The Internal Revenue Service's "Compliance 2000" initiatives.
Mr. Chairman and Members of the Subcommittee: I am Michael J. Murphy, Executive Director of Tax Executives Institute, and I am pleased to present the Institute's views on the Internal Revenue Service's "Compliance 2000" initiatives. As the Subcommittee well knows, in my prior position as IRS Deputy Commissioner, I played an active role in the development and early implementation of Compliance 2000. This marks my first time before the Subcommittee as a private sector representative. I am accompanied today by Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs.
Tax Executives Institute is the principal organization of corporate tax professionals in North America. Our approximately 4,800 members represent more than 2,000 of the leading corporations in the United States and Canada. TEI represents a cross-section of the business community, and 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. TEI is firmly committed to maintaining a tax system that works -- one that is consistent with sound tax policy, one that taxpayers can comply with, and one in which the IRS can effectively perform its audit function.
That the Institute's mission -- the development of a fair, equitable, and administrable tax system -- parallels that of the Internal Revenue Service is no accident. TEI believes taxpayers and tax administrators share a common goal and, to the extent possible, should strive to achieve that goal as partners, not adversaries. It is because of the Institute's commitment to improve the tax system that we welcome the IRS's Compliance 2000 initiatives and welcome this hearing as evidence of the Subcommittee's interest in bettering tax administration.
Focusing on the Right Target
Mr. Chairman, in announcing this hearing, you properly emphasized Congress's concern with the level of voluntary compliance. You cited figures on the size of the annual tax gap, on the amount of the IRS's accounts receivable inventory, and on the number of non-filers. TEI agrees that Congress and the IRS should be concerned about the level of voluntary compliance. We are concerned, however, about the potential misuse of the IRS's statistics, especially those relating to the so-called tax pp.
Stated simply, the cart should not be placed before the horse. Before the problems confronting the tax system can be solved, they have to be properly defined. Hence, before the IRS can effectively focus its limited resources on increasing voluntary compliance, the level of noncompliance must be quantified and properly stratified, and its causes must be understood. Before the problem of non-filers can be addressed, we must identify why people are not in the system in the first place. In other words, before Congress and the IRS shoot, they should make sure they know what their targets are. "Ready -- fire -- arm" is not the pathway to effective " efficient results.
I would like briefly to address the three items highlighted by the Subcommittee: non-filers, accounts receivable, and the tax pp.
Non-filers: TEI strongly endorses all reasonable efforts to bring non-filers into the tax system. We recognize that inevitably compliant taxpayers have to make up any revenue shortfall occasioned by the noncompliers. I would, however, offer two cautions: First, TEI does not believe that any of its members falls into the non-filer category. Second, we urgently request that any solution not exacerbate the heavy burden already placed on business taxpayers who are, of course, the major and most effective link between the IRS and individual taxpayers.
Accounts Receivable: As to the IRS's accounts receivable inventory, I note that corporate taxpayer problems in this area do not place the revenue at risk, but rather serve to frustrate taxpayers and IRS representatives alike because of their intractable nature. Specifically, the problems frequently relate to the IRS' "offset program," whereby a credit in one account is used to eliminate or reduce a deficiency in another. Because of glitches in how the program works in respect of large corporations, the result is often the imposition of unnecessary burdens on corporations. We know that the IRS is continuing to work on the offset problem, and are unaware of any significant accounts receivable issues in respect of large corporations. We do recognize, however, that the IRS has an interest in collecting tax deficiencies in a timely manner. To the extent the result of Compliance 2000 and other IRS initiatives is to enhance the ability of taxpayers to comply in the first instance (a goal that TEI whole-heartedly supports), this receivables "problem" will be mitigated.
Tax Gap: Finally, as to the tax gap, TEI is greatly concerned about the $125 billion "tax gap" figure that has been bandied about. Specifically, the Institute believes the existing data distort the size and components of the tax gap, especially where the figures purport to depict the large corporate tax community. As the Subcommittee knows, the tax pp is defined as the difference between the tax reported on the taxpayer's original return and the "amount of tax due." As computed by the Internal Revenue Service and the General Accounting Office, however, the 'amount of tax due' clearly encompasses items that do not result from noncompliance -- especially volitional noncompliance -- including (1) adjustments voluntarily made by taxpayers on qualified amended returns (i.e., on an actual amended return or at the commencement of an audit); (2) proposed IRS adjustments that are resolved in the taxpayer's favor during administrative proceedings; and (3) proposed adjustments that are reversed by the courts. To include those adjustments in the corporate "tax gap" is just plain wrong. Concededly, efforts have been made to refine the data -- to distinguish between the so-called gross and net gaps -- but the problems with the data persist. Indeed, the IRS has itself acknowledged the potentially counterproductive nature of the tax gap figures. Thus, in testimony last year, then-Commissioner Goldberg discussed the significant limitations of IRS's (and the GAO's) tax gap figures and urged Congress to "be as circumspect as possible about the data on the tax gap."
Mr. Chairman, I want to belabor this point, because TEI believes it is important to keep focused on the big picture and to avoid generalizations and misrepresentations. We urge the Subcommittee to lay to rest the blatant misconceptions about the corporate gap and to get on with the real work of addressing verifiable pockets of noncompliance (whatever its cause).
From my prior position in the IRS and my current perspective at TEI, I believe Compliance 2000 is consistent with the IRS's goal of identifying the problems confronting the tax system and developing targeted, bold approaches to dealing with them. This is what Compliance 2000 is all about: defining where the noncompliance is; determining what causes it; and developing short- and long-term strategies to address the problem areas. It involves not forsaking traditional enforcement, but enhancing and supplementing it with quality-driven, customer-oriented initiatives. TEI supports Compliance 2000 because it meshes well with what American business has been forced by competition to do: work smarter.
The Perspective of Corporate Taxpayers
Mr. Chairman, TEI members come to the Compliance 2000 initiatives with a different perspective from other taxpayers. The bulk of TEI's members work for companies that are part of the IRS's Coordinated Examination Program. This affects our views for three reasons. First, the large corporations that are part of the CEP program are subject to continual examination by the IRS. They do not -- cannot -- play the so-called audit lottery, because the IRS has its revenue agents on their premises day-in and day-out. Thus, although the Subcommittee has expressed concern about the decline in the IRS's audit rate -- a concern that TEI shares -- the audit rate of CEP taxpayers already greatly exceeds that of all other taxpayer groups. This does not mean, however, that examinations cannot be conducted more effectively and in a more user-friendly, customer-oriented manner. In other words, for CEP taxpayers in particular, Compliance 2000 does not stand as a substitute for the examination process, but as a philosophy to guide how the IRS pursues its enforcement strategies.(1)
Second, CEP taxpayers know better than most that not all noncompliance is voluntary. For more than a decade, corporate taxpayers have been subjected to change heaped upon change in the Internal Revenue Code. They have had to cope with vague statutory provisions and the absence of timely regulatory guidance on important issues. They have had to contend with monstrously complex and burdensome statutes and regulations. They know first hand the truth of what the IRS says underpins Compliance 2000: "Most noncompliance is unintentional. Much of it is due to the complexity of the tax laws."(2) Hence, corporate taxpayers recognize the need for change.
Finally, CEP taxpayers have already begun to see benefits from the IRS's quality management initiatives, of which Compliance 2000 is an integral part. Indeed, through TEI, corporate taxpayers have participated in a whole range of IRS projects intended to improve the tax system. We have seen progress in involving taxpayers in the examination process, in developing innovative approaches to solving (or avoiding) disputes, and in conducting examinations on a more timely, expeditious basis. Obviously, the pace of change can at times be frustrating, but TEI stands firmly behind the IRS's Compliance 2000 initiatives, particularly as they relate to the CEP improvements. The many CEP improvements that have already been implemented provide evidence of the salutary change that Compliance 2000 can effect in the relationship between taxpayers and the tax collector.
TEI's Assessment of Compliance 2000
Compliance 2000 is not a single program or even a group of programs or prototypes. It is an operating philosophy that transcends the IRS's program objectives to serve its goals of reducing taxpayer burden, enhancing voluntary compliance, and achieving quality-driven productivity. These goals are clearly ones that TEI itself supports and ones that we believe can be effectively pursued through Compliance 2000 and the application of quality management principles.
Compliance 2000 is in its infancy, and TEI appreciates that the IRS cannot be expected to remake itself overnight. At the same time, the IRS can and should be held accountable for its actions, including how quickly it can bring its programs "on-line." We believe the IRS should be commended for thinking boldly about the tax system and should not be unduly criticized for acting prudently and cautiously. As Commissioner Peterson has said, changing the tax system is like turning a battleship: not only does it take time, but when it does change it leaves a tremendous wake. Notwithstanding our belief that the IRS should be given sufficient time to develop and implement its programs, we agree with the Subcommittee that the time is light to assess whether the IRS is moving in the right direction, to establish measurement systems to gauge its progress, and to mold its initiatives. We caution, however, that given the cascading nature of the IRS's initiatives, much of what we are looking at today is history -- a snapshot of where the IRS was yesterday, not necessarily where it is today and where it intends to be tomorrow. Care must be taken not to base policy decisions on things that are already on the path to beneficial change.
As TEI sees it, the goal of Compliance 2000 should be to enable the IRS to redeploy resources from the essentially compliant to the blatantly non-compliant. The IRS's initiatives should not be viewed as supplanting traditional enforcement functions (the examination of returns, collection of amounts due, and other investigations), but as permitting the IRS to better focus its resources. Obviously, there will be a continuing need to allocate resources to examine returns, to provide an administrative appeals process, and to litigate cases where other efforts to forestall or resolve disputes prove unsuccessful. But prudence demands that the resources be allocated in the most effective manner possible.
Thus, the IRS must integrate Compliance 2000 into its traditional approach in order to maximize voluntary compliance. It must reshape its enforcement activities to reflect the Compliance 2000 philosophy. It must also "work smarter" in its examination of large corporations. TEI is convinced that there is a huge potential for improving the relationship between the IRS and taxpayers and for achieving greater compliance without agony. The IRS's initiatives in the CEP program demonstrate that the Compliance 2000 philosophy can be successfully married to enforcement activities.
Examples of IRS-TEI Cooperation
A maxim of quality management is customer orientation: as Chairman Conyers said, the IRS must view taxpayers as customers, not as the enemy. We believe that the IRS has embraced this principle in developing Compliance 2000. TEI is pleased to have actively participated in the development of many of the IRS's Compliance 2000 initiatives, especially those relating to the overhaul of the Coordinated Examination Program. Thus, at the IRS's invitation, our members have taken part in far-ranging and candid discussions with John Monaco, the Executive Director of the CEP program, and with other senior executives of the IRS. We have been eager to do so, because we believe the goals of taxpayers are perfectly compatible with those of the IRS when it comes to performing
examinations quicker, better, and with a view toward developing new, more efficient ways to resolve issues before examination. TEI views itself not only as a stakeholder but as a full partner in many of the IRS's projects.
During the past few years, TEI representatives have participated in a whole range of discussions with the IRS on bringing quality management principles to tax administration issues. Among the subjects that the Institute and the IRS have discussed are the following:
* Early resolution of issues,
for example, through the development
of a revenue procedure
allowing taxpayers to
settle issues from the year
currently under examination
all the way through the
current filed year.
* Advanced pricing agreements,
pursuant to which a
taxpayer's transfer pricing
arrangements are scrutinized
and agreed to on a before-the-fact
* Taxpayer involvement in the
examination planning process,
pursuant to which taxpayers
and the audit team
can agree, among other
things, to reducing cycle
time by better scheduling
and fine-tuning requests for
necessary information and
the taxpayer's response to
such requests, and to educating
the IRS audit team to
the specifics of the company's
business practices and
industry norms (from how a
company makes its products
to how it accounts for them).
Other areas in which TEI has been involved include the training of IRS personnel, procedures relating to multi-district "support" audits, and the development of measurement systems to gauge how successful the new efforts are. In addition, we have recently undertaken to provide corporate member support to the Commissioner's Advisory Group on issues relating to the data collection challenge posed by the IRS's proposed transfer pricing regulations under section 482 of the Code.
The IRS's Education and Communications Efforts
Mr. Chairman, TEI has long prided itself on establishing and maintaining good relations with the IRS. As someone who spent 30 years with the IRS, I can attest to the breadth and substance of the communications between TEI and the IRS. For example, IRS and Treasury Department representatives actively participate in TEI national, regional, and local meetings throughout the United States. These speakers include executives and managers from the Commissioner's side of the IRS, the Office of Chief Counsel, and the Department of the Treasury. They include government representatives not only from Washington, but from regional and district offices as well. The interchanges have, without exception, been candid and worthwhile.
The communications challenge facing the IRS is two-fold: the IRS must not only communicate with taxpayers, but also with its own employees. The challenge is daunting, for the IRS's management must convince both internal and external stakeholders that Compliance 2000 is not simply this week's slogan, a hollow catch-phrase. Although TEI is a strong supporter of the IRS's effort, not enough corporate taxpayers and IRS employees have a firm understanding of what the IRS wants to do and how it proposes to do it. Thus, we agree that the IRS needs to redouble its education and communications activities.
The Institute will continue to support the IRS's education efforts. With respect to our own members, we have already devoted substantial amounts of time at our conferences and seminars -- on both the national and local levels -- to discussing the coming changes in the CEP program and their significance for our members. We have also agreed to publish articles by IRS officials on the initiatives in our bimonthly magazine -- The Tax Executive. Indeed, the May-June issue of the magazine contains three Compliance 2000, CEP-related articles by IRS representatives: Assistant Commissioner (Examination) George O'Hanlon, Assistant Commissioner (International) Regina Deanehan, and CEP Executive Director John Monaco. Our members have greeted the news positively and with great anticipation; they are eager to have the promise of Compliance 2000 turn into reality.
TEI has also been supportive of the IRS's efforts to educate its own personnel of the importance of Compliance 2000. To be successful, Compliance 2000 -- and its CEP analogs -- must go beyond the Commissioner and her Executive Committee in the National Office: it much reach Regional Commissioners, District and Service Center Directors; it must reach Division Chiefs in Examination and Appeals, and Large Case Branch Chiefs; it must reach Case Managers and Team Coordinators; it must reach Specialists (International Examiners, Computer Audit Specialists, Employment and Excise Tax Specialists, Pension Specialists, Engineers, and Economists); and it must reach examining revenue agents. During its liaison meeting with local IRS officials, TEI members have stressed their commitment to the new initiatives and urged those officials to embrace the changes. TEI views Compliance 2000 as a means of empowering both taxpayers and IRS field personnel to achieve the Commissioner's objectives.
The Challenges Ahead
Of course, the best public relations work in the world will only get you so far. Thus, care must be taken to avoid losing valuable momentum. Our members appreciate that the cultural change the IRS is seeking takes time, and we have received many reports that IRS field offices are already advocating and introducing many innovations. Changes on the IRS's side, moreover, have spurred taxpayers to seek common ground and, hence, has moved both sides away from an "us vs. them" syndrome.
The progress, however, must continue. Already our members have expressed frustration at the slow pace of change at the field level. Initiatives announced to great fanfare in Washington have not yet been embraced by personnel in many districts. In addition, our members are concerned that the philosophy undergirding Compliance 2000 does not seem to permeate all IRS initiatives at the National Office level. For example, although the overall goal of Compliance 2000 is to increase voluntary compliance and reduce the amount of taxes that must be collected through the examination process, the IRS's recent section 482 regulations were clearly written from an enforcement perspective. Specifically, the regulations set forth a standard for setting transfer prices that can only be met after the taxpayer files the tax return. Such an approach does not comport with Compliance 2000. Similarly, some members have expressed concern about the implementation of the IRS's Closing Agreement Program in respect of qualified employee benefit plans. The purpose of the program is wholly consistent with Compliance 2000: to provide an alternative to disqualifying a plan for minor, possibly inadvertent violations. In practice, however, TEI members report that they have been faced with penalties far in excess of any tax benefit that the company or affected employees might have enjoyed had the error
not been discovered. Again, we appreciate the need for the IRS to monitor vigilantly compliance with the Code's employee benefit provisions. Given the almost universal agreement that those provisions are impossible to understand, let alone comply with, the implementation of the Closing Agreement Program has apparently become somewhat heavy-handed.
A third example relates to recent IRS and Justice Department litigation strategies and procedures. In some cases, the Tax Court has severely criticized the IRS for its dilatory tactics. For example, trial attorneys seem unwilling to stipulate to uncontrovertible facts or to rely on the work product of the audit team. Where the taxpayer has worked with the IRS audit team to prepare a case for litigation (for there are some cases that are destined for litigation from the outset), it is frustrating and wasteful to see much of that effort effectively discarded. We recognize that the time demands on government litigators are great and that certain delays or demands fall within the ambit of legitimate litigation strategies. We further appreciate that certain strategies may even be prompted by the taxpayer's own tactics. We submit, however, that Compliance 2000 must permeate the entire tax system: it cannot stop when a notice of deficiency is issued. Otherwise, the efforts of the IRS will surely not be successful.
Mr. Chairman, make no mistake: Notwithstanding these concerns, TEI remains committed to and supportive of Compliance 2000. Based on my prior experience with the IRS, the key management challenge is for the IRS to develop a strategic plan that properly allocates resources to both traditional but refocused) enforcement activities and to the specific Compliance 2000 initiatives and that also sets forth standards by which the IRS's progress can be effectively measured. Please be assured that TEI stands at the ready to assist the IRS and the Subcommittee in moving the initiatives forward.
Tax Executives Institute appreciates this opportunity to present its views on the IRS's Compliance 2000 initiatives and would be pleased to answer any questions you may have about its positions. In this regard, please do not hesitate to call the undersigned or Timothy J. McCormally, the Institute's General Counsel and Director of Tax Affairs, at (202) 638-5601. (1) To the extent Compliance 2000 leads to the development and timely issuance of comprehensible and administrable regulations (or other administrative guidance), taxpayers will be better able to file their tax returns on a basis consistent with the IRS's position; this in turn will reduce the likelihood that audit adjustments will be necessary. (2) Statement of the Honorable Fred T. Goldberg, Jr. before the Subcommittee on Commerce, Consumer and Monetary Affairs, House Committee on Government Operations, on Business Information Reporting (June 10, 1991), at 7.
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|Date:||Jul 1, 1992|
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