TEI's comments to IRS Oversight Board: on September 19, 2006, TEI Internation President David L. Bernard filed comments with Raymond T. Wagner, Jr., Chair of the IRS Oversight Board.

Background

Tax Executives Institute was established in 1944 to serve the professional needs of in-house tax practitioners. Today, the Institute has 53 chapters in the United States, Canada, Europe, and Asia. Our 6,000 members are accountants, attorneys, and other business professionals who work for 2,800 companies; they are responsible for conducting the tax affairs of their companies and ensuring their compliance with the tax laws. TEI represents the business community as a whole, and our members deal with the tax code in all its complexity, as well as with the Internal Revenue Service, on almost a daily basis. TEI is dedicated to the development and effective implementation of sound tax policy, to promoting the uniform and equitable enforcement of the tax laws, and to reducing the cost and burden of administration and compliance to the benefit of taxpayers and government alike.

The companies that employ TEI's members have almost without exception been assigned to the IRS's Large and Mid-Size Business (LMSB) Division. The largest 1,600 taxpayers within LMSB are subject to ongoing audits as part of the Coordinated Industry Cases (CIC) program. The Institute's comments are largely based upon our experience with this segment of IRS operations.

The IRS's Strategic Goals

Approved by the IRS Oversight Board in May 2004, the IRS's strategic plan for 20042009 identifies three strategic goals for guiding the agency's direction:

* Improve Taxpayer Service;

* Enhance Enforcement of the Tax Law; and

* Modernize the IRS through its People, Processes, and Technology.

The IRS has proposed the following five measures and target values that it believes should be used to evaluate progress in achieving its three strategic goals:

E-File Rate

This e-filing proposed measure is defined as the percentage of all major tax returns filed electronically by individuals, businesses, and tax-exempt entities. Under the proposal, the target date for reaching an 80-percent e-file rate would be moved from 2007 to 2012.

TEI supports the goal of increasing the participation rate for electronically filed returns. Further, we agree that a properly designed and implemented e-filing process will advance key IRS objectives, namely, reducing errors, speeding processing, and enhancing enforcement of the tax law.

At this juncture, however, it appears that the benefits of e-filing for businesses inure primarily to the government, while imposing significant implementation costs on business. The IRS needs to make the benefits of e-filing a reality for corporate taxpayers.

TEI recognizes that this measure is directed primarily at individual taxpayers. Large business taxpayers are now required to file their returns electronically. In January 2005, the IRS issued a mandate for large corporations to e-file their 2005 tax returns. Although TEI had concerns about the manner in which the requirement was implemented, the Institute worked diligently with the IRS to make the mandate more administrable. The requirement seriously burdened taxpayers and software providers, consuming enormous resources. In short, corporate taxpayers will realize little benefit from the e-filing mandate this year, notwithstanding the significant additional cost and effort that have been required. The IRS must demonstrate that e-filing will reap rewards to business taxpayers by streamlining forms, providing more efficient audits, and eliminating the need to file duplicative information in various formats and with multiple locations. Without such benefits, it will be difficult to convince business taxpayers not subject to the current mandate to voluntarily e-file their returns.

ACSI Survey: Individual Taxpayer Scores

Adopted by the federal government in 1999 as the standard metric for measuring citizen satisfaction, the American Customer Satisfaction Index (ACSI) is a national economic indicator of customer satisfaction with the quality of products and services available to household consumers in the United States. The scores by individual taxpayers for the IRS in 2004 and 2005 were 64, out of a possible 100; the proposed target value would increase this score to 69, to be achieved within 3 years.

Compared with other government agencies, the IRS's ACSI score is relatively low. The overall ACSI score for the federal government in 2004 was 72.1, with agencies such as the Veterans Administration's National Cemetery Administration scoring an astonishing 95. (In contrast, the highest private sector company score that year was 88.)

As the nation's tax collector, the IRS is unlikely to become the government's most appreciated agency. As the ACSI commentary recognized in 2004, "The collection of taxes is not an activity that taxpayers look forward to or expect a great deal of satisfaction from." The IRS's score has improved 26 percent since 1999, although the score has leveled off in recent years.

The best way to achieve "customer" satisfaction is through consistent, excellent service. TEI agrees that the ACSI score is an appropriate measure for the IRS. Given the recent leveling off in the rate of improvement, however, TEI believes that raising the ACSI score five points within three years is a laudable goal, but may not be an achievable target.

In addition, we suggest that the measure be expanded to provide a separate ACSI score for business taxpayers.

Employee Engagement

For several years, the IRS has used the Gallup Organization to conduct an employee survey using its Q12 methodology, which is a set of questions to which employees can offer responses on a 1 (least satisfied) to 5 (most satisfied) scale. A key measure is Gallup's computation of an overall employee engagement measure. An overall engagement level of 4.0 by FY2009 is the target value for the IRS; its current score is not provided.

According to Gallup, organizations with high levels of employee engagement are likely to have higher employee retention, customer loyalty, safety records, productivity, and profitability. TEI agrees that measuring employee satisfaction with their jobs is a key to providing quality service to the public. Because experienced managers are crucial to ensuring employee satisfaction, however, the "graying" of the IRS workforce--and the retirement of more experienced managers--might well impede the agency's ability to raise its employee engagement score. This issue needs to be addressed by the agency in its long-term planning.

Moreover, the Board notes in its Commentary that participation in the survey declined from 2004 to 2005. TEI suggests that the lack of participation may well be a sign of declining employee morale. If the trend continues, the Board may wish to investigate this issue further.

Voluntary Compliance Rate

In 2006, the IRS reported an annual gross tax gap--defined as the amount of tax for a given tax year that is paid voluntarily and timely, and expressed as a percentage of the estimate of true tax liability for that year--of approximately $345 billion for tax year 2001 (the most recent data available), based in part on the National Research Program (NRP) evaluation of 2001 individual tax returns and extrapolation of earlier estimates. Components of this gap include $27 billion attributed to nonfiling, $285 billion attributed to underreporting, and $33.5 billion attributed to underpayment. In the underreporting category, $25 billion is attributed to large corporations, although the estimate is based on data that have not been updated.

The IRS estimates the voluntary compliance rate for tax year 2001 as 83.5 percent. The target value for the voluntary compliance rate is 85 percent in 2009.

Although TEI agrees that compliance should be part of the IRS's performance measurements, we caution that steps must be taken to ensure that the measurement is accurate. In October 2005, the Government Accountability Office (GAO) alluded to measurement and data verification issues in respect of the tax gap:

   Regularly measuring compliance is
   also critical to IRS's ability to reduce
   the tax gap. A significant part of IRS' s tax
   gap estimate is based on recently collected
   data on individual income tax reporting
   compliance. However, other areas of the tax
   gap rely on old data and outdated methodologies.
   IRS does not have approved plans,
   with one exception, to collect more current
   compliance data covering the various components
   of the tax gap.

   Although it can be challenging to develop,
   data on the reasons why taxpayers
   do not comply with the tax laws could
   help IRS more effectively tailor its efforts
   to reduce noncompliance. IRS has
   begun to capture data on the reasons
   for noncompliance, but it has concerns
   with the data. Although IRS is developing
   a system intended to capture better
   examination data, it does not have specific
   plans to develop better data on the
   reasons for noncompliance.

   IRS's strategies for reducing the tax
   gap involve improving taxpayer service
   and enforcing tax laws, but do not
   have a clear focus on quantitative long-term
   goals or results measurement. Establishing
   clear goals and measuring
   progress toward them would be consistent
   with results-oriented management
   principles and would provide IRS with
   a solid base upon which to develop a
   more strategic approach to reducing
   the tax gap. (1) (Emphasis added).

Among the strategies identified by the GAO for attacking the tax gap are simplifying the tax code, providing quality service to taxpayers, and enforcing the tax laws by using tools such as tax withholding and information reporting. The GAO also recommended collecting data on the reasons noncompliance occurs.

TEI agrees that simplifying the tax law should be a high priority in trying to reduce the tax gap. The more complex the Internal Revenue Code, the more it creates unintended opportunities for taxpayers than a simpler, more understandable law would provide.

We also agree that the IRS should collect data on the causes of noncompliance. More accurate, timely data collection is the key to a compliance strategy. The data most recently released are based on 2001 information; a goal of 85-percent voluntary compliance will provide little direction if it is not known until 2014 that the goal was reached. In addition, the data should not include any figures for complying with the tax law as written. Finally, the Institute suggests that efforts to reduce the tax gap should focus on non-compliant taxpayers and not add extra burdens to those that are already attempting to comply with the law. For example, the recently developed Schedule M-3 (Net Income (Loss) Reconciliation for Corporations with Total Assets of $10 Million or More) should assist the IRS in selecting returns for further investigation. In this regard, absent compelling reasons, the government should not seek to "offload" compliance costs--e.g., by expanded information reporting--to compliant taxpayers or, alternatively, should consider providing some form of compensation for the burden.

NON-REVENUE ENFORCEMENT ACTIVITY

The IRS performs many activities that are primarily regulatory in nature, including granting tax-exempt status to qualifying organizations, reviewing qualifying employee plans, enforcing the regulations of the Bank Secrecy Act, and dealing with other government entities such as states, municipalities, and Indian tribes on tax issues. The functions are performed in the Small Business/ Self Employed (SB/SE) and Tax Exempt/ Government Entities (TE/GE) Divisions. The IRS has proposed an index of such activity based on outcomes in non-revenue related functions, which would function like the Consumer Price Index (CPI). The FY2005 index was 125.1. The target value for this index is 137.6 by FY2009, approximately a 10-percent increase.

As we mentioned at the beginning of our comments, TEI's experience is primarily within the IRS's Large and Mid-Size Business Division. Because we have little experience with the functions performed by SB/SE and TE/GE, we have no suggestions to make in respect of this measure.

ADDITIONAL REMARKS

As the Board notes, the five measures do not capture any activity to modernize the IRS processes and technology and invites comments on whether such a goal should be added. TEI recommends the addition of a goal based on the modernization of the IRS's technology, perhaps related to the IRS's e-filing initiative for large corporations, e.g., the elimination of duplicate filings and the streamlining of forms and schedules.

In addition, we suggest consideration be given to establishing a measure for currency of audits, especially in respect of large taxpayers under continuing CIC audits by the IRS.

TEI appreciates the opportunity to comment on the IRS's proposed long-term measures. If you need additional information, please contact Kelly A. Nall, chair of TEI's Administrative Affairs Committee, at 972.605.1217 or [e-mail]; or Mary Lou Fahey of TEI's legal staff at [phone] or [e-mail].

Standards of Conduct

Since the Mission, Principle, and Purposes of TEI can be achieved only by the observance on the part of its members of the highest standards of professional conduct, the Board of Directors adopted the following:

Tax Executives Institute, Inc., recognizes the following as the standards of conduct for each member in administering tax affairs for which she is responsible:

* The member accepts taxes as the cost of civilization and accepts the laws imposing taxes as the mechanism for distributing that cost among businesses and individuals. The member will comply with those laws, whether or not agreeing with them.

* The member recognizes an obligation to minimize company tax liability, within the bounds of the law and to the extent consistent with policies or objectives of the company, having due regard for the interests of society in sound tax policy, and will advise and support action to obtain that objective, to the best of the member's ability.

* The member recognizes an obligation to make an affirmative contribution to the sound administration of tax laws, and to the adoption of sound tax legislation, by cooperation and consultation with the persons charged with those functions, having due regard for the interests of society, as well as the interest of the company and its employees.

* The member accepts each Government representative as a person devoted to fulfilling the obligation to collect revenue honorably in accordance with law. The member will deal with the representatives on that basis, and will take occasion with others to uphold this view of Government representatives. In case of any deviation of a representative from that standard, the member will present the pertinent facts to the authorities authorized to take action with respect to the deviation.

* The member will present the facts required in tax returns and all the facts pertinent to the resolution of questions at issue with representatives of the government imposing the tax.

* The member will employ assistants and outside representatives upon the basis of their technical competence, always having due regard for the highest standards of professional ethics.

* The member will at all times recognize a duty of professionalism to solicit and will not use TEI membership to solicit business or sell products to other members.

(1.) See U.S. Government Accountability Office, Testimony before the Subcommittee on Federal Financial Management, Government Information, and International Security, Committee on Homeland Security and Governmental Affairs, U.S. Senate (statement of Michael Brostek), GAO-06-208T, Introduction (Oct. 26, 2005), reprinted at http:// www.gao.gov/new.items/dO6208t.pdf#search=% 27GAO06208T%27.

PROPOSED LONG-TERM ENTERPRISE MEASURES AND TARGET VALUES

Long-term Measure              Target Value/Target Date

* E-file participation rate    * 80 percent/2012

* Individual taxpayer          * 69 (out of 100)/2009
  satisfaction index

* Employee engagement          * 4.0 (out of 5.0)/2009

* Voluntary compliance rate    * 85 percent/2009

* Non-revenue enforcement      * Index of 137.6/2009
  activity index