March 25, 2003

The Honorable Amo Houghton Chairman

Subcommittee on Oversight Committee on Ways and Means

U.S. House of Representatives

1136 Longworth House Office Building

Washington, D.C. 20515

Dear Chairman Houghton:

The American Institute of Certified Public Accountants commends the Subcommittee on Oversight for the panel's long-standing support for proposals designed to improve the tax administration process and protect the rights of American taxpayers. In this regard, we are pleased to have the opportunity to offer comments on taxpayer rights proposals as requested by the Subcommittee's March 12, 2003 advisory. Our comments herein specifically address a number of the taxpayer rights and tax administration provisions contained in (H.R. 5728) the Tax Administration Reform Act of 2002. Although H.R. 5728 passed the House of Representatives in 2002, it did not become law. We anticipate that these same provisions are likely to receive serious consideration by the Committee on Ways and Means in 2003.

Extend the Due Date for Electronically Filed Returns

Low-Income Taxpayer Clinics

Penalties and Interest

Collection Process

Better Means of Communicating With Taxpayers

The AICPA is the national, professional organization of certified public accountants comprised of more than 350,000 members. Our members advise clients on federal, state, and international tax matters, and prepare income and other tax returns for millions of Americans. They provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America's largest businesses.

H.R. 5728 contains a number of provisions designed to promote taxpayer rights and tax administration. We would like to offer comments on the following provisions of H.R. 5728 that we consider particularly significant to tax practitioners and their clients; specifically the provisions involving: (1) an April 30 due date for electronically filed returns; (2) low income tax clinics; (3) penalties and interest; (4) the collection process; and (5) a better means of communicating with taxpayers.

1) Extend the Due Date for Electronically Filed Returns

Section 205 of H.R. 5728 would provide an April 30 due date for individual income tax returns that are e-filed. The AICPA supports electronic filing and wants it to work well for all taxpayers. We applaud the creativity of this proposal to encourage e-filing, but believe that the same incentive could be achieved by deferring the processing of electronic payments on e-filed returns until April 30, without changing the due date. This would avoid the complexities and problems, detailed below, of a separate e-file due date.
 
The Incentive to E-File

Most taxpayers who file electronically do so to accelerate the processing of refunds. Treasury's proposal would provide a similar cash-flow benefit for "tax-due" returns by allowing taxpayers to hold on to their cash until April 30. It is difficult to predict how much of an incentive this delay would provide, given that the difference between an immediate charge on April 30 and the slower processing of checks mailed on April 15 might result in additional "float" of less than a week. However, the delayed due date would at least remove the e-filing disincentive of immediate electronic payment on April 15.

This cash flow incentive is an important factor in the e-filing decision process because the public and practitioners continue to have concerns over electronic filing. Predominant among these concerns are that, contrary to IRS advertising: (1) e-filing does not reduce tax paperwork for taxpayers and practitioners; (2) computer-prepared paper returns are no less accurate than those submitted electronically; and (3) e-filing is more—not less—expensive. Finally, there are lingering concerns about privacy and the government's ability to collect more information from electronically filed returns than from paper returns.

In light of these considerations, we believe that deferring processing of electronic payments on e-filed returns until April 30 would achieve the same cash flow incentive to e-filing as would a delayed filing date.

Extended Due Date Issues

Return Processing Problems

Under H.R. 5728, taxpayers would gain the maximum cash-flow benefit by filing on April 30. This last-day (and potentially last-minute) rush of returns will cause processing problems for practitioners and the IRS, and could cause some returns to be filed late as a result of processing log-jams. By processing electronic payments from e-filed returns on April 30—no matter when the return was filed—the IRS and practitioners could process electronically filed tax-due returns normally through the tax season and still give the maximum incentive to e-file.

Estimated Tax Payment Problem

H.R. 5728 does not extend the due date for estimated payments, although crediting of overpayments of prior years taxes is considered timely through April 30 on e-filed returns. Without a general extension of the estimated payment due date, taxpayers might have to substantially complete an e-filed tax return by April 15 in order to calculate and make timely estimated payments within the safe harbor based on prior year's taxes. Also, by allowing overpayments on April 30 e-filed returns to be timely credited towards estimated taxes that would otherwise be due on April 15, there may be different due dates for some federal and state estimated tax payments (see the section below on state tax conformity).

Federal Extension Problems

As an alternative to filing their individual returns on April 15, taxpayers may request an automatic four-month filing extension. The proposal does not address whether this automatic extension would be lost if a taxpayer who intended to e-file by April 30 was unable to do so and had not filed an extension by April 15. This could occur, for instance, if the return could not be processed electronically for some reason beyond the taxpayer's control, for example, the taxpayer died between April 15 and April 30, or there was a processing glitch such as where someone else erroneously filed using the taxpayer's social security number or where an error is made in copying an employer identification number. Without an additional opportunity to file an extension before May 1, prudent taxpayers and practitioners would file extension requests on April 15 even if they plan to complete the return electronically by April 30. This could result in the IRS receiving an extension request for every e-filer expecting to take advantage of the later due date. Finally, if a taxpayer could file for an automatic e-filing extension on April 30, the legislation should clarify that the extended due date would be August 15, not August 30 or 31. By allowing deferred processing of payments for e-filed returns instead of a later due date, these problems are avoided.

Deferring processing of electronic payments would also give the government an opportunity to encourage e-filing for extended individual returns. If the government deferred processing of electronic payments for 15 days where an extended return is filed electronically, this would provide a powerful cash-flow incentive to e-file many extended returns. Again, the IRS could easily accomplish this change, without adding complexity or changing the tax law. The proposal, as currently written, provides no e-filing incentive for extended returns.

State Tax Conformity

The change in the due date for federal e-filed returns causes a number of potential problems for taxpayers and state and local governments, unless these governments conform their laws to the April 30 due date for e-filed returns.

·         Taxpayers would have to prepare their federal returns by April 15 in order to prepare their state returns.

·         If taxpayers extend their state returns because they haven't completed their federal return, states could see a substantial increase in the number of extensions.

·         Many states require a copy of a federal extension request as part of a state extension request; April 30 e-filers could not comply with that requirement if they did not request a federal extension.

·         Taxpayers could erroneously assume that their electronically filed state tax return is due on the same day as the federal return, resulting in state late-filing penalties.

·         The proposal allows timely crediting of overpayments of prior year's taxes against current year's estimated taxes on April 30 for e-filed federal returns. Either states would have to conform their rules or taxpayers would have to pay state estimated taxes by April 15 to avoid state late payment penalties.

Thus, unless states change their laws to conform with an extended federal due date for e-filed returns, much taxpayer confusion and state tax filing complications could result. Implementing this proposal for the next filing season would not allow enough time for most state legislatures to change state laws in time to avoid these problems. These state tax conformity issues would not arise if the federal government simply defers processing of electronic payments until April 30 rather than extending the due date.

Complexity

H.R. 5728 would create different rules—based on filing method—for return due dates, tax payments, and filing extensions. Many of these rules are already complex. Multiplying the number of filing rules would add a layer of confusion. Deferring electronic payment processing rather than extending the due date offers a much simpler approach to promoting e-filing.

Maintain April 15 as the Well-Known Filing Date

April 15 has been engraved into our national psyche as the date by which we must take some action on our taxes. Although one intent of this proposal is to help people who have trouble getting organized by April 15, we suspect that further delay in getting organized may result, yielding one last haven for procrastinators.

In general, tax practitioners would prefer a firm deadline, which is not easily by-passed, to lend some finality to the annual crush of tax return work. Practitioners do not relish extending their busy season 15 days and creating a last minute April 30 push to take maximum advantage of the "float" on tax-due returns.

We believe that returns should continue to be due by April 15, with deferred processing of electronic payments on e-filed returns. This would keep April 15 as the date by which taxpayers must address their tax obligations, but still provide e-filing incentives.

The AICPA supports efforts to make e-filing more appealing to taxpayers, and believes that this proposal is helpful. However, we believe that deferred processing of payments for e-filed returns would provide the same incentive and would avoid the complexities and return processing problems of a separate due date for e-filed returns. The IRS, state governments, and practitioners could process returns more easily, and taxpayers would be better served.

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2) Low-Income Taxpayer Clinics

Section 106 of H.R. 5728 would increase federal funding to low-income taxpayer clinics (LITCs), but limit funding to clinics that represent taxpayers in controversies before the IRS. This change in the law has already been imposed administratively by the IRS, after applications for the current year had already been submitted, leaving many low-income preparation clinics without expected matching funds.

Although assisting low-income taxpayers with controversies is an important and necessary function, it requires an intensive focus on the issues facing a fairly limited number of taxpayers. Clinics that prepare "routine" returns provide broader, more basic compliance assistance to many more individuals. In some Congressional districts, citizens don't have the language and math skills or the convenient access to the government that allows them to comply with our complex tax requirements. VITA programs are helpful, but they are seasonal, often changing location from year to year, with taxpayers not knowing where to go and whether they will find their records there or anyone who is familiar with their return. VITA is administered by the IRS, with some taxpayers suspecting whether the program serves their best interests.

We urge Congress to fund LITCs that offer return preparation assistance, because without this assistance (1) low-income taxpayers will struggle—and often fail—to file correct returns; (2) low-income wage earners will not receive tax benefits Congress intended for them; and (3) the IRS will expend more resources on compliance problems.

Return Preparation Complexity

Tax law complexity hits low-income taxpayers particularly hard. Often these taxpayers lack the education and skills to prepare their own tax returns. For many, English is their second language; tax forms and instructions are difficult enough for those native English speakers.

Low-income taxpayers cannot afford to hire the return preparers that over half of all American taxpayers use to cope with tax return complexity. LITCs can and do supply tax compliance assistance not otherwise available to low-income taxpayers. IRS taxpayer assistance alone cannot provide the quality and quantity of assistance needed. Even commercial return preparers who try to serve the low-income market by keeping their prices down cannot devote much time to each return and often supplement their revenues by marketing refund anticipation loans which low-income taxpayers can ill-afford.

Loss of Congressionally Intended Benefits

Without low-cost professional assistance, many low-income families may not even learn about the benefits that Congress intended to help them, like the child tax credit or the earned income tax credit (EITC). The EITC's complexities deter some low-income taxpayers; others try to claim the EITC on their own, but make errors that can lead to penalties and disqualification. In attempting to find help, still other taxpayers fall victim to tax scams that have plagued the EITC.

Congress implemented the EITC to offset the regressivity of income and employment taxes on low-income wage earners, and it can make a real difference in the quality of life for low-income families. Support for LITCs that prepare returns will facilitate these complex filings and get the benefit into the hands of the working poor who need it most.

Increased Cost of Administration

LITCs reduce the IRS's administrative burden by helping taxpayers prepare "clean" returns that can be processed without delays, missing information, or mis-claimed benefits. Professionals who work with clinics are subject to standards of conduct that help assure honest returns and limits controversies.

Thus, LITCs help low-income taxpayers receive the intended tax benefits, while helping to prevent fraud and errors. By reducing the IRS burden in processing these returns, LITCs strengthen the tax system and allow the Service to focus on more productive issues. Congressional funding of LITCs is very effective. In order to qualify for federal funds, LITCs must solicit private matching donations and mobilize volunteer professionals.

The AICPA supports the remainder of H.R. 5728, Section 106, which would increase LITC funding and authorize Treasury and the IRS to "promote the benefits and encourage the use of LITCs. We believe that Congressional efforts on behalf of low-income wage earners would be most effective by continuing support for low-cost, professional return preparation services for those near the bottom of America's economic ladder.

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3) Penalties and Interest

Estimated Tax Penalty

Interest Charge and Threshold

H.R. 5728, Section 301 would modify the current failure-to-pay estimated tax penalty by (1) converting the current estimated tax penalty into an interest provision for individuals, estates, and trusts; (2) increasing the threshold for estimated tax underpayments from $1,000 to $2,000; and (3) authorizing a simplified averaging method for determining whether the estimated tax underpayment threshold is met.
 
The AICPA supports converting the estimated tax penalty into an interest provision for individuals, estates, and trusts. In addition, we also recommend that the legislation be amended to provide for conversion of the estimated tax penalty into an interest provision for corporations. Conversion of the estimated tax penalties into interest charges should result in a more accurate characterization since the penalties are essentially fees for the use of money. We also support increasing the estimated tax penalty threshold to $2,000 for individuals, and enacting the simplified averaging method.

Rate

Section 301 would apply only one interest rate per underpayment period—the rate applicable on the first day of the quarter in which the payment is due. Currently, if interest rates change while an underpayment is outstanding, separate calculations are required for the periods before and after the interest rate change. Having only one interest rate apply per underpayment period would end the potential for multiple interest calculations occurring within one estimated tax underpayment period. The AICPA supports this provision as simplifying the computations.

Underpayment Balances

Section 301 would also simplify the calculation of estimated tax by (1) eliminating the requirement to track each underpayment separately; and (2) making underpayment balances cumulative. Under this proposal, taxpayers would no longer need to track each outstanding underpayment balance until the earlier of the date paid or the following April 15. The AICPA supports this provision as simplifying the computations.

Leap Year Issue

Under Section 301 of the legislation, a standard, 365-day year would be established for calculating estimated tax penalties. Current IRS procedures require separate calculations when outstanding underpayment balances extend through a leap year. The AICPA supports this provision as simplifying the computations.

Exclude Interest on Individual Federal Income Tax Overpayments

H.R. 5728, Section 302 generally provides for an exclusion from gross income of the interest paid to individuals by the federal government on overpayments of tax. The AICPA believes this provision is a constructive proposal by attempting to provide equivalent effective interest rates on underpayments and overpayments for individuals.

Interest Abatement

H.R. 5728, Section 303 expands the circumstances under which interest on a tax underpayment may be abated to include (1) any erroneous refund not caused by the taxpayer; and (2) underpayments attributable to erroneous written advice furnished by the IRS. The AICPA supports this provision.

Deposits to Suspend Interest

Section 304 of the bill permits taxpayers to limit their underpayment interest exposure in a tax dispute—without affecting their ability to be heard in Tax Court—by allowing them to make cash deposits to suspend the running of interest. These accounts are intended to help taxpayers better manage their exposure to underpayment interest without requiring them to surrender access to their funds or requiring them to make a potentially indefinite-term investment in a non-interest bearing account. Further, under this proposal generally, taxpayers would be permitted to withdraw the deposited amount with interest or to allocate and apply it to tax underpayments.

The AICPA supports the proposal in concept. We believe that the initiative blends some good features of several current law approaches to avoid deficiency charges.
 
Modifying Interest Netting Rules for Individuals

There are several special rules under current law whereby taxpayers and the government are given grace periods to take certain actions without accruing additional interest charges. For example, the government is generally provided 45 days to process refund claims without a requirement to pay interest on the overpayment of tax. H.R. 5728, Section 305 modifies current law by applying the interest netting rules to individual taxpayers without regard to this 45–day period.

We support the provision on interest netting, as the measure is designed to ensure that individual taxpayers are not charged interest on amounts where no true liability actually exists. Section 305 should mitigate taxpayer resentment over the imposition of interest on equivalent outstanding amounts under the pretext that a true liability exists where none does.

Waiving Certain Penalties for First-Time Unintentional Minor Errors

Under Section 306 of the bill, the IRS is permitted to waive, once per taxpayer, the IRC Section 6651 failure-to-file or failure-to-pay penalties when an individual taxpayer has committed unintentional, minor errors. In considering this waiver, the IRS would take into account: (1) the taxpayer's compliance history; and (2) the likelihood that imposing the penalty would be grossly disproportionate to the action or expense necessary to have avoided the error.

The AICPA supports this provision. In addition, we recommend expanding this waiver option to cover other penalties, particularly those that are mechanical in nature like the failure-to-deposit penalty. We believe that this penalty safe harbor would encourage and create vested interests in compliance, because a history of compliance would be more likely to result in relief. Also, expanding this provision would reduce the time spent by both the Service and taxpayers on proposing an assessment, initiating and responding to correspondence, and negotiating subsequent abatement.

Frivolous Tax Returns and Submissions

Under current law, the IRS has the authority to impose a $500 civil penalty against individuals who file frivolous original or amended returns. Section 307 of H.R. 5728 would modify present law, regarding submissions that raise frivolous positions or that are intended to delay or impede tax administration, by increasing the frivolous filing penalty to $5,000 and by expanding the penalty's scope to cover collection due process hearings, installment agreements, offers-in-compromise, and taxpayer assistance orders. The bill would also require the IRS to publish a list of positions, arguments, requests, and proposals that the Service has determined to be frivolous.

The AICPA supports increasing the frivolous filing penalty to $5,000 and the proposed expansions in its application. In fact, our February 6, 2003 letter to (Acting) Commissioner Robert E. Wenzel states that this penalty proposal is potentially preferable to the regulatory proposal designed to control frivolous offer-in-compromise filings by assessing a user fee. Nevertheless, we would not want the frivolous penalty proposal to be used to stifle—overtly or inadvertently—legitimate taxpayer submissions whether that submission is an offer-in-compromise, a filing involving a collection due process hearing, an installment agreement, or a taxpayer assistance order.

Although we are pleased that the proposal would require the IRS to publish guidance regarding what constitutes a frivolous position, we recommend expanding this requirement to also provide guidance regarding the meaning of the legislative language (from last Congress) involving "a desire to delay or impede the administration of Federal tax laws." It is particularly critical that the guidance regarding what constitutes "a desire to delay or impede the administration of Federal tax laws" be restricted to truly frivolous positions or actions. Such guidance would go along way to ameliorate concerns about the potential misuse of the expanded penalty's application, especially if the IRS consults with the practitioner community in the development of such guidance.

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4) Collection Process

Partial-Payment of Tax Liability in Installment Agreements

H.R. 5728, Section 101 clarifies that the IRS is authorized to enter into installment agreements that do not require full payment of the taxpayer's liability over the life of the agreement. Further, the bill requires the Service to review these partial-payment installment agreements at least every two years.

The AICPA supports this proposal because it gives the IRS more tools for settling taxpayer accounts. However, we would have reservations about the proposal if the initiative were drafted to also require an extension of the collection period.

Extending Time Limit for Contesting IRS Levies

Under current law, a taxpayer is generally required to bring an action for wrongful levy within nine months of the date of the IRS levy. H.R. 5728, Section 102 would extend the period to contest a levy from nine months to two years. This proposal is contained as a recommendation in the National Taxpayer Advocate's Fiscal Year 2001 Annual Report to Congress (dated December 31, 2001). The AICPA supports this initiative.

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5) Better Means of Communicating With Taxpayers

Section 221 of the legislation requires the Treasury Inspector General for Tax Administration to issue a report to Congress on ways to improve IRS communications with taxpayers, particularly focusing on technological advances such as e-mail and fax communications. This provision is consistent with our long-standing support for (1) fostering electronic communications between the IRS, taxpayers, and tax practitioners; and (2) a dramatic increase in IRS use of e-mail and fax communications as alternatives to regular mail.

* * * * *

Thank you for considering the AICPA's views on H.R. 5728. Should you need any further feedback on our positions regarding this bill or any other taxpayer rights initiative, please do not hesitate to contact us. If you have any additional questions, please contact me at (202) 414–1705; William R. Stromsem, AICPA Director, at (202) 434-9227; or Benson S. Goldstein, AICPA Technical Manager, at (202) 434–9279.

Sincerely,

Robert A. Zarzar
Chair
Tax Executive Committee

cc: House Ways and Means Committee Members
Senate Finance Committee Members 
IRS Oversight Board Members
Pam Olson, Treasury Deputy Assistant Secretary-Tax Policy

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