time. Maybe if you have a thought
that you want to share with us in written testimony or
otherwise, we would benefit from it. Thank you so much.
Chairman BUCHANAN. Ms. DelBene, you are recognized.
Ms. DELBENE. Thank you, Mr. Chair.
Thank you all for being here with us today.
Ms. Petronchak, I wanted to follow up on comments you made
earlier when we were talking about the challenges that small
businesses face and the inconsistency that we see for small
businesses versus large businesses.
What do you think we should do to address these issues?
What procedures would you like to see? Or do you have
recommendations on what you think we could do that would work
for small businesses?
Ms. PETRONCHAK. So some of the things could be implemented
administratively. I think Pete had talked about the IDR
process, and LB&I isn't perfect by any means. But those are
things, from a quality perspective, within the Service, I think
they could take a look at and decide that they want to change
those processes for taxpayers and indicate that, gee, when we
are developing the facts, it is important to put the human
element on it and actually having a discussion with the
taxpayer about the information.
And although that is not perfect and you will still have
disagreements and still have contentious exams, it is an
administrative process that could be implemented by rolling out
new procedures for their agents in how they interact with
taxpayers on a routine basis.
I mean, they are developing the facts. We have all spoken
to the independence issue in Appeals. So that initial fact
finding, that document request, is critical to a taxpayer
feeling like they have had the opportunity to present their
position and be heard by someone at the Service who is going to
be open about what it is they are looking at and the treatment
they are going to decide on a particular tax issue.
So I don't know that anything needs to be mandated, but the
IRS, in looking at their procedures, could say--I was
Commissioner of Small Business, and, yes, when I was there,
back when I left in--was one of those things I could have
looked at and said, gee, there are ways we could be interacting
on a much better basis with our taxpayers to make them feel
better about the voluntary compliance system.
Ms. DELBENE. Thank you.
Mr. Sepp, it seems the current procedures for small
business leave room for improvement, and I know you talked
about that in your testimony as well.
You also pointed out in your testimony that larger
businesses also have some challenges when it comes to the right
to appeal. And I wondered if you could talk a little bit about
your assessment of why organizations, like members of the CEETA
coalition, are facing the challenges in dealing with the IRS
that you outlined. What are some of those challenges, and why
do you think those are happening?
Mr. SEPP. Sure. That is the Coalition for Effective and
Efficient Tax Administration. It is a coalition not only of
large business groups but taxpayer advocacy groups, because we
are concerned that some of the trends, both in Small Business
and Self-Employed Division toward audits but LB&I, are leaking
across to each other, and we are going to have auditing
procedures that are taking the worst elements in all divisions
to be used against taxpayers across the spectrum.
Some of the problems we are facing: designating certain
cases for litigation, where they might have precedential value
even though there really isn't a clear connection to
precedential value or large numbers of taxpayers who might be
affected. There is the designated summons, which is a rather
extraordinary IRS power for getting information out of
uncooperative taxpayers that is being increasingly used in
cases where the taxpayers really are being cooperative. And, of
course, there is the use of third-party counsel to work
auditing situations, not to advise but, rather, to do things
that approach deposing witnesses.
But all of this really matters to taxpayers across the
board, because, again, as everyone has testified here, there is
on paper a directive to the Secretary to provide procedures for
fair and independent audit appeals, but, in reality, it is just
not happening. And I see this in case after case.
Even small business owners who are getting things like the
90-day letter, if they are lucky enough to ever have gotten a
30-day letter in the first place, they think it is a demand to
pay tax. They don't even realize it is the revenue officer's
report that would allow them to take an appeal to Tax Court.
They don't even understand the basic nature of the process,
because they are so intimidated by it.
And, again, this is why we support H.R. 3220 as a start of
a package that could begin addressing these things.
Ms. DELBENE. Thank you very much.
I yield back, Mr. Chairman.
Chairman BUCHANAN. Thank you.
Mr. Holding, you are recognized.
Mr. HOLDING. Thank you, Mr. Chairman. Thanks for holding
this hearing.
You know, obviously, we don't usually hear from our
constituents' interactions with the IRS unless they are
negative. And I appreciate the Committee looking into ways to
enhance this experience.
So I am just concerned about what I think is a new
diversionary tactic being used by the IRS to keep taxpayers
from accessing administrative appeals. So we all know that
cases docketed in the Tax Court are typically transferred to
Appeals for consideration--are not typically docketed unless
they are designated for litigation. And it has come to my
attention that the IRS may be restricting taxpayer access to
appeals in some cases that are docketed in Tax Court.
And the case that I am aware of was not designated for
litigation nor referred to Appeals, the two standard options
for making an audit dispute. And, instead, the case was kept in
a purgatory-type status, waiting for litigation, under the
justification of ``sound tax administration.'' I put that in
quotes because that is the term they used. And that was the
only option available. The only option available to the
taxpayer was litigation.
So my question--and I am going to ask Mr. Sepp to respond
first and then open it up to the panel: In your experience as a
practitioner, have you or any of your clients experienced
something analogous to this?
Mr. SEPP. I should state I am not a practitioner, but
people in the small business community----
Mr. HOLDING. Right.
Mr. SEPP [continuing]. Other taxpayers have come to us, and
there has been that sort of experience relayed to us. And there
are other experiences, such as what are called speed-up
situations, where a taxpayer may receive a notice of audit and
requests for documents, and suddenly they will find in the mail
yet another determination, and they haven't even had a chance
to respond to the first one. And it is a way of intimidating
the taxpayer into taking a position that is detrimental to
them.
Mr. HOLDING. Mr. Shinn, you are nodding your head there.
Mr. SHINN. Yes, sir. We have seen this in a very similar
fashion with foreign penalties on foreign reporting. And I
mention it in my verbal and in my written response. We have
seen it numerous times.
That is why I make the comment that they need to follow the
rules or there needs to be a repercussion to the Service. You
follow it, or you lose your opportunity. Somehow, we have to
hold them accountable to the process. That is why you have a
taxpayer bill of rights.
Mr. HOLDING. Ms. Petronchak?
Ms. PETRONCHAK. Congressman, I am not sure of all the
specifics around it, but in the revenue procedure that
addresses cases, so if a taxpayer filed a Tax Court petition,
they generally can get their case heard by Appeals before they
actually end up in Tax Court if they have not already been to
Appeals. I don't remember the revenue procedure that covers it.
So there is a provision.
However, you used a term that shows up in several of the
revenue procedures: sound tax administration. I don't know what
that means, but in regards to sound tax administration, they
don't have to offer alternative dispute resolution, the fast-
track process that I talked about in my testimony.
So I think sound tax administration is a way that they can
choose to treat cases differently than what we would see should
be the normal treatment of a taxpayer and how their case would
move through the system. What the answer is to that I don't
know, but I think the use of sound tax administration they are
using as leeway to do many different things with a taxpayer's
case.
Mr. HOLDING. Thank you.
Ms. Wilson, do you want to add anything to that in the
final few seconds?
Ms. WILSON. No. I just want to 100 percent agree with her
that, you know, she is spot-on on the issue. And that is why
you see my head going back and forth violently, because I
couldn't agree with her more on that issue.
Mr. HOLDING. Thank you.
Mr. Chairman, I yield back.
Chairman BUCHANAN. Thank you.
The gentleman from Oregon, Mr. Blumenauer, you are
recognized.
Mr. BLUMENAUER. Thank you, Mr. Chairman.
I find the conversation fascinating, but in the backdrop of
my experience, when I visit our local IRS offices and when I
have meetings, which I do routinely with tax practitioners, tax
attorneys, accountants, part of this strikes me that it would
be easier to resolve some of this if the IRS was equipped to
operate in a modern economy, if it didn't have a computer
system that is so far out of date that they have to delve into
the archives, find somebody encased in amber that can figure
out FORTRAN programming.
I have meetings with people who work at the IRS and have
them break into tears because they don't have any time to talk
to people on the phone to be able to maybe help guide a little
bit. There are people who don't fully understand the rules and
regulations and the opportunities within the agency and the
training budget.
I hear from both people in the agency and from the
practitioners who, interestingly, are not hostile to the IRS;
they are frustrated. They are frustrated that they tell
clients, ``You have a good point. We can work together. We can
resolve it and get your $3,700 back. But it will cost you more
to work with me to get it.''
And I just wonder what you think is attributed to the fact
that we have slashed the budget, slashed the workforce.
Congress, each year that I have been here, makes the Tax Code
more complicated. And, in some cases, it is a rush to be able
to actually get the stuff out in time, and sometimes we miss
the deadline.
So at what point is Congress complicit in this by not
taking the largest tax-collecting system in the world, which
relies heavily on voluntary compliance and treats our employees
and our taxpayers with respect and put the resources behind it
to make it a--any of you have any thoughts on that?
Mr. Shinn?
Mr. SHINN. Yes. In Sarasota, at our office there in
Sarasota, Florida, the number of people in there, the whole
area that was set for walk-ins is gone. The number of agents
has been reduced. I will be the first one to stand up and say
it is going to take more resources.
If we are going to stand here and say we are going to
provide more appellate officers, that takes dollars. If we need
more access through the internet and to broaden our e-services,
which obviously we are all nodding our head, we need to use
technology to give access. And in those phone calls, extending
the hours, all that takes money. And that is why we are here
today.
Mr. BLUMENAUER. But would that be helpful for some of these
things----
Mr. SHINN. Absolutely.
Mr. BLUMENAUER [continuing]. If there were extended hours,
if there were more people, if there was more training, a modern
computer system?
Ms. PETRONCHAK. Sir, I would say additional funding would
be useful. I mean, IRS can do some things administratively, but
you mentioned training. I mean, I was Commissioner of the Small
Business Unit in 2008. And for me to have adequate training for
my revenue agents who do the exams and the collection officers
who--the revenue officers who did collection, it was a really
high-focused training for one of those groups each year, but I
couldn't afford to have a real highly focused training for each
of those groups, even back in 2008. So you can imagine.
Well, how this plays out in terms of taxpayers and
practitioners, I mean, we feel like we are having to try to
educate the revenue agent on the issues, because they can't get
the training they need within the Service. And they are working
issues on exams that they have never seen before, and so then
they tend to go to somebody for advice. But you know how it is.
You talk to three different people; how much gets translated as
it goes down the line and really actually comes to form a final
conclusion.
Mr. SEPP. I would also make a quick plea for funding in
another area, the Volunteer Income Tax Assistance program and
the low-income tax clinics.
Right now, I think eligibility for the LITC program is 250
percent of poverty level. That is about $60,000 for a household
of four. That is not going to capture all that many small
business clients, for example, who might desperately need
assistance and could get it through a nonprofit organization
like that.
Mr. BLUMENAUER. Great.
Thank you for your patience, Mr. Chairman. I just hope at
some point, when passions cool, to look at how we treat our
accounts receivable and being able to think through the
resource, the training, the computer, that I hope shouldn't be
politicized, but I think the evidence is that that will pay for
itself many times over and relieve blood pressure medication.
Thank you.
Chairman BUCHANAN. I hear what you are saying. They said
the computers, some of them are back from the seventies and
eighties and sixties. I can't imagine that, but that is part of
the testimony we had.
The gentlelady from Indiana, Mrs. Walorski.
Mrs. WALORSKI. Thanks, Mr. Chairman.
And thanks to the witnesses again for being here today and
lending your expertise to us. I think this has just been a
fascinating conversation. And it has been a conversation,
listening to your expertise and to questions that we have, and
the unanimous response that we all have. We are all kind of
talking about all these same issues.
One of the rights enshrined in the Taxpayer Bill of Rights
is the right to pay no more than the correct amount of tax.
Mr. Sepp, I was struck that less than 5 percent of small
business taxpayers appeal their audit determinations and that a
big reason for this is taxpayers believe it is cheaper to just
give up and pay the IRS rather than appeal. That, to me, is
incredibly disheartening. If a taxpayer thinks they are paying
more in taxes than they should, you know, my advice is
absolutely fight it. The tools are there to fight it. Instead,
their perception seems to be that appealing it isn't worth the
time or the money. We need to change that perception, as well
as the actual time and money associated with appealing.
But I just wanted to address this to Mr. Sepp and Ms.
Petronchak. You both discussed dispute resolution and options
that would be less formal, lower cost for taxpayers. You also
noted that the IRS has failed to expand its use of these fast-
track dispute resolutions.
Ms. Petronchak, can you explain how these fast-track
procedures work and how they assist taxpayers in resolving
cases quickly?
And I am just going to tell you, my follow-up question to
both of you, Mr. Sepp as well, is, is there a way that we in
Congress can do something about that, or is it purely just IRS
authority?
So I would just like to hear about the options and then,
what can we do.
Ms. PETRONCHAK. So, in fast-track settlement, it is an
option where, you know, I am being examined by the IRS and we
know that I have a dispute over--let's just make it simple--
travel expenses. So they have said what their position is; I
have said what my position is. So the taxpayer and IRS can
agree that a fast-track settlement, having the use of an
appeals mediator while it is in Exam, would be beneficial to
all parties to come to resolution on the issue.
So, getting to your earlier comments, it brings quicker
resolution. The taxpayer is hoping to get this resolved at
least cost so they don't have to go on to formal appeals, much
less go to Tax Court, which not only is cost, but many small-
and medium-size taxpayers don't want their laundry aired out in
public court.
Mrs. WALORSKI. Oh, absolutely. Right.
Ms. PETRONCHAK. So, even though they may think they are
right, they are not going to choose that as the venue to go to,
because they don't want their neighbors talking about their
issues with IRS.
And so fast track, you know, we used to see a lot of them;
we don't see as many anymore. But the procedures I talked about
that Small Business is using for their exams, when they wait to
the end of the process to have a discussion, doesn't lend
itself to having that alternative dispute resolution.
Mrs. WALORSKI. And what can we do about it, Mr. Sepp?
Mr. SEPP. Based on my limited study of other countries'
practices and what the taxpayer advocate has said, there seem
to be several problems.
One, we have to restore the independence of the ADR
process. In almost every case, from Australia to U.K.,
Portugal, all around the world where ADR is much more common
and hundreds of thousands of cases will get resolved this way,
they have to keep the mediator or arbitrator function well-
insulated away from the tax authority.
We may not be able to use private accredited mediators
here, much in the way that it appears in the Small Business
Taxpayer Bill of Rights that was introduced in the last
Congress, but we could have a situation where there is an
office of mediation with specially trained people, rather than
plucking people from Appeals who have some training in
mediation and arbitration. You could even house that bureau
somewhere in the Treasury so that it has further independence.
The other important thing, I think, is to instruct the IRS
where mediation and arbitration can be used. The agency will
often exclude so-called campus collection cases and other types
of matters for ADR from the start. And we have to resolve those
kinds of issues as well.
Mrs. WALORSKI. I appreciate it.
Mr. Shinn, did you want to add anything quickly?
Mr. SHINN. Yes. And in response, that is why I think,
especially in small business, that it needs to be a requirement
of the steps, so that that way people aren't afraid of appeals;
it is part of the process. The fast track is there and is part
of the sign-off.
Mrs. WALORSKI. I appreciate it.
Thanks, Mr. Chairman. I yield back.
Chairman BUCHANAN. I want to thank everybody for the
opportunity, but let me run through--and this will be a
question to all of us. We are trying to simplify the dispute
resolution, trying to improve on the process. And I want all of
you to take a minute on that.
But before I do, I want to say a couple of things. I do
agree, with big corporations--it doesn't mean that there is not
work to be done in dispute resolution, but I have been in that
world. And you have CFOs, you have plenty of cash, and you have
to go to court, you go to court. You don't want to, but they
have resources.
What I am concerned about personally is individuals. I read
in USA Today 62 percent of Americans--I use this a lot, but it
was stunning to me when I read it--don't have $1,000 in the
bank. So if you get a letter from the IRS that you owe $2,000,
where are you going to go resolve that? A CPA, accountant, that
is going to be a couple, $3-, $4,000. You probably are going to
just say you are better off to write a check or get on a
payment plan, just agree with the IRS and move on.
Small businesses, a dispute resolution, if you ever think
about going to court, you could be talking over $100,000,
$50,000.
Did you say, Ms. Wilson, you are in a law firm?
Ms. WILSON. No.
Chairman BUCHANAN. Okay, a CPA firm. But you know, when you
hand it off to the tax lawyer, you are talking big money. And
usually you just cave and say, you know, let's go make the best
deal and get down the road. That has happened to me and others,
I have heard of it, where they don't think they owe the money,
but at the end of the day, the $10- or $20,000, the $5,000, the
$30,000, it costs you more with accountants and lawyers to go
try to resolve it.
So the question I have for the individual taxpayer, the 62
percent who don't have $1,000 in the bank, how do we simplify
this dispute resolution where people can have their day in
court but it doesn't take six months, a year? Because, as that
meter is running, there is no way you can afford to go to court
or, you know, arbitration or work with someone to try to
resolve that.
Mr. Shinn, I will give you the first opportunity from that
standpoint. And I know you have dealt with that. But that is
just my sentiment. That is what I have heard over the years.
Mr. SHINN. That is why I said we have to have the
opportunity to have access through phone calls and walk-ins.
And, also, when the taxpayer doesn't follow the deadlines,
there are repercussions. When the IRS doesn't follow their
protocol, there needs to be repercussions, because, to the
taxpayer, it is hard and fast.
So I can give you one quick analogy that really struck me,
is I helped an employee, a 90-year-old person of color who
could not write. He was a night watchman at a packing house,
worked several years there. Prior to that, he worked at another
packing house, where they treated him as an independent
contractor. And he got billed. And he didn't know what to do.
It went all the way to collections, and they garnished his
wages. He ended up with pancreatic cancer, and the employer
asked me to step in.
I tried to get the collection officer to settle, and the
employer was going to settle. They wouldn't take a dime less,
and he passed away 2\1/2\ weeks later. I called that collection
officer, I sent him a copy of a death certificate, and I said,
that isn't in the taxpayer's best interest.
And that is what we are dealing with, and it is so sad.
Chairman BUCHANAN. Yeah.
Ms. Wilson?
Ms. WILSON. You know, I now work at an accounting firm, but
I was a local taxpayer advocate and worked with Nina Olson. So,
you know, this is near and dear to my heart, as exactly what
you are talking about, Chairman Buchanan, in the sense that----
Chairman BUCHANAN. Let me just say with you and all, we are
looking to do IRS reform, and this is one of the biggest areas.
I think we have to find a way that people can get these
disputes settled. So that is what we are looking for.
But go ahead.
Ms. WILSON. Yeah. And I think we need to simplify the
process. I think it is intimidating, and I think, because it is
intimidating, taxpayers feel that the only way they are going
to resolve it and win is if they engage help. And, as your
point, most taxpayers don't even have $1,000 in their account.
So I think, you know, that we need to find a way to
simplify the process. We need to find a way to make it less
intimidating for the taxpayers. And we need to focus on that
bill of rights that says you shouldn't have to pay more tax
than you actually owe.
Chairman BUCHANAN. Mr. Sepp?
Mr. SEPP. We have to find a way to institutionalize
alternative dispute resolution mechanisms. We have got to learn
from the experiences in other countries, where millions of
individuals have utilized the process, making it less formal
but more actionable, with fewer delays, applying to a larger
number of cases, with a more independent arbiter involved.
If we do those things--and H.R. 1828 from the last Congress
is only a starting point for this--if we do that, I think we
will dramatically increase the access to justice that taxpayers
need.
Add to that things like the Low Income Taxpayer Clinics,
add to that more resources for the Taxpayer Advocate's Office,
and you have the beginning of a core of principles that will
get to this point of giving taxpayers the justice that they
need. And they still need it.
Chairman BUCHANAN. You get the last word.
Ms. PETRONCHAK. Okay, Chairman.
So fast-track settlement, I agree, should be available for
all taxpayers. Just to give a little history, Large Business
and International developed this process 2002, 2003, but it
didn't become final and actually institutionalized for small
business and self-employed taxpayers until 2015.
Chairman BUCHANAN. Yeah.
Ms. PETRONCHAK. So when I commented on a couple processes I
think could make things more transparent and easy for
taxpayers, there are some things that they have there.
Now, fast track isn't the answer to everything, because you
may have reluctant IRS folks to use it. Pete mentioned, you
know--I in my written testimony mentioned outside mediator or
taxpayer. To them, hiring an outside mediator for $1,000,
$1,500 is cheaper than taking this on to Appeals or Tax Court.
I hadn't thought about the concept of a mediator group, you
know, somewhere in Treasury or somewhere that serves as an
independent mediator----
Chairman BUCHANAN. The problem is, if you owe $2,500 or
$2,000, you can't pay $1,500, because you just say----
Ms. PETRONCHAK. Right.
Chairman BUCHANAN [continuing]. You know, I am going to go
ahead and just write the check or figure out a way to write it.
Go ahead.
Ms. PETRONCHAK. But, again, you know, IRS hasn't shown that
they are extremely interested in this alternative dispute
resolution. I would caution against saying, well, we mandate
you to use alternative dispute resolution, because if they
don't come to the table willing to settle and fast track, the
taxpayer and IRS have to agree, or they just walk away and the
taxpayer still has their appeal rights.
So, somehow, I mean, maybe looking at some of the other
systems, come up with, well, what is the happy medium here and
how this could be changed. It is there; taxpayers would love to
use it. Individual taxpayers need to be able to use it, which--
now it is available really to businesses, small and large. But
it needs to be expanded and made available and at least cost
and be successful once it is used.
Chairman BUCHANAN. Well, I would appreciate for all of you
to get your thoughts and your ideas to our Committee. We want
to work together, the Ranking Member and myself, on a
bipartisan basis, because this is an important issue.
And I have been in that world where larger organizations
have the resources. I am concerned about the person that gets a
$1,000, $1,500, $2,000 small business or individual tax bill.
How do we resolve that without putting them into bankruptcy or
putting them in a bad situation?
I agree with you--a lot of times you get that notice
through the IRS. I have gotten more than my fair share; a lot
of us have. You know, it is frightening to a lot of people. And
this is an area we need to work on and get your thoughts and
your ideas.
So, in closing, I would like to thank our witnesses for
appearing before us today.
Please be advised that Members have two weeks to submit
written questions to be answered later in writing. Those
questions and your answers will be made part of the formal
hearing record.
With that, the Subcommittee stands adjourned.
[Whereupon, at 3:24 p.m., the Subcommittee was adjourned.]
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