Congressional testimony on development of federal tax forms by the Internal Revenue Service.
Mr. Chairman and Members of the Subcommittee: I am Larry R. Langdon, Director, Tax and Logistics for Hewlett-Packard Company. I am here today in my capacity as President of Tax Executives Institute to present the Institute's comments on the development of federal tax forms, schedules, and instructions. I am accompanied by the Institute's Tax Counsel, Timothy McCormally, and together we will endeavor to answer any questions you might have about TEI's position on this very important subject.
I. Introductory Comments:
Forms as a Measure of
Mr. Chairman, Tax Executives Institute (TEI) is the principal association of corporate tax executives in North America. Our 4,300 members represent approximately 2,000 of the largest companies in the United States and Canada, and are responsible for coping with the tax laws -- from both a planning and a compliance perspective -- on a day-to-day basis. We are committed to working with government in developing and maintaining a tax system that works -- one that is consistent with solid tax policy and with which the taxpayers can comply.
TEI is pleased that the Subcommittee has recognized that Congress's role and responsibility does not end with the enactment of tax legislation. We are also pleased that more attention is being paid to how legislation "translates" -- to use the Chairman's word when he announced this hearing -- into the real world. And, if I might extend the analogy, we believe that the tax forms and schedules represent a potent "simultaneous translation" of how well Congress and the Administration do their job in developing tax rules that taxpayers can live with.
Mr. Chairman, TEI has long maintained that greater emphasis should be placed on the administrability of particular proposals during the legislative process -- and we believe this hearing could serve to underscore the problems that arise when administrative concerns are given short shrift. We believe that if more attention were paid on the front-end to the workload burdens posed by legislative proposals, then less complex and more administrable provisions -- as seen most immediately in the resulting forms, schedules, and instructions -- would be enacted. (1)
To this end, when the Institute testified before the Subcommittee earlier this year on the Chairman's penalty reform legislation, we recommended that the Internal Revenue Service be asked to testify before the House and Senate tax-writing committees to address the administrability of all proposed tax legislation. The IRS's testimony would be designed to ensure that clear, administrable, and cost-sensitive rules are enacted into law, and we suggested that the testimony specifically address the following issues:
* the ability of the IRS to administer the provision and the estimated cost to the IRS of doing so; and
* the ability of taxpayers to comply with the provision and the estimated cost to taxpayers of doing so.
TEI believes that the IRS's more active participation in the legislative process -- on the sole question of administrability -- is critical to reducing the complexity of the tax laws. Mr. Chairman, we believe this proposal to enhance the administrability of the tax laws could be effectively linked with the Subcommittee's current review of the development of federal tax forms. This is because, although administrability can be measured in many ways, perhaps the most vivid and immediate picture is painted by the forms and schedules required to translate a statutory provision into a set of instructions for taxpayers to use in navigating their way through the maze that the Internal Revenue Code has become.
Thus, if substantive provisions were not added to the Code until the IRS had an opportunity to develop what the resulting form would look like, perhaps those provisions could be streamlined and made more administrable. Indeed, it is our understanding that on occasion pre-enactment forms have been developed and that some modifications have been made to the relevant statutory provision to simplify the "translation" process. We similarly understand that the IRS has undertaken to develop an "administrability impact statement" in respect of pending legislative proposals.
Mr. Chairman, we recognize that political and budgetary exigencies frequently operate to deny the tax-writing committees sufficient time to consider the administrative aspects of proposals and that the development of pre-enactment forms as a general matter may prove impossible. We recommend, however, that it become an aspirational goal of the tax-writing committees, as should the IRS's preparation and Congress's review of "administrability impact statements."
II. The Business Taxpayer's Involvement
with IRS Tax Forms
Mr. Chairman, TEI members have collectively dealt with virtually every line and box on every tax form and schedule that the Internal Revenue Service has published in respect of business taxpayers. This exposure has made us sensitive to the "translation" problems the Chairman has referred to. Ordinarily, we approach forms matters on a "micro" basis -- analyzing the burdens a particular form will impose, developing detailed procedures for gathering the required information from our company's far-flung affiliates, and then riding herd on our operations people to ensure that the information is submitted in sufficient time to permit our compliance with laws.
In this regard, a fundamental difference between individual and business taxpayers (especially the larger corporations represented by our membership) is the ongoing nature of the forms -- the information gathering and analysis -- challenge. Unlike individual taxpayers who become concerned about IRS forms and schedules primarily in the first quarter of the year -- after they receive their W-2s and 1099s and as they face the April 15 filing deadline -- corporate taxpayers generally confront the forms challenge every day. Thus, whereas the Chairman has stated the Subcommittee's goal is making "the yearly job of filling out a tax return less painful," we must advise you that for corporate taxpayers the job is a neverending, daily one.
III. TEI's Involvement with the
Forms Development Process
A. General Comments
Over the years TEI has had a generally excellent and productive relationship with the IRS's Tax Forms and Publications Division. We have prepared written statements on myriad tax forms and schedules and met frequently with IRS representatives to review their reactions to our recommendations.
We are pleased to note that the IRS has frequently responded positively to our recommendations. At times, of course, the Forms Division seems constrained not to adopt the Institute's recommendations by virtue of the Treasury Department and IRS Chief Counsel's technical interpretation of the underlying substantive rules. Although this can prove frustrating -- the technical people advise us to discuss the matter with the Forms Division which in turn tells us that technical rules prevent amelioratory action -- we understand and appreciate the need for tax forms to implement the law as currently interpreted by the Treasury Department and IRS.
Thus, notwithstanding our sincere belief that more could be done in the forms development process to minimize the workload burden posed by various forms, we have found the IRS open to our comments and criticisms and generally responsive to our concerns.
B. Development of Form 5471 as
a Paradigm of Cooperation
TEI's comments on particular forms are developed as a result of its members' experiences with those forms. Thus, the Institute solicits recommendations and suggestions from its members and forwards them to the IRS. We also review draft forms when they are released for public comment. (For example, we have circulated for review the proof copies of 1989 forms relating to business taxpayers that the IRS released on July 26.)
The Institute has not been involved in any formal forms testing program, but our views have occasionally been sought before the referral of particular draft forms to the Office of Management and Budget. One project that we believe was especially productive was the development of Form 5471, which is an information return with respect to foreign corporations. Form 5471, which was developed following the enactment of the Tax Equity and Fiscal Responsibility Act of 1982, represents the consolidation of several previous forms -- Forms 957, 958, 959, 2952, and 3646 -- and served to substantially reduce reporting burdens.
As our later comments will make clear, taxpayers continue to have some difficulty in securing all the information requested by the form and, quite candidly, fathoming why the IRS needs certain information or needs it presented in a particular format. There should be no doubt, however, that Form 5471 is a vast improvement over its several, and sometimes duplicative, predecessors. (2) We believe the process through which the form was developed could usefully serve as a model for the development of other forms.
IV. Special Concerns and
Mr. Chairman, I now turn to Tax Executives Institute's specific comments on the forms development process and our recommendations for how that process can be improved. As previously stated, the Institute and its members generally approach IRS forms on a "micro" basis. We dissect particular forms, schedules, and instructions, and offer suggestions on how one line of one part of one schedule might be improved. For example, we have offered comments on how large the boxes should be on Form W-2 (3) and on the federal tax deposit coupon, and we have recommended that the IRS print its form on standard sized, 8-1/2 by 11 inch paper. (4)
Through our analysis of particular forms, we have discerned some trends and developed several broadbased, "macro" recommendations that may be of interest to the Oversight Subcommittee.
A. Timing Issues
1. Development of Forms. One general concern is the time period in which the IRS develops forms and seeks public comment on them. Stated bluntly, for corporate taxpayers, the release of draft forms in mid-July (as was the case with the proofs of various 1989 business forms) could not come at a worse time. Although some of the difficulty is attributable to corporate tax department personnel scheduling vacation during the summer months, the real problem is that July and August are the time that calendar-year taxpayers are immersed in preparing their returns for filing. (The extended due date for such taxpayers is September 15.)
Thus, at the time the IRS asks for comments on next year's forms, corporate taxpayers have not generally been through the filing process with this year's forms. More fundamentally, because of the burdens associated with return preparation, taxpayers (most notably, the compliance personnel with "hands-on" experience) are unable to devote sufficient resources to reviewing the draft forms. This is especially the case since the IRS generally provides only a 30-day window for the submission of comments. (Indeed, during return-preparation season many companies would also find even a 60-day comment period problematic.)
We wish to note, however, that the IRS has occasionally been receptive to our out-of-time submission of comments on the forms. We also recognize that the forms-revision process can reasonably be viewed as being two years' long. Nevertheless, we remain frustrated with the mid-summer, short timeframe aspect of the forms development process.
2. Release of Final Forms. That frustration pales, however, compared with the burdens posed by the untimely issuance of forms for use in the current filing season. Regrettably, forms are issued so late in the information-gathering process that corporate taxpayers are faced with the possibility of literally not being able to comply or of incurring substantial additional expenses in collecting the required information.
The "lead time" problem is especially pronounced with respect to information concerning foreign operations or affiliates. Simply stated, the gathering of the information from foreign affiliates, in particular those that are not 100-percent owned by the taxpayer, is not something that can be quickly accomplished.
Most large corporations endeavor to send information requests to their foreign affiliates well before the original due date of their returns (and those requests, of course, would have to be prepared even earlier). Indeed, many companies begin the process before the end of the year to which they relate. Where the form is revised (or an initial form is not released) until close to the normal due date of the return, taxpayers are compelled to prepare and circulate a new request (to either supplement or possibly supplant the new request). For corporations with a large number of foreign subsidiaries, this job (which frequently requires detailed explanations of new data requirements and occasionally translating information requests into several different languages) can be daunting. (5)
The burden, moreover, is not confined to forms relating to foreign operations. For example, changes in Forms W-2 or 1099 invariably entail systems changes by the taxpayer. The IRS certainly knows from its own experience that often changes cannot be made at the flip of a computer switch. Time is required to develop, implement, and test new systems.
TEI has no formal recommendation at this time with respect to when new forms are released -- in either draft or final form. We recognize that the IRS's own burden is great. Obviously, "the sooner" new or revised forms are issued, "the better." We do recommend, however, that taxpayers not be required to re-file their returns in situations where forms are released after the beginning of the filing season and that taxpayers not be subject to sanctions where their inability to comply is attributable to the late issuance of the pertinent form.
B. Use of Requested Information
to Select Returns for Audit
Mr. Chairman, the IRS's forms and schedules should seek only that information necessary to determine the taxpayer's liability for tax. Indeed, where particular information will not be used to select returns for audit (or where the taxpayer's return will be audited in any event), we believe consideration should be given to limiting the information that is required to be provided at the time the return is filed. Specifically, we suggest that in appropriate cases taxpayers should be permitted to submit the information not when they file their returns but rather when those returns are audited.
TEI acknowledges that in respect of individual taxpayers, who as a group are subject to an audit rate of less than two percent, this recommendation may not seem entirely appropriate. With respect to corporate taxpayers, however, especially those that are subject to continuous audit as part of the IRS's Coordinated Examination Program (CEP), the option of providing the information during the audit has considerable merit. Moreover, we do not believe it would be necessary to implement this recommendation as a general rule. Rather, it could be adopted on a form-by-form, or even schedule-by-schedule, basis.
For example, we have previously recommended to the IRS that taxpayers not be required to provide much of the information sought by Form 5471 (Information Return with respect to a Foreign Corporation) when they file their returns. Rather, that information could be made available at the commencement of an audit of the taxpayer's return. We have made a similar recommendation concerning the information required by Form 1118 (Computation of Foreign Tax Credit - Corporations). We would be pleased to share our specific recommendations with the Subcommittee.
In conclusion, if there is a common theme that runs through the comments we receive from our members in respect of forms and schedules relating to foreign operations, it is that the information required to be submitted on the form itself should be curtailed and that any additional required information should be allowed to be furnished on audit. Once again, we believe such an approach would seem especially proper in respect of CEP taxpayers.
C. Request for Extraneous or
We also suggest that the IRS should narrow the scope of its specific information requests to seek only information that is necessary to compute the taxpayer's tax liability. Perhaps the prime example of a form that seeks extraneous information is Form 1118, which concerns the computation of a corporate taxpayer's foreign tax credit.
Specifically, although the foreign tax credit provisions of the Internal Revenue Code impose an overall, as contrasted with a per-country, limitation on the foreign tax credit (augmented by a number of "separate baskets"), Form 1118 seeks a breakdown of data on a per-country basis. In discussions with the Forms Division, as well as with representatives of the IRS's Office of Associate Chief Counsel (International), we have been advised that much of the information requested by the form was being sought not to verify the taxpayer's tax liability, or eligibility for the foreign tax credit, but rather for data analysis purposes by the Treasury Department's Office of Tax Analysis.
Mr. Chairman, TEI firmly believes that the IRS's tax forms should facilitate compliance and should impose no greater administrative burden than absolutely necessary to achieve that goal. Thus, although section 6001 of the Code authorizes the Secretary to require the filing of "necessary" returns, we question whether the collection of information not directly related to a determination of the taxpayer's liability is appropriate. In this regard, we acknowledge that section 905(b)(2) of the Code arguably requires the Secretary of the Treasury to secure adequate proof -- including information on a per-country basis -- of the taxpayer's entitlement to foreign tax credits. We recommend, however, that information on a per-country basis should not be required where that information has no direct bearing on the amount of, or the taxpayer's eligibility for, the credit. If necessary, therefore, Congress should amend section 905(b) to clarify that the submission of information on a per country basis is not required.
TEI has provided the IRS with a redesigned Form 1118, which we believe would give it all the information necessary to verify the taxpayer's eligibility for the foreign tax credit without imposing undue information-gathering or reporting burdens. We would be pleased to provide copies of our proposal to the Subcommittee.
Mr. Chairman, with respect to unnecessary burdens, I wish to briefly refer to the requirement that taxpayers file two copies of Forms 5471 (Information Return with respect to a Foreign Corporation). The instructions for the form state that taxpayers should file one copy of the form with their tax returns and file a second copy with the Philadelphia Service Center. When we inquired about this duplicate filing requirement, we were advised that "the separate filing provides the Service and Treasury with the capability to readily compute statistical information . . . ."
Although the taxpayer burden associated with the duplicate filing requirement may seem insubstantial, we question whether taxpayers should be required to shoulder any form-related burden not directly associated with the determination of their tax liability. At a minimum, we suggest that where information is not facially required by the statute, the IRS give consideration to setting forth in the instructions the reasons the information is being requested. If nothing else, the IRS's providing taxpayers with an explanation for particular data requests would have the salutary effect of enhancing taxpayer relations.
Similarly, consideration should be given to instructing the IRS to amend its regulations under Treas. Reg. 1.1502-75 to eliminate the requirement that taxpayers file both Forms 851 (Affiliations Schedule) and 1122 (Authorization and Consent of Subsidiary Corporation to be Included in a Consolidated Income Tax Return). Both forms require a listing of all members of an affiliated group. Although the Forms Division recommended as early as February 1986 that the consolidated return regulations be revised to eliminate the requirement that Form 1122 be filed (because the necessary consent could be deemed to be given by virtue of the parent company's filing of Form 851), the appropriate change in the regulations has not been forthcoming.
D. Submission of Information in
TEI believes that where necessary information is available in an alternative format, taxpayers should be permitted to simply attach that alternatively formatted material to their returns, rather than completing the IRS form line-by-line. Thus, if the taxpayer can produce computer-generated schedules setting forth all the information requested by the form (for example, because those schedules were produced in accordance with the taxpayer's financial accounting procedures), the taxpayer should not be required to fill out the form. One area where the use of attachments would simplify the taxpayer's reporting burden is Form 5471 (Information Return with respect to a Foreign Corporation.)
We note that on occasion the instructions to an IRS form authorize the taxpayer to submit information in alternative formats but require the taxpayer to obtain the IRS's prior approval. We question, however, whether prior approval should be necessary as long as the information is set forth in the materials submitted with the taxpayer's return. At a minimum, the IRS should set forth general guidelines for the submission of information using alternative formats.
Mr. Chairman, Tax Executives Institute appreciates the opportunity to present our views on the process related to the development of tax forms, schedules, and instructions. We look forward to working with the Subcommittee, as well as with the IRS Forms Division, in refining the process and would be pleased to respond to any questions you or other members of the Subcommittee might have.
(1) Although TEI believes that many IRS forms and schedules should be revised to reduce unnecessary burdens on corporate taxpayers, we must acknowledge that much of the burden is attributable not to the particular requirements of specific tax forms, but rather to the underlying substantive tax rules. In this regard, in the fall of 1988 TEI surveyed companies in the major industries represented by its membership in an effort to gauge how the return preparation burden was affected by the Tax Reform Act of 1986. (In our efforts to quantify the additional administrative burden imposed on taxpayers by tax reform, we devoted particular attention to those companies with substantial overseas operations.) Respondents were asked, among other things, to compare the amount of staff time devoted to preparing their 1987 return to the corresponding figure for 1986. Not one company reported a reduced reporting burden as a result of tax reform; the reported increases ranged from between 10 to 191 percent. Similarly, the companies reported increases in staff time devoted to substantive research from between 30 to 1,025 percent, and increases in the amount of fees paid to outside tax advisers from between 0 to 3,750 percent. Upon request, we would be pleased to provide the Subcommittee with additional information concerning our survey.
(2) In this regard, we note with concern that, in its recent "White Paper" on intercompany pricing, the IRS suggested that an "enhanced" Form 5471 be developed to solicit detailed pricing information from taxpayers. TEI believes that requiring detailed pricing information at the time the return is filed would prove a staggering administrative burden and have urged the IRS not to unravel the simplification effort that gave rise to Form 5471.
(3) We have also discussed the difficulty that many employers encounter in reporting all the required information in the limited space available on the Form W-2 and the resulting confusion to employees when the employer is obliged to issue supplemental forms.
(4) In making this recommendation, the Institute observed that differing paper sizes are not computer, copier, or taxpayer friendly. We are pleased that the IRS has agreed to use standard paper "wherever possible."
(5) Even assuming the affiliates were able to respond immediately to the request, it could be weeks, if not months, after the issuance of the revised form before the information would be available in a "return-usable" format.
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|Title Annotation:||by Tax Executives Institute President on August 3, 1989|
|Author:||Langdon, Larry R.|
|Date:||Sep 1, 1989|
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