Transcripts For CSPAN Tax Preparation Industry 20140413

The laboratory was put here because they could grow the plants onsite and do the preliminary research. It is exciting project. The laboratory is interesting for many reasons. Part of the reason this lab was so important is that caused the government to come forward with what was called the patent, the u. S. Patent law. Which said if you invented something with plants, and it processs worthy of worthy of patenting, it was issued a patent. History and, the literary life of fort myers florida, including a stop at the botanical research laboratory. On cspan2 and cspan3. And taxnment officials preparers told the Senate Finance committee that a simpler tax code in the National Licensing are the rest bang the best policies for preventing fraud. Included h in our ceo h r block ceo. They were also asked about the legend irs targeting. This hearing is 2. 5 hours. The finance committee will come to order. There is just a week to go before the april 15 deadline. Millions of americans are spending a good portion of the spring struggling to fill out tax forms. The complexity of the code causes errors to flourish. Congress is not blameless. That is one reason it is time to rewrite the tax code and make filing your taxes easier in america. Americans, maybe even a majority, nothing will have a bigger impact on their pocketbooks all year long. The majority of americans want to get it right. But because the tax code is so byzantine and cub located complicated, nearly 80 million americans pay their return. Ring and most of those preparers dont have to meet any standards for competence in order to pair prepare summary elses return. Because of the baffling outcome of the court case, protection has taken as significant below. Us too often seems to be the case, the most bowler ball people will bear the brunt of the effects of this decision. These are often people struggling from paycheck to dayseck, counting the until the refund comes through to help them make ends meet. They could be seniors or working families who qualify for the earned income tax credit. Or they could be immigrants, proud to pay taxes in their n tocountry, and just wanted make sure they are following the rules of the tax code that is hard for anybody to understand. Heres my bottom line. For the second time in 18 years, the Government Accountability office has done in independent inquiry and has found that the absence of meaningful oversight is harming too many citizens who can least afford it. The problems they run into could be as simple as a typo or miscalculation. They could also be much worse. Cases, theygious skipped the line who says to did the work. Then they boosted the refund, filed the return, and pockets the difference. Unless the taxpayer can prove what happened, they are running for the money when out. Rs finds i am proud to say my home state of oregon gets this issue right. With theers keep up theirng code to maintain licenses. Oregon standards work. The gao to collect the system a few years ago and found that the took a look at the system a few years ago and found that oregon tax returns were 72 more likely to be accurate than the rest of the country. There are ways for congress to help in this arena. I believe that comprehensive tax reform must make simplifying the tax code and filing easier. That must be a priority. Committee passed the act last week, practically sent agreed it isenter time to and stop and go policies and give americans more certainty about their taxes. The plan i worked on with former senator greg which makes filing it triples more the standard deduction, which would illuminate the need of 80 to itemize their deductions. Has let ouron charge to protect taxpayers from Identity Theft. Senator carson has also fought hard for taxpayer right. They have valuable ideas on how to solve the challenge. That is the date challenge of today posterior ends. Todays hearings. As long as the crow does code is so overgrown, they shouldnt have to worry about crooked or incompetent preparers. It is that simple. Nk ofld like to tha witnesses. Senator hatch and i plan to work on this issue in a bipartisan way. We welcome your comments. Thank you, mr. Chairman. The day for individuals to complete their income tax reforms returns is one week away. No means of millions of americans have had difficulties complying with the deadline. The majority of americans seek the services of a paid preparer to comply with the tax code. Of the 142 million returns filed by individuals, nearly 80 million, or roughly 56 , were prepared by a paid preparer. Our system relies heavily on that faith voluntary compliance which in turn requires the services of paid preparers who competent and ethical. The irs tried to implement regulations that imposed ethical standards on any person that try to prepare returns for compensation. Fromrs has been prevented upholding those rules. Among the approaches to solving a problem is government regulation. There are other approaches. Our approach is comprehensive tax reform that results in a much simpler and straightforward tax system with fewer compliance and administrative burdens. A less complex system that allows for simpler compliance rules to read it will ruin r errors. L reduce it will reduce the need for complex tax filings and eliminate opportunities to cheat the system. It is my belief the bestwick to taxpayersy to protect is to implement a fair and simple tax system that reduces their dependence on paid return preparers. Towe get there, we need minimize the damage that unethical preparers can cause. Ideas forward to hearing about how to publish this. The commissioner testifying before us today there are other matters that deserve our attention. The Ongoing Investigation into the targeting of conservative groups during the 2010 and 2012 campaign seasons. For congressional committees are looking into this matter. The irs officials have with some exceptions been a walk rating. Cooperating. Been quarter that is why it was disheartening to hear the fact is that the Inspector General used to work [no audio] and in testimony before congress, he stated that the allegations had proven to be true. Furthermore, the commissioner describe the activities as quote targeting during his confirmation hearing. I want to remind you of that. I really appreciate you being here today. More than you know. Seem like we are engaging in semantics. The words we use are important. Administration, rather than acknowledging what went on, is going to engage in work like play to minimize what happened, we will have difficulty minimizing these issues. On top of that, we have the regulatory effort at the irs that is designed to further marginalize the same conservative groups. We are talking about the proposed regulations targeting 501 c organizations. The spectrum have condemned these regulations. They undermine free speech and the ability of citizens to participate in the political process. Number ofd a record Public Comments filed in response to the proposal from all points on the political spectrum. From what i gather, they were almost uniformly negative. This regulation would silence grassroots organizations. Ofwould ensure that a number industry should critics remain on the a number of administration cracks remain on the sidelines. In theuld work both ways future. This proposal was disturbing given what has gone on at the irs with the tightfitting targeting scandal. To me, that is not good enough. Should go awayns entirely. The commissioner has the power to make that happen. Throughout the public debate over the proposal, little has been said in the role of the irs commissioner. As was confirmed by secretary has the commissioner authority to prohibit these regulations from taking place. Thank you, senator hatch. Our hearing will consist of two panels. The first consists of two witnesses. The second includes the General Accounting Office and individuals who are knowledgeable about tax preparation. We have eight witnesses. We hope you will limit your testimony to five minutes. The first witnesses the commissioner of the irs. The second is nina olson. Thank you both for coming. Youre prepared statements are going to automatically be made part of the record. Went up to start, commissioner. Thank you. For the opportunity to discuss irs regulation of paid return preparers. The community is a key ally in our efforts to for fill our mission of Taxpayer Service and compliance. Each year, paid preparers are called on to complete 80 million returns. About 56 of total individual income tax returns filed. A make the irs posture easier by helping clients report their taxes. At the same time, the level of oversight has traditionally been on even at rest. Meet attorneys must mandated competency requirements, they only make up 40 of the universe of prepared return people. That leaves the other 60 without any oversight. Like oregon have regulated unlicensed preparers, but most of the community favors federal oversight to avoid a patchwork of state requirements. Will the majority preparers are competent, there are those who engage in fraud. Others do not have enough training and are not equipped to do an adequate job. Returnthat richard preparers are competent, date and that they launched the Preparer Initiative in 2010. Individuals must register with the irs if they prepare refunds for compensation. The initiative required paid preparers who are not cpas or attorneys to pass a competency exam and complete education requirements. The irs also extended the asical rules, commonly known Treasury Department to 30, to all preparers. This allows us to suspend or otherwise discipline preparers who engage in unethical or distributable conduct. Since 2010, more than one million individuals have registered with the irs and obtained a number. ,s of next last month, 677,000 preparers were active in our database. They must use this as the identifying number and returns on returns they submit for compensation. The irs has a comprehensive compliance and enforcement strategy. Note that thet to registration requirement gives the irs a better line of sight than ever before. The information we obtain through the registration process helps us do more to analyze trends. Spot anomalies. The irs announced the testing phase of its return program in 2011. The test was designed to develop 84,000 testsour were given. He pass rate was 74 this means that 26 were unable to pass. The education requirement consisted of 10 hours of federal tax law topics, three hours of updates, and two hours of ethics or professional conduct. Lawsuit resulted in a Court Decision that the testing and education requirements in january, 2013. An Appellate Court upheld that decision. It is truetinues that preparer registration does help identifying the bird butared commit competency and continuing education may put us on a path to insure all preparers provide the appropriate level of service to taxpayers. Level services will translate into improved overall Tax Compliance. And certainly with that, more administration more effective administration. Urge congress to pass the item that will require us to regulate preparers. In the meantime, we are taking a close look at the possibility of an interim step involving a program of voluntary continuing education. Before moving forward, we will solicit feedback from a wide range of external stakeholders as to whether such an interim step would be useful. The better solution is for congress to grant us authority to provide better oversight. This concludes my testimony. I would be happy to take your testimony questions. Members of the committee, thank you for holding the hearing on a subject i consider among the most important for u. S. Taxpayers. Nearly 150 million individual taxpayers filed tax returns every year. Many jointly with their spouses. A significant majority of taxpayers he paper bearers to prepared pay preparers submit their returns. In recent years, around 80 of filers have received refunds. The average refund amount is a little under 3000 per return. Often higher for low income taxpayers. Preparer does can have a significant Financial Impact on the taxpayer. Professionals whose work affects the Financial Lives of their clients are widely regulated. Anyone can hang out a shingle as. Tax return preparer no skill is required. I know this well because i began my prepare career in tax preparation in 1975. I hang out a shingle hung out a shingle. Widely Available Software packages. To do my job, i had no choice but to study and learn. One next we had to know something about the tax law to be a return preparer. Payers had some assurance. Today, there is no such assurance. These transformational changes have taken place in the return preparation field. First, the advent of software has eliminated barriers of entry into the profession. The impact meant of refundable the enactment of refundable have a and preparers financial incentive to inflate refunds. As a result of the radical ianges in the industry, congressed that certify these preparers. I recommended that congress strengthened Due Diligence requirements. There is an important distinction between these approaches. Well Due Diligence is an important part of any due only occurs after the taxpayer has been harmed. Prevention is less costly and more effective. Congress should clarify that the irs has the authority to establish an him standards for the unenrolled preparer population. They should require test and continued education. The only argument i have heard against this is the cost will be passed onto the consumer. The per taxpayer cost of the Program Director was implementing seemed very reasonable compared to the far more significant cost the gao and others have found. Where errors cause some payers to over pay by thousands of dollars and others by to underpay and then face irs enforcement action. In the absence of clear legislative authority, i believe the iris should do the following. Offer unenrolled return preparers the opportunity to have a voluntary certificate. Ofond, restrict the ability preparers to represent taxpayers unless they earn the certificate. Mount a Consumer Protection campaign that educates taxpayers. Reminds taxpayers to obtain a copy of their tax return with the preparers signature. Ae iris should develop database to include all preparers that register with the irs. The vest and enforcement best enforcement is to have an informed and educated consumer face. In this instance, taxpayers. The clearcut ways to do understand which preparers meet levels of competency and which are not willing to make the effort. That is why having a mandatory designation along with cpas and attorneys is so important. It it is a line that the taxpayers can understand. Missiles and, thank you. Olson, thank you. You are the National Taxpayer advocate. It is your job to go to bat for the kind of people we are seeing getting sleaze fleeced. I would like to you to amplify on the new incentives and opportunities for the unscrupulous taxpayer to rip people off. Could you describe that in more detail . There are several ways. One is entities that would not normally be involved in the profession of return preparation use the ability to give advance loans on the refund to cross cars theyds, whether could purchase with the down payment but at high interest rates, or just simply be loan product itself. Like paystub loans. Fraud. Er is out and out where preparers will take the taxpayers return after the taxpayer has approved it, its items they will inflate on the return and pocket the refund. Then the taxpayer find out about this when the irs is contacting them insane, you always taxes. Them to be engaged in a long and extended conversation. The preparer is long gone by that point. I appreciate your clarifying that. Id be that the standards were adequate even before we saw taxpayers bumping up against the kind of problems you are talking about. I appreciate your demonstrating. That is usually the case that the unscrupulous or always one or two steps ahead. I gather, so were clear on this hast, the loving decision created new problems in terms of protecting taxpayers. The decision, first of all my reading is it did not owe to the fact of whether regulation is desirable. It addressed whether the irs has the authority to regulate the taxpayer. Right now, there is an injunction against the irs being exam andmplement the education requirement. That is an obstacle. We can register taxpayers but cannot require them to be tested. How limited are the tools that are left, given the loving decision . Is there are some 12 left that they are narrow. They dont go to the heart of what you have been talking about. Protection against the unscrupulous preparer. I share the view there are many if that the majority of preparers who are honest and reputable. But it sure looks like some new opportunities, trapped indoors, have been accreted for those who are unscrupulous. Given thew decision in the loving case how restricted the tools are. The irs has penalties that can apply against preparers it identifies. Incomeires in the earned credit for preparers to complete Due Diligence certification. We have the ability to seek an objective release in jumped of root injuctive relief. But the irs cannot audit itself out of the situation. It cannot apply penalties or even do injunctions with 1. 2 million preparers. It can get the kind of competence that we need to engender by doing oneonone audits. We need a much rotter approach. Taxpayers need the designation so they can say, this is someone that has decimated competency. I appreciate that. And especially the last point. We need a system that upfront to those who need these services where the, as you call it, the bright lines are. And where you have to go to get the Consumer Protection. In the alternative to that, but we are stuck with his reactive kind of tools where you are playing catchup. Is that a fair appraisal . The taxpayer has already experienced the horror harm. Is helpful to have your views. Senator hatch. Let me ask you what the irs is doing to educate the public about how to set up lacked select a competent preparer . And what else should do . Alluded to answer to this, but i would like to have more. As part of our outreach, we provide a wide range of information and advice to taxpayers trying to trying to assist them. We advise people they should be preparerho their tax is. They should check them out. There is no way we can provide any minimum standard guarantee for tax repairers. All we can do is say, you should be careful. You should know who your practice tax preparer is. For your average preparer, that is a difficult thing to do. There is no way to figure out who has studied and has a minimum level of competence. Our view has been, if you had a way of getting that information to the taxpayer, the market would be a more more intelligently applied. Im going to a taxpayer who has the minimum standards, so i am taking a bigger chance. At that time, we cannot give them this Additional Information. We have to tell them, be careful with your preparer. Is not particularly helpful. Theres one thing that my office did. We created a poster last year in environment to warn taxpayers to do two things. Required torers are give you a copy with their number on it. If there is one piece of information, it would be for taxpayers to at least get that. If the preparer alters the return, you want to have the name and identifying number. You can show that there really was cross fraud committed. That is an important piece of information for us to have. Mr. Commissioner, one of my charges to you was you needed to restore Public Confidence in the irs. Affirmed it was your intent to make that a reality. However, there have been hat between the furor over the rulemaking, which received over 148,000 i think over 150,000 comments, most of which were negative, and recent or nots about whether your agency is producing documents related to the ongoing political targeting concerned it, i am is no longer such a priority. The American People deserve to have an iris free from political bias. We have to hold you accountable as members of congress. I am personally holding you accountable to make sure no such bias is or will be present. I believe you believe that. And intend to do that. Can you tell me what steps you have taken to begin restoring that trust . And how my colleagues and i can be assured you will continue to make this a top rarity . Priority . And will continue to be a priority. Documents, we the complaints about the volume of material we have provided. We have provided 700 thousands of 700,000 pages. Everything weyou can find. We have worked with your staff and the ways and Means Committee staff. Twitter defy Additional Information you may need to read we are providing that material in volume. Hopefully we are nearing closure. Invited you all the information we have. The concern has been by those committees that do not have the authority to see taxpayer information, where we have to review every single page, redact information related to individual taxpayers, before we can relay that information. Provided by the end of this week another 50,000 pages of information. No one has a greater interest in me personally or the irs and having these investigations come to a close. When we get a final report from someone, we will look at the facts. Actions what additional need to be taken. We have inspected except that all the inspectors general recommendations. Important that every taxpayer can be confident that they will be treated fairly by the irs. They will be treated the same everyone elses. That is good, thank you. I think my colleague. I would say, it is senator caseys turn. I dont see any evidence that protecting taxpayers from is aupulous preparers partisan issue. That is what we are focused on here today. A lot of heavy lifting to do. Well go to senator casey. Again mr. Chairman. Thank you, mr. Chairman. Address an issue that has been raised a number of times, including this morning. The 501 c four issue. The processing of those. We did our subcommittee assignments recently. Im disappointed that the new chair of the subcommittee i was just appointed the new chair of the subcommittee. Anycommitted to making sure kind of abusive practices are now repeated. Repeated and are rooted out and exposed. An committee undertook investigation which has been a bipartisan investigation. It included interviews with individuals who are impacted as well as irs employees. The two chairmen, it is my understanding that the Committee Staff has completed the investigation and is prepared to release its findings and conclusions. I would welcome the release of the conclusions of that bipartisan investigation. Look forward to working with you. Thank you, senator. Certainly that investigation was well underway when chairman the committee. Senator hatch has been constructive in terms of working with me. This is the only type partisan investigation that is taking place. I am hopeful we will have that report ready for members. Thanks very much. I wanted to start with you, commissioner. Identified team has tax scams on a socalled dirty dozen list. There are two issues i have worked on that are related to this. The kind of abusive data or information. One is the death master file preventing that from being used for fraudulent purposes. As well as working with the Social Security administration to prevent or minerals from stealing Social Security checks. Broadly, on this issue of scams and preventing them, what would you hope we could do here in the congress . Starting here in the senate and Senate Finance committee . To help the irs protect taxpayers . I assume it would be some sort items youou will of later the some sort items you outlined on page six and seven . We are here supporting congressional efforts to give us the authority to set minimum standards for tax preparers. Preparers are competent into a good job. We are worried about those on the periphery. They either dont have enough information or are figuring out race ways to defraud taxpayers. Into otherthem activities which may or may not be in their interests. Toare proposing with regard Identity Theft and refund fraud generally that the Congress Give us the authority to get w2 information. We are the victims of our own progress. In the old is, you used to get the refund months later. And now, with left running when you files the return, we get you a refund within 21 days. We have refer out leapfrogged the receipt of information by third parties. Beritical part of this would to have thirdparty information and the w2 information earlier so we could make sure there is some comparison. Congress already took has been very helpful, although there are still people who have access to it. We are concerned across the board about the ease of theft of Social Security numbers in the public sector. No one has older ever stolen the numbers from the irs database, but the use them to file false returns. Missiles and ms. Olson . One thing that is an emerging theft of Social Security numbers from preparers. Hacking into preparer databases. That is difficult it is you do get wage information. It even if we cannot tell that is a bad return. Doing upon it a pilot to see if you can match the name on the return with the name on the account itself. The bank account. That is having mixed results. There may be things on that and where you can work with the Financial Institution to do greater security. Arnie stoller supposed to go in dollars are these supposed to to go into their . That would be an easy thing. The criminals you are talking about scams. They are going to do whatever is easiest. The more you can create their ears, they will look somewhere else. They wont necessarily go away permanently, but they will go somewhere else. Senator casey, senator grassley. I will go next. He cried to go ahead. Senator roberts. Thank you. When you visited with me last year, prior to your confirmation, you told me it was your role to clean up the irs and get the agency back on track. Regards to the Affordable Care act. Your longterm goal is to restore integrity. I have confidence you will be able to do that. However, prior to your confirmation, you said the irs was targeting certain groups during the application process. Trampling on their First Amendment rights. It seems there is a commonsense step you need to take. You should take it today. Stop all action on the proposed 501 c four regulations until knows what went on. Is. The implication of this how we can address the issues raised and hold people accountable. That is why have joined with my colleagues to stop you from proceeding until we have answers. Here is the deal. We have court of regulation title 26. The most important rules are issued as regulations. The treasury decisions are prescribed by the commission are and approved by the secretary or his delegate. Other rules may be issued by the signature of the commissioner or any other official to whom authority has been delegated. Decisions are prepared in the office of the chief counsel after approval by the commissioner. Here is the deal. Us,constituents informed with some degree of outrage, there is an iris fox and the First Amendment Chicken House. The response was, we know that. We are writing regulations that tell the fox to behave himself. We are investigating why the fox was even in the First Amendment Chicken House in the first lace. I have some suggestions. Why dont we get the fox out of the Chicken House. Until we getions our investigations done. At least who put the fox and the Chicken House. Hold him accountable. Why cant we stop on these regulations until we are done with the reagan investigation . Having worked on my uncles farm, i have a little bit of familiarity with foxs and hen houses. Inmy early testimony february, says the volume of comments have gone up, the chances of us finishing any regulation before the end of the year are slim if not nonexistent. Our hope has been one or more of the six investigations that have been going on since last year will be completed well in advance of that. In terms of the goal of not having a regulation until we have some investigation done, unless the investigations are going to go on for into next year, and hopefully this committee or others they will issue the report in 34 months. Well in advance of any time we would have the chance to complete this regulation. With regard to the regulation, not having been around when it was originally formulated, my anyitment and dedication is regulation that is issued should be fair to everybody. Clear and easy to administer. We are going to carefully review the 150,000 plus comments that have been made. Review. Just ordered the im not sure however but he knows whether they are positive or negative. But the legislation has attracted a lot of interest. By the time we hold a public hearing, and repurposing any regulation and get more public comment, it will be towards the end of this year. My hope would be that someone thed have it one of investigation will be done, if not more. We are committed to reviewing the findings of the investigative report, taking any additional action necessary to put it behind us. I want to thank you for that word committed. You are unequivocally committed to this committee. The 501 c four proposed regulations will not be finalized this year. I think what i have said is the chances of it being finalized before the end of the year, not before the election, are slim. We are not rushing to get them done. The chances of something happening in dodge city, kansas. Are slim to none. Some left town. Why dont we say none. What can we do that . We could do that. It is a slim chance. What i can commit to is we will not be near completing the regulations before somebody has completed an investigation. I hope you share them with us as we go through them. Time has expired. Thank you visitor thank you mr. Chairman. I wrote you and secretary lew and asked about the decision to delay the employer mandate until 2017 for 5099 employees. That category of businesses is not specified in the Health Care Law at all. In order to qualify for the delay, you require employers to certify they did not lay off employees. Certification seems like unnecessary information unless you think the mandates will cause businesses to lay people off. You think businesses will lay off their employees in order to avoid paying penalties under the law . If not, why are you requiring the certification . Legalat is the justification for the new category . In the certification quashes process . Tax policy issues like this are the domain of the Treasury Department. Made by theons were Treasury Department. I did not participate. As a general matter, i dont think companies with regard to Health Care Issues are going to willynilly layoff employees. I think most companies are dedicated to their work force. Basis where, what those decisions made has to be addressed to the Treasury Department. You have to sign off on them. All regulations are issued by treasury and the irs. The issues behind questions like that are decided by the Treasury Department. The key chief counsels office. I requested a response from you and secretary lew by march 7. At what time can expect a response . I assume you can be an errand for making sure this gets done . I will commit i dont know why other than any response gets cleared my commitment to you and this committee is we will reply promptly to any letter. I will get you a prompt response from our side. I cant say when the Treasury Department will respond. We should respond promptly. You talked to secretary lew and he made the same promise. I dont know why people say they will answer if they wont. Anyway, lets go on to the second question. Just last week, i wrote to you concerning the nonprofit hospital reforms i authored and were enacted in 2010. Imposed and new requirements on nonprofit hospitals to hold them accountable for their tax exempt status. Key legal guidance does not appear to be got all iced finalized. What has been the delay in finalizing the regulations . A series of proposals have been drafted. In december, january, we provided treasury provided, with the irs jointly, guidance to hospitals that they could rely on the existing proposed regulations. We expect the final regulations will be issued before the summer is out. The hospitals have already been advised a can rely on the earlier regulations that are out there. The 2010 nonprofit hospital irs andlso required the the department of health and Human Services to collect information on nonprofit hospitals and report to congress. A report should have been issued to congress for what he 12, but Congress Never received any report. They have yet to receive a final report. 2012 report by the Inspector General reported that the irs interinto a memorandum of understanding hearing understanding with aj says hhs. They agreed with the recommendations. As i understand it, the hasrandum of understanding not been finalized. What is the status of the memorandum between irs, hhs . When would you expect it to be finalized . Why has there not been an annual report . When can Congress Expected pg13 report . We have been working cooperatively with hhs. Confirmationtten from them about the process we will use going forward. The problem with timing it takes for the takes 23 years data to be filed. The 2011 data has been made public by hhs. We expect to provide jointly data the our summer we will be issuing a report for 2011. That is the timing in which we actually get the final beta. Every year thereafter, we word pride will provide the report on an annual basis. We are collecting them for the same time. Putting the data together. Late asar, it will be of the time the hospitals have to file the data. Starting this summer, you will get the data required. Thank you, senator grassley. To thank you and senator hatch for holding this hearing. I think all americans expect the irs to administer our tax laws in an impartial manner. They expect tax preparers to operate any competent and ethical manner. I am pleased the committee is examining the issue. To see if legislative action is necessary to protect americans from unscrupulous preparers. I want to give you an opportunity turn to something that has been mentioned by my colleagues and discussed of late give you an opportunity to correct the record. Last week, the Washington Post fact checker awarded you three pinocchios. Theyour statement that Inspector General has not used the word are getting. Targeting. That the virus targeted specific groups. Targetedhe irs specific groups. Given that the post article and the confusion around recent statements that you have made on this topic i wanted to give you the opportunity to correct the record here read the question is, do you agree that certain groups are targeted for scrutiny . I appreciate the opportunity to correct the record. It has been intriguing to me it has become a big issue. What i said in my testimony, which seems to have triggered this, is that the report last may, in his findings inappropriate criterion were used to select applications for review. It was in response to a question aout my question is, couple times since then, i made onlyear that the my point was in response to the question where they said the Inspector Generals finding was targeted. That to be how it this big an issue, i dont know. The issue is, however you describe it, it should not have happened and should not happen going forward. We are committed. We have taken all the recommendations and accepted them. In anyople relationship with the irs we will continue to audit people. Democrats and republicans. Some will go to church and some will not. When you hear from us, it is because of something in your tax return. People need to be competent that is our commitment and general approach to these issues. Just as a followup, the post article referenced to your use of the term targeting, posed this question. Toxic it wase so wiped from the lexicon once you arrived at the irs . Anyone in thes administration or treasury are white house treasured pressured or counseled you against using the terms . No one in the administration. The only concern i have heard have been me i have been to 20 offices. Several the employees have term. Ed to the nobody in the white house or treasury or administration has asked me not to use the word. Thank you. Mr. Chairman, about a minute americansd more seeking tax preparation assistance and that is the the taxle complexity of code. Much of the Affordable Care act through the tax code so when uninsured americans file taxes they node to figure if they qualify for the subsidies and what they can more financiales and medical sense to get coverage or pay the penalty for violating the law. Doesnt the Affordable Care act issues on complexity top of those we already have making it even more difficult driving even more americans to tax preparers when coulds to getting returnreturns in on time . Believe most are prepared to handle the complexities arising from the Affordable Care act . I think we will have questions from the preparers and taxpayers. The vast majority of americans will check off box that says they have insurance or medicare and they wont be affected. For the people in the area applying for insurance and getting advance premium credits asked. Ill be questions one of the things is to make sure that we are prepared to answer the questions. Comment . Have a i think there is certainly a great deal of complexity in the Affordable Care act. I would note and im watching carefully and closely how the approaching that also on the compliance side what they owes money as a result of it. There is one thing about the Affordable Care act that is important. We will get a lot of information from third parties which will inaccurate identify claims. During the Filing Season and that is very different as the earlier alluded it is important for us to go ahead and 1099 information early to avoid the fraud and errors in the regular tax system. Is an actual added benefit in the Affordable Care act that we dont have with the rest of the filing system that would be good to have in the rest of the filing system. Thank you. Thank you, senator thune. I appreciate you are complexity ofhe the code because the congress is not blameless here. Session somery other group comes up usually with a good cause and what happens on the finance committee we add it to the code. There have been Something Like 15,000 changes comes to maybe or two for every working day in recent years. Right at the heart of tax reform and look forward to colleagues. My senator isaacson is next. Talking about tax key toication is the this. Another key how long i have to church and answer questions. April 15 proximity to everything was about the i. R. S. Listening to senator caseys statement we are close to having conclusions from the bipartisan investigation. Is that correct . Will let senator hatch chime in here, but i believe so. Certainly the staffs have been talking, senator hatch has been very constructive, given the is the onlyis bipartisan investigation into this. And obviously there were errors made. Is no question about that. It is important that we wrap hopefuland im very that we can do that quickly. Senator hatch . This upe tryin trying to wrap as quickly as we can. It has been slow. We still havent got and number of documents that we still have to get. With the distinguished chairman we are working in a hopefully matter and can conclude in the future. I understand you sent us a you madedicating that available all of the documents for purposes of this investigation. Is that right . With me. Ave the letter a couple, three weeks ago we the we provided you all of documents we had about the determinations process which was inspectort of the generals report. Since then we had requests for aboutonal information not the determinations process but lois any involvement by lerner. Thethe base issue of determinations issue that the i. G. Raised you have all of the documents we could find. Are intruding on senator isaacsons time and i will let the last wordhave here. We did get they said they most of the documents and then we found out that they hadnt. Ofjust got a new set documents last week. We are appreciative of the cooperation. We still havent gotten into the treasury documents as much as we would like to. Starting. E are all i can say is we are trying todo the very best we can conclude this investigation and hopefully we will in the near future. We are committed to getting done commissioner and we will get it done in a bipartisan way and i want to assure you following upbe with you quickly on any remaining questions. I knew that as of a couple of you had given us everything we asked for and that youres me as indicative of cooperation. This is not going to be imputed senator isaacsons time. In that case let me just say i appreciate that. Good working roux lakesships with the staff relationships with the staffs of majority and minority and we will continue to work and whatever you need we are anxious it to you. Senator isaacson. Will roll the clock back to you have the five minutes. Voluntary complyian dependences system the peoplence the american have in the Internal Revenue service is the key to voluntary compliance. Whatever the answers are, the better off all of us are. Want to thank commissioner the visit he made to atlanta. Business before and watching a business head employee, if that was typical of other Office Around the country, i think the the new jersey i. R. S. Up because il two was impress. Thank. A statement about the incentive for the preparer to take advantage and pocket the difference. How do they pocket the difference . Some of the ways is if you can get a larger tax refund for customer and you are actually preparing returns in a furnitureship or in a rental place or in any number of entities that are selling products unrelated to a loan,n you can give you know, advancing funds so applyhe taxpayer can those inflated refunds to purchasing a product. And what we are seeing in some instances and i used to see this in the low income taxpayer i representedhen taxpayers is we saw this in the ahicle purchase where taxpayer would use the loan on an up plated refund to inflated refund to purchase an automobile. Then disallowld the refund and the taxpayer would be unable to make the highers ongoing on the dollar vehicle than they really could afford. They owed the refund back to the i. R. S. And the car was ultimately repo 70sed and they end up with cancellation of debt income for the next year taxable. Other more direct ways is the preparer can put his bank account down as the bank account the refund should go and all done electronically and big feeher take out a before he provides the refund to the taxpayer, keep some of the keep it all and there is no way for us because it is all electronically when he puts down his bank account how to keep it from going to his bank account. Those taxpayers dont have bank accounts. Ha is a fraud against the taxpayer. The taxpayer. St i want to ask about the i. R. S. Free file program. Talked about the low income the most abused. Has free file helped . Seems like Electronic Technology would help people income. Deductions or many of the taxpayers most vulnerable do not have Computer Literacy. The level of Computer Literacy that would enable them to do that. The walk in sites and vita sites they are trying to andtaxpayers to sit down they walk them through, they have computer terminals and you prepare your own return and if you can learn it once maybe next career you can do yourself. Is a very high learning curve. I think one thing that can help this w2 1099et information in advance then the i. R. S. Can pour into whether it is commercial software or free file or the ofe fillable forms as part the consortium that you could in that might make it easier for taxpayers to say i ceteraese dependents et and prepare their own returns. It is a big lift for this population. My last question and i the time, mr. Chairman. Un enrolledch an preparer in a fraud, you dont to do that to that person. Can you refer them to the Justice Department for prosecution and investigation . When he we find systemic is a or fraud that violation of law we can refer it for prosecution. Is after the taxpayer has been abused and we dont have to each catch everybody who fraudulently clients or to prosecute them all. They are at risk if they commit fraud from the tying of their runs for in the filing of clients,urns for their they are at risk of prosecution. The question is whether we can of them to make a difference. C. M. S. Does a good job of enforce against fraud in medicare and medicaid by profilesghly visible of anybody they catch defrauding the government. Might be beneficial to the i. R. S. There is city a lot of people playing out they are roulette and assuming that at the levels they are operating, thee hard to find them and question is whether there will be enough resources to prosecute them. Thank you, mr. Chairman. Thank you, senator. Good points that you rely out to be rouxl more into the free file. Questions about whether they can do state returns and these kinds of matters. Closely with you on it. Senator burr . Commissioner, welcome. Senator coburn and i have shared you inrrespondences with the last two weeks. I thank you for that timely response. To thes in relation chicago district of the nlrb thesion as it related to northwestern Football Players and their potential unionization. We said to you that our interpretation of section 117 of the enternal revenue code was what your tax experts said there was an exclusion specifically stated in there for scholarships, educational that made those exempt from ordinary income. To stay one ons exception. Shall not apply to that portion of any amounts received that payment for services by the student required as a condition for receiving the scholarship. Meaning if the individual received a scholarship portion that represents a payment for a service was no longer tax exempt. Back a detailed letter from you basically stating the section 117hich is and the exclusion for scholarships. Very specific statement in here. Definition of employee for labor law does not control whether the individual the purposese for of federal tax. Words, scholarships are code. Ed by i. R. S. And this is going to raise a big question because in nowhere did your letter note the disqualifying thing found in the tax code which is providing a service. Let me just state for my decisions the nlrb said these students are employees. Was brought by northwestern Football Players are underey said we the control of the university. They tell us when to go to to go to a game, they control, therefore we opportunity to bargain with them because we are employees. I. R. S i mean excuse me nrlb made a determination that they were employees and of thed to section 23 act. Let me just quote from that. In relevantides part the Term Employee shall include any employee. The Supreme Court held by applying the broad definition it is necessary to consider the definition of an employee, a person who performs arvices for another under contract of hire subject to others control or right of forrol and in return payment. Now let me just suggest to you that doesnt meet the exclusionary part of section 117, i really dont understand it. And i understand your point here law doesnt dictate let me point then to tax law. Ruling 77263, which section 117 and the tax law treatment of athletic scholarships the i. R. S. States this clearly. Any amount paid or allowed to or on behalf of an individual to enable an individual to pursue studies or research is not considered to be an amount scholarship or fell fellowship grant if such amount represents compensation for past, present or future services or for services that are subject to and underlined direction or super vision of a grantor or if such or research are primarily for the benefit of the grantor. These conditions will negate the existences of a grantrship or fellowship as defined in the regulation. So the body of tax law is pretty clear on this question, commissioner, bargaining for excluded fromt be income as athletic scholarships. The players were seeking the northwestern case and they make the argument that they are employees. Theyhat the scholarships receive from the university are compensation for services rendered. The nlrb agreed with the players employees and that their scholarships are compensation for services rendered. Me just ask you, how can the thes. Ignore tax law and facts in the answer that they send me . For you to well, first of all, it will be interesting to see what the nlrb final decision as that issue from the Regional Office goes. Orward as it if it goes as currently written for those scholarships taxable . Well, as the revenue ruling you are talking about talks to distinguish obviously graduate students who teach and do research and get paid and that issue. Obviously interesting discussions are going on in the ncaa about whether in fact student athletes should get sty stipends. The principle has been that they are student athletes and the toolarship allows them attend college and to participate in athletics and the historically has been rule applied. To the extent that the circumstances change is why intly and that say it will be interesting to see where this goes obviously we will take another look at what the definition of compensation whatcholarships are and the situation is. Thus far the experts in the i. R. S. Have ruled that nothing has changed thus far that would cause us to make a commissioner, let me ask just from the explanation and what i law, where have i missed it that it is clearly stated there that if if he are supervised, if they perform a Service Required by that entity controls them, this is no longer considered a scholarship . I think that you are reinterpreting what the tax law says. Im saying is historically what Football Players do today is no different than what they did five, 10 or 20 years ago and always been treated as those were scholarships. To the extent that the nature of the compensation changes then we take a look at it. Nothing in terms of what a athlete does has changed nl right result of the field b. We have po move on. We have a lot of witnesses. You are way over. Itlet me say, mr. Chairman, concerns me that we might look at it in the future. Either follow the statute that is in the law which i think is very clear or we dont. Sure that the i. R. S. Statute is open for interpretation when it is as it is that you would wordso change a lot of there to suggest that this does determination. Senator brown. That the labor law says. Senator brown. You, mr. Chairman. I appreciate bringing up such an whatesting issue that happens at northwestern with these players. Definitely not asking for compensation. I know senator burr didnt say that. Is about concussions and a kid that gets hurt and loses his scholarship because he is of no then ande University May not have healthcare provided for. I remember suspension of a major player at a university in my state hot suspension did not the effect until after ballgames pause of the revenue he represented to the university espn. Aa and so even though he deserved deserve ithe didnt te until after he would play the ballgame that would bring in the revenue. Lot of we have a discussions ahead of us on this. If i could say by the way. We have a number of witnesses on the second panel. We will have to continue with the questions. Question. Go on to my of fraud by tax preparers. Senator brown . Be that. L nobody on the panel has talked about earned income tax credit. I cant stay for the secondable. Secondpanel. Know one will have much to say about the earned income tax credit. If we look at the eitc. And what that ctc means. If we look at eitc as too much fraud and we always should be vigilant to be sure we might be on carriedused interest in blocker corporations and accounts in the cayman islands. Let me ask to ms. Olson, there report that found higher rates for eitc and estimate that between 20 to 2 2 of eligible eitc. S are claiming we put time in getting people to sign up and know about it and be it. E of what do we do to maintain and ctc whilee itc and reducing error rate and enrollment. Despite the fact that they lift millions of families out of poverty he says the risk of fraud is so great it should be eliminating both credits. Comment on both of those, if you would. The i. R. S. Has some research some very Good Research audits of eitc taxpayers that really demonstrate that the sources of are very great and you have got you know just a complicated statute so you have kinds of errors and then you do have fraud for all of the reasons we talked about her. Of thenerability population. The population changes one third every year. A learningto have curve where you are teaching people, they are leaving eitc the eitc innto great numbers. Other proposed in testimony multiple ways of addressing the errors including education, redesigning the combinea little bit to the family related credits and dependency exemptions and child credit into a larger family and them andable worker credit because that makes the overall dollar amount a little less for each provision and a little less attractive for fraud. The eitc has very low Administration Costs for such a large social benefit program. Are, are in the compliance and error and fraud rate. And we dont know what it fraud what isonight know error. Dont know what is error. Very benefit programs have high Administration Costs and not as high, you know, error costs. That is because they have a lot of front End Application process. We dont. You file on an income tax return. Very inexpensive. We have the costs at the back end. That no otherhas benefit program has is a high Participation Rate. Of thee 75 to 0 80 eligible taxpayers getting that money is higher than any other program that the United States administers to that population to my knowledge. If you really want to look at the effectiveness and efficacy, yes, we have a high error rate costs and a high Participation Rate as opposed to the programs with low error but very high Administration Costs and low Participation Rates. At itthink if you look wholistically, yes, we have to it down the error rates and made really substantive proprose pals how to do that. It iseffective program very good in my personal opinion. And my professional opinion, too. I agree with the Taxpayer Advocate. We had two big meetings i had with everybody who has ever thought about this program. We tried a lot of different things. Tohink the error rate 20 22 and amount of payment made in error, it is not all fraud, are untenable. A great program. As i told everybody we have to make it clear to the public we is a problem. A serious problem that we care about and in fact we are going to do something about it. One of the things we he need and we asked the congress this time is authority for what is called correctable error authority. If we find and know there is a problem in a return we cannot change that return unless it is just simple math errors without an audit. And contacting the taxpayer. Error authority would allow us when we know there is an error to make the taxpayerd advise the and they could appeal and come back at us but it would allow us theliminate some of improper payments at the front end rather than requiring an audit each time. My colleagues time is expired. Senator carpenter. Thank you. Very nice to see you both. Thank you both for your service being with us today. Im delighted we are having this commend you andnd holding it. H for three things to do for deficit reduction. 1. 4 trillion in 2009 and last only 680 billion and this year expected to come in and billion and drop more start going back up again. Reform. Entitlement save the programs for the kids and doesnt savage old people or poor people. Reform that brings down the corporate rates to something competitive and again deficit reduction. And ask how to get a better result for less money and this that. Into we spend a lot of time in recent years looking at this. Terms we get make sure in of the revenue that is many coming to the treasury that the a fair andre paying reasonable amount but not being unduely burdened because some of our neighbors are not doing their fair share. And this hearing puts a real spotlight on the ways that we can better ensure that everybody is paying their fair share. Im delighted we are having the hearing. Years of investigation by g. A. O. Inspector general have revealed Serious Problems with the tax return preparation by preparers who are not c. P. A. s or not attorneys and otherwise credentialed. And as we know this poses for taxproblems administration particularly for highly complex tax provisions like the eitc. It is easy to fill out the tax it. To apply for but the actual compliance is quite a different matter. Circuit of the recent Court Decision it looks like legislation is necessary to to adequatelys. Regulate the tax preparers. Support i. R. S. Efforts to create a voluntary Certification Program for preparers. Let me ask the question. Do you believe that offering certification will offer enough opportunity for return preparers to distinguish themselves so that many preparers will participate . Go ahead. It to me. Goive i think that if we couple that voluntary certification with exampleditions for right now unenrolled return preparers can represent audits before the i. R. S. Of returns that they prepare. And we should and that is a rule that we have promulgated. We should change that rule to toy grant that ability people who have taken the test demonstrated competency and continuing education. They can also write their name and say you can call us if there are questions about the return and we should certifiedhat to preparers. So that that gives a leg up to people who are taking the time out to do the voluntary and continuing education. They can say we can do these whereas other people cannot. It wont work if we dont have a comprehensive education campaign. Houseto make it the good keeping seal of approval. A cheer choice, go to attorney, enrolled agent or certified preparer or all bets are off. This regard help in other than passing the legislation which i would like see us do . How can we help short of that . There may be nothing . Something . E this hearing is valuable to give visibility to the issue to to as we do to get taxpayers be careful when they select a preparer to try to determine is andeir background competency. Again, the government and the i. R. S. Have a great interest in preparers because the errors that are provided or the fraud that is created when it is not done well creates a tremendous burden on the system question ofhe he whether we are getting adequate compliance. A voluntary program would be a step forward but still leaves to periphery rifr returns. Rroneous so it is ultimately it is not as of sings of one and half dozen of the other. It is critical that taxpayers get proper advice and we get as many activities cat tax returns so we dont fit are resources. My time is expired. I will return just by submitting record. On for the i thought senator thune asked a question worth highlighting and to about a substantial portion of the Affordable Care act implemented through the tax will get ayou question from me on that. Great to see you both. Thank you. I appreciate my colleague bringing up the voluntary compliance issue. Doesnt deal with the scofflaws. That the majority of preparers are honest. Is what to do about the outliars. They wont comply with the compliance point. We will discuss that and all of the options here for dealing problem. Senator . Follow only that note. One of the options i believe is make thingso simplier from a technology per eastbound. Some brought up the Free File Program which is a Public Private partnership between the i. R. S. And commercial Tax Software Companies that offer federal tax preparation and inception it has saved over 30 million taxpayers and in helping them with their filings and also saved the federal government Something Like 91 million. Im sure there are a lot of people who make less than how to use word or excel. This is about continuing to make of the tax code simple so that the simpler,ation of it is too. Young peoplees of using an online version but then going and paying a little bit going the nexten year and thinking they were adviceo get some great and they are sitting across from somebody that knows barely more than they do but charging them, know, two times or three types the rate. So to me, make the tax code simpler, make it easier for people to file. Make the code easier to that people know exactly what they are doing. Isnt that the direction that we going . Be absolutely. I mean i made the complexity of the tax code the number one most for taxpayersm many times in my annual reports to congress. I was an unenrolled return preparer and then an returns who prepared for many clients. Wouldbaffled why people not do some of the returns. There was a nervous factor that mistake andake a missed something. I think that is driving people returnincome levels to preparers. Usage has notfile been robust in terms of the taxpayers even though it covers a large population. Some of that is that some group taxpayers like to buy the products to get all of the ther bells and whistles on products incorporating with the accounting programs, et cetera. Go to returno preparers like i said before because they dont want to make a mistake and dont trust even with the software. I think the i. R. S. Publicizes fillablefile or free forms. I will come back to something i said earlier. I think it is very important for i. R. S. To be able to get w2 1099 data as early as possible to make it available to taxpayers to download into the Software Programs they may purchase so preparers can into their programs and so that people can download fillable file or fee forms and get a little further along and that is accurate information. You miss key stroking errors and things like that. W2 that got sent to a wrong a dress. Technologybe the big push. If congress could set some goals for the i. R. S. To move forward in this. We congress set goals for the i. R. S. To get into Electronic Filing and even though it didnt goal in the it became and theale and a goal i. R. S. Organized around achieving that. Get to the next electronic oompf with getting the thirdparty information reporting timely and help protects but also against fraud. I think, you know, software has to focus all its attention on making it intuitive and there is intuitiveness we could probably put into the tax code explanations and we will certainly teak you up on that offer. To ask quickly because we suffered this the muding loss in slide area of the state and looking at all of this as a to Disaster Relief and you have seen the incidents with sandy. Look athink we need to the issue of what is available to communities . Riflelike we are almost shy and then a community where you lost your house in a lot of instances still have to pay on the mortgage even though the house has been totally wiped out. Help these communities with we have made recommendations thate past about disasters didnt quite qualify for president ally declare disasters. I also think your idea about of the mortgage relief and debt relief and things so you taxable events because you cant pay these things, that is very important. Toould be more than happy look into that. Thank you. Thank you, ms. Olson. Of you, this was very helpful in terms of the technology issue. One in the senate senatorh savvy than cantwell. We will follow up on the issues of trying to protect people from tax get debt with they relief. At this point, i think we completed the first round. Like to introduce our second panel and we will have introduce dr. John barrett. Associate professor at Brigham Young university. Thank you both very much. You spent a lot of time at the thank youble and we for your expertise and patience. I would like to introduce mr. James mcteague. Director of tax issues from the Government Accountability office. And wayne mcelrath. He will answer any questions members have after mr. Mcteague. I know this topic generates a passion, but i think we right. Mcelll have mr. Wayne rath answer questions that members may have after providesgue testimony. The next witness, mr. William the president and c. E. O. Of h and r block and ms. Salisbury have tax clients waiting for you at home in oregon. We thank you for coming. And dr. John barrick momentarily. And the attorney at the consumer aah bin,r and mr. Dan attorney for the institute of justice. Let us have senator hatch introduce the associate professor of Brigham Young. Like to welcome the professor from the school of ofntiantcy at the college youngss at brigham university. The professor is a leading activities democratic expert in taxation. Wealth of practical experience. The highlights include two years tax experience with a bipartisan joint committee on years as a taxur consultant with price waterhouse. We welcome you all here and happy to have you here helping to understand these issues. Thank you very much, senator hatch. And we thank all of the witnesses for coming. In order to give members time to youquestions, we ask that limit your testimony to five minutes. The prepare statements will automatically be part of the record. Why dont you start. Thank you, mr. Chairman. I dont think your mike is on there. Can you hear me . Yes. That is better. Okay. Andk you, mr. Chairman members of the committee. Im pleased to be here to discuss the quality of Services Provided by paid tax preparers. Onlions of taxpayers rely them to provide them with accurate and fully compliant tax returns. Has long recognized that paid preparers actions have ability to impact on administer tax laws effectively and collect the revenue that the government. Despite the responser of paid preparers, the i. R. S. Authority regulate the paid preparers is limited to certain preparers as you heard such as attorneys publictified accountants. The majority, 55 are inenrolled i. R. S. Regulated by the the i. R. S. Initiated steps to courts ruledthe that the i. R. S. Lacked the authority. Into hownsight unenrolled preparers perform we oneloped two scenarios based common tax issues and call them the waitress and the mechanic. In the waitress, our undercover investigator posed as a single mother who received wage income and unreported cash income it livednd had one child who with her during the year and qualified for the earned Income Credit and one who did not. In the second, mechanic and his the majority of income from his wages but also workide income from repair and child care. They had three children who lived at home. College. Ded as you can see from the board on my right, and figure three in in 19 visits to randomly selected commercial paid preparers, refund errors ranged from 52 lower to 3,700 should havethey been and other two instances did thepaid preparer calculate correct refund amount. In the waitress scenario, they errors. Key first, not reporting all of the cash tip income and second, as beingboth children eligible to receive the earned credit. Ax the clustering of the bars illustrates that different preparers made the same errors. Example, four did not claim the cash tip income which refundted the waitress by 654. One preparer told our investigator that if she reported the tip income it would be a red flag and her employer audited. Three preparers made both errors which resulted in refunds by more than 3,700. Again, one preparer told the she couldor that claim the second child if no one else did even though the child with her for more than half of the year. Mechanic scenario, resulted in refunds overstated by 3,000. One preparer said that if the side income was reported the tax fee would go up and refund would go down. As to show how the refund would change if the side income was reported. Taxpayers were not well served by the preparers that we visited. But as the next board illustrates, figure six on the written statement, they paid a services in inr the and fees varied widely. Ranged fromhanic, 300 to 600. Formingly, the average fee the waitress scenario was nearly 300. Her weekly pay. Often, paid preparers did not these upn estimate of front or the actual fees charged were higher. Fees, however, did not translate into more accurate returns. Correctcharged for the return was one of the lowest at 311. Investigators inquired about the high fees we heard a range of responses like we charge more in the morning than the afternoon. We charge more early in the tax season than later. The earned income tax credit form is one of the most expensive. Our finds are anecdotal, the analysis of i. R. S. Research Program National Research Program data reveals that preparer filed returns error an estimated 60 rate compared to estimated 50 for selfprepared returns. Paid prepared returns were similar to those encountered during the visits. Filedample, preparer returns claiming the earned income tax credit had an of 51 . D error rate undoubtedly, many paid preparers do their best to prepare clients accuratern returns thats are and compliant. Poor performance can result in havinhaving to pay backaches and interest and possibly pennalcies. G. A. O. Looked at states that regulate, we found that returns filed by paid preparers in oregon which has the most stringent requirements ofthy likely to bere accurate than comparable returns filed by preparers in the rest the country. Given the important was paid preparers we are recommending if significantees preparer errors exist it should alexis concludes my statement. Thank you very much, mr. Cobb. I think you will be next. Would you like to add to that . No. Very good. We are pleased to participate in this important discussion about protecting consumers from incompetent and unethical preparers. As a Worlds Largest consumer tax services provider, competent tax preparation is something we take seriously. Last year we filed more than 22 million income tax returns. We know a lot about consumer views on taxes and know what it takes to maintain expertise in this always changing tax landscape. Taxpayers, protects to address his needs to issues need to be addressed. First, we support legislation that sets standards for preparers. The most obvious way to address incompetent tax return preparers is to establish a set of minimum standards. They provided objective measure for consumers and tax preparers to measure and monitor the competency, expertise and performance. This is critical, because the ultimate goal is to help file more complete returns. Equally important is the reduction of fraudulent returns. More than 80 Million People filed an individual income tax return with the help of a tax return preparer every year. Consumers need an objective way to know the person they turn to is competent and meets standards necessary to accurately prepare tax returns. Taxpayers agree, a recent survey that we commissioned found that nine out of 10 consumers support requiring professional tax preparers to meet minimum training standards. As this initiative moves forward, the u. S. Treasury department and irs Department Must leverage the lessons learned. They must partner with private industry to create an effective and costefficient program. The components of the program must include demonstrated competency, continuing education and background screening. Preparers tourn meet minimum standards and stay current with the code is not about granting the irs Additional Authority that it should not have, or to advance anticompetitive pursuits. It is about attacking the 60 of consumers who get help with their taxes every year. Why we require our preparers to meet stringent education and competency standards. 75 hours of tax law and return preparation education, plus 35 hours of skill training in their annuallyr, then another 15 hours of continuing education and 20 hours of skill training. The second key item that must be addressed is implementing consistent Fraud Prevention measures across all tax preparation methods. The steps designed to prevent fraud in the paper. Channel are notably absent in the doityourself channel. Specifically, for the 40 of taxpayers who do their own taxes using doityourself software such as h r blocks, they are not required to provide the same information and documentation to substantiate their eligibility for this refundable credit. Congress must close such obvious gaps, not only for ei tc, but for all refundable credits. Proper paymentnd rate persisting, this is an obvious opportunity that should be seized immediately. Consumers are not concerned about answering more questions. In the same survey, a significant majority expressed a willingness to do more to help combat tax fraud. Such as answering more questions, or even waiting a long therefore the refund. Government, the tax preparers, software developers, and taxpayers each plays significant role in the process. Taxpayers are willing to do their part as long as it is administered consistently for all. Additionally, the differences standards creates a loophole for those who dont want to comply with the requirements. They simply use a doityourself product. Irs should set standards for software to ferret out coast preparers. Before i close, let me take a moment to acknowledge her interest in streamlining the code and filing process. We would be pleased to share our tax expertise on these issues with you and your staff, the tax analyzesd h r block proposed legislation and regulations with an eye on how they will affect consumers. In doing this analysis, the institute has access to the real world expertise of our 70,000 Tax Professionals who are on the front line with consumers. We urge congress to listen to consumers and move to enact minimum standards for preparers and implement consistent antifraud measures for tax repairs. Tax repairers. Welcome, you made a long track at a busy time of the year. We really appreciate your coming. Thank you. Im not sure your mic is on. Lets make sure. We always want oregonians heard. That is right. Wyden, Ranking Member hatch, and distinguished members of the committee, i am and irs enrolled agent and a licensed tax consultant in oregon. For the past six years i have served the state of oregon as a member of the board of tax practitioners. I have served on the board for the last two years as chair. I am pleased to be here to discuss with the committee the actions that oregon has taken to protect taxpayers from incompetent and unethical tax return preparers, and to recommend that congress per fight the irs with the authority to require individuals to demonstrate minimum competency in tax return preparation. Either by passing a state board examination, or for the individual to pass an irs examination, and then to impose continuing education requirements after passage of such examinations. Oregon foundeason it necessary to develop its own program 40 years ago is the same today as it was then. Initial training and registration was essential before anyone can even begin preparing your tax return. Organs track record proves this. 1972, oregon determined that people engaging in tax return preparation should be licensed and be required to obtain continuing education relating to tax return preparer occupations. The board of tax practitioners currently regulates tax return preparers in oregon. Oregon requires paid preparers who are not already licensed by the state as cpas or attorneys to obtain a state license to prepare tax returns. To become a licensed tax preparer, a person must have a High School Diploma or the equivalent, complete 80 hours of approved qualified education, as a state administered examination , and then pay a Registration Fee and application. Licenseesewal by requires proof of at least 30 hours of continuing education. According to a report to this committee prepared by the gao office in august of 2008, federal tax returns for the year 2001 filed in oregon are more likely to be accurate than returns filed anywhere in the rest of the country. Found thaty, the gao the odds that a return prepared by an oregon paid preparer is about 72 higher than the odds for a comparable return filed by paid preparers in the rest of the country. Oregon has been a leader in requiring a licensing of tax preparers for over 40 years. By the gao as noted show the excellent results of oregons regulations. Accordingly, the oregon state order of tax practitioners urges the congress to enact ,egislation similar to oregons which would require an individual to demonstrate competency in the preparation of tax returns and satisfy continuing education requirements. We suggest that such competency be demonstrated by a written examination approved by state board of accountancy, or a board of law examiners, or a state entities such as the oregon board of tax practitioners, or by the irs. The passage of an examination recognized by a state such as oregon to show competency and tax return competency, must be considered to demonstrate tax competency for federal tax return preparers in order to recognize efforts that have been undertaken at the state level and to avoid duplicate and unnecessary taxing. We commend the Senate Finance committee for holding this hearing and considering this important legislation. Thank you for the opportunity to be with you, and please let me know if you have any questions. I am very willing to answer. Thank you, that is very helpful. Members of the committee, thank you for inviting me to participate in this hearing. Protecting taxpayers from incompetent and unethical preparers is an important topic. I would like to share a former colleague and classmates recent experience with the preparer who received services from a ghost preparer. A new client comes to visit a cpa and indicates that he has a tax problem. The client never attended college, as a single father, has single children and is facing uncertain economic times. During the previous year, he engaged a preparer who claimed that he could give him an 8,000 refund at the cost of 800 or 10 of the refund due. Not signn prepared did the return, nor did he provide reliable preparer Contact Information as promised. The client did receive a thousand dollar refund and began spending it. However, a short time later the client received an irs notice denying the three American Opportunity credit set reclaimed, one for himself and each of his two young children. The money had to be returned. Who is to blame . Both the client and the tax preparer knowingly submitted or had opportunity to know about the return that the return or claim to false information. The client is now worse off than before 30 06 full amount of the 800d, plus he is out the operation fee. The preparer is a ghost not to be found, 800 richer than before. All of us at this hearing would like to prevent this type of behavior from happening again. How can we best do that . First, our tax system is necessary to raise revenue and complex, as been noted today. 6. 1 billion hours complying with the law and the codes of over 400 million words, this complexity has led to the need for tax return preparers. Inability to regulate the most unscrupulous and unethical, the inability to impose ethics on return preparers and the creation of winners and losers within the industry. I firmly believe that the current Regulatory Framework is insufficient to address these limitations. I will make several recommendations that the congress and irs should follow to better protect these tax preparers. First, voluntary disclosure. We live in a free society. Let the markets decide. Great incentives for return preparers to voluntarily register. Attorneys, cpas and enrolled agents already do this. If the irs chooses to endorse or certify a new class of return preparers with only 15 hours of education, the irs will provide a field approval and a false sense of security. Second, eliminate or limit refundable credits. The growth of refundable credits and the income tax system encourages unethical behavior by tax preparers, ghost prepares and others wishing to defraud the federal government. Earned Income Credit, child tax and others are refundable. This will double the amount of refundable credits available but income tax system. My research has shown that financial incentives to matter very the current law encourages and creates incentives for fraud to the unscrupulous and unethical, this is easy money. Enforce existing return preparer laws. In 2005, the Irs Criminal Investigation Division stated that they have numerous tools available to address return preparer fraud. If the irs already has ample statutory authorized tools, why do they need regulations to address this issue. Encourage irs to enforce existing tools. Fourth, educate tax preparers. Taxpayers. Taxpayers are ultimately responsible for their return. They have an obligation to put forth a good effort. If something promised to you by anyone sounds too good to be true, it probably is. Buyers beware heard taxpayer education can be an effective tool that the irs has historically used successfully. The tax law is large and complex. For these reasons, the majority of taxpayers seek out return preparers to help them. But there are those that attempt to defraud the income tax system. Rather than regulate, please take the previous steps that mention. Will beon for taxpayers a simple income tax system as chairman wyden. Thank you for giving me the opportunity. Wyden, thank you for inviting me here today. Mr. Chairman, thank you for holding this hearing on the need this is a Consumer Protection issue as well as a revenue protection issue. Either Congress Needs to give irs the authority or the state to enact such laws. Have issued a model act to encourage states to adopt such laws. When i began this work, i assumed that tax preparers were licensed professionals with certain educational credentials. The tax return is the most important financial transaction during the year for many individuals. It would only make sense that consumers place their trust that preparers are unregulated in 46 states. Contrast this with other professions that do require statesng in all our most like hairdressers or landscape architects. The lack of regulation for tax preparers has resulted in an environment that breeds incompetence and fraud. This raises questions heard how accurate our tax returns prepared by used car dealers . That themagine incentive for accuracy will take a backseat to profit. We found serious tax error fraud and four other 17 tests. The preparer said she found a problem she did not know how to handle. If she were to ignore it, we would receive 3000 in return. She then called her tax people, who told her we did not need to report the dividend and just ignore it. We conducted another round of testing and found fraud and six at of 19 tests or about dirty percent. About 30 . The preparer deducted the cost of were close and laundry. The preparer also tried to convince the tester to make up a dependent, as she does not have any. Her refund would go to 5,000 if she did. Finally, the tax preparer deducted 400 in tax preparation told heren though she she did not pay for tax preparation last year. Unfortunately, these results are not unique. We can see these are not limited to a handful of bad apples. Bringing Enforcement Actions is inadequate is inadequate. It probably cost the government up to hundreds of thousands of time to goresearch after the bad actors. First, the interest of consumers in obtaining competent tax preparation far outweighs any procedural costs. Second, we believe that preparer regulation will not create significantly greater costs. These are minimal. Costs absorbed hundreds of dollars in fees. Revealed that preparers would sometimes charge up to 500 first little as 15 minutes of work. Thank you for the opportunity to testify. I look forward to your questions. Thank you, chairman wyden. Congress should not give the irs additional power over tax preparers by forcing them to get an irs license before they can assist taxpayers with her tax returns. Tax preparers are already regulated by numerous federal statutory requirements imposing civil and criminal penalties for everything from failing to keep a list of the returns they are prepared in the past three years to actual tax fraud. Tax preparers are also required to register with the irs to obtain an individualized number ptin, so that the irs can analyze and track their returns. These tools already are by the iris with what it needs to identify, track and penalized a few bad apples without unnecessarily burdening the vast majority of lawabiding preparers. I have three main critiques of prepare licensing as bad public fewcy, followed by a solutions. Prepare licensing is protectionist and anticompetitive. Rather than protecting consumers, licensing the galatians can protect large incumbents and industry insiders from competition by erecting costly barriers to entry. Indeed, several analysts have concluded that the largest firms such as h r block stand to benefit the most from licensing preparers. The irisingly, regulations were a product of lobbying by powerful special interests. H r block, jackson hewitt, and into it, the makers of turbotax, all actively supported licensing, while other insiders obtain special exemptions for the members. Ceo oversaw the drafting of the regulations at irs. Of course, momandpop preparers dont have the resources to send lobbyists to washington dc to represent their interests. Licensing burdens usually fall hardest on the little guys, who dont have the same resources thecant benefit from economies of scale. Licensing is expected to push out tens of thousands of preparers. Most of those who would have been put out of business were ,easonal momandpop preparers like my preparers. Second, and tumors would be harmed by preparer licensing, which raises prices and reduces choices. Competition,uces which is bad for consumers. Between reduced competition and increased Regulatory Compliance costs, essence and is expected to artificially drive up the prices consumers pay for tax preparation. Licensing also reduces Consumer Choices and interferes with consumer autonomy over personal finances. Many taxpayers will be not only left with fewer options, but will be forced to seek a new prepared if licensing forces are current preparer out of business. Instead, taxpayers, not the irs to be the ones who get to decide who preparers or taxes. Licensing may also result in unintended consequences that harm consumers. Higher prices may push unqualified tax payers to prepare their own returns. It may also boost the number of ghost preparers who do not sign the return forms they prepare. Licensing regulation cannot do much about Fraud Prevention that isnt already achieved by that by the ptin radiations. Dishonest preparers can take courses just as well as honest preparers. For example, iris trained and foundied preparers were to have a 61 error rate in 2011. Similarly high error rates were found in studies of irs employees answering to single tax questions. Found that licensed california preparers had the third highest error rates in the country for over for two years in a row, despite the states longstanding licensing program. As because a real problem is not competency, but tax code complexity. It almost guarantees that every return has an error in it, some inadvertent, some intentional. Thus, licensing will not event tax preparers for making errors, it will simply limit who is licensed to make those errors. Licensing should be rejected because Better Solutions for these problems are to exist. First, voluntary certification is far superior to mandatory licensing. It allows consumers and prepares to decide the value certification, and permits them to opt in or out. Simplify the tax code to reduce error rates. Third, the irs already has the legal and technical tools and needs to track bad apples. Enforcement of these existing laws is far preferable because unlike licensing, it does not impose a substantial cost on the vast majority of lawabiding tax preparers. Thank you. An. Thank you, mr. Alb i want to see what i can do to draw out the key questions. I understand it, is particularly concerned about the small practitioner. I certainly understand why Small Businesses can be frustrated with needless government red tape and bureaucracy. My understanding am however, here, mr. Alban, is that you are a small practitioner. Cpas and to our ltcs. Do you all feel, apropos of mr. Albans point that somehow his disadvantages you against mr. Cobb . Looks to me like both of you past the competency test very does not look to me like a disadvantage to a small practitioner. Well, the numbers prove it is not in oregon, and in california. With our licensing in oregon, as recent as 2011, it is that rly 84 of the practic petitioners in oregon are not employed by the big companies. California is nearly 89 . That. Disproves posted set some form of registration for practitioners. Andf i may add, quickly, there are 40 of our system that are smallbusiness people. Now that we have at least addressed this question of whether small practitioners are disadvantaged by having some minimum standards, i want to ask you, we have had our system for decades. We oregonians are pretty outspoken souls. I can tell you ive been on the finance committee since 2005, and i have not had anybody here is a practitioner come and say, oh my goodness, ron, it is going to be bureaucratic water torture if we have the kind of thing that we have in oregon. We pass a competency test, we undertake 30 hours per year of continuing education. Audit preparation and sanction qualified. Ho are not theres no sign of unhappiness. Whatat a fair appraisal of we have . Of course, the results of been documented by the General Accounting Office. We have superior results with this kind of system that at least i would characterize as appropriate oversight to really get at what is really missing today, which is the minimum competency standard. Fair assessment . Very fair. What can the irs learned from oregons experience over these decades . I heard a discussion for mr. Alban about the cost heard of not heard complaints about oregons cost or things of this nature. There are other lessons from the standpoint of oregons experience for the irs. The cost and oregon the costs in oregon are very reasonable. Because we require education, we have a lot of resources in the state that provide costeffective education, rather than spending two or three or 400 for give education, you can get education to other resources. Education is not an issue. A registration the Registration Fees are very affordable, even for small business. I had a larger business in years stillnd paid those and managed to keep my head above water with the business, so it is not a concern. We have wondered why it has taken the nation so long we are always we are always too logical. One of the things that concerns me about some of these questions , with respect to having minimum competence and the like, is those who are opposed say we already have these tough standards. It seems to me what you all have found is that that is not the case. What would basically have is , whenve, afterthefact the harm is done to people who just want to get every single dollar back that they are owed. Is that a fair characterization . Fairs, chairman, that is a characterization. As you stated, the majority of the actions that the irs had tools and actions that he can take our afterthefact, after the refunds have gone out, after the paid preparer has disappeared in some cases. It is the taxpayer who is left explaining and dealing with the back taxes and havent a back interest and penalties. Up front regulation has the potential to prevent some of these refunds going out. My time is expired. I appreciate the fact that you have done this second independent inquiry. People can question the value of one independent inquiry. I wouldnt, because i have watched the professionalism of your office over the years. Note, because you are scrupulous and documenting the facts, you said look, we looked at 19 sites. There been other analyses which are pretty much in line with viewers. We have a lot of heavy lifting. O do to fix this were going to be working with all of you. Senator hatch. I want to thank all of you for being here. Each of you has presented us with various perspectives that i think will benefit the committee , and hopefully the irs as well. Then ask your question. Preparers such as attorneys, cpas and agents have long been regulated and subject to professional standards of competence and ethical conduct. Evidence that returns prepared by these are lessled repairs prone to error than those prepared by now unregulated preparers, or even ghost preparers . Evidenceare specific that shows that credentialed preparers in those specifically mentioned groups are fundamentally different. However, i dont have full access to the data that the gao or others have used. As an academic, i am always willing to help them design more specifically reliable and more educated studies examining these important questions. Thank you. Increasing Computer Literacy has made it easier for people to prepare and file their own tax returns. The percentage of self prepared returns as been increasing in recent years. Is this trend one that is improving or degrading the overall quality of Tax Compliance . That is an issue that we did not look at in the study. When we did look at data from irss National Research program database, and looked at error d returns preparer file versus self repair returns, we did see a significant difference. Returns prepared by paper paris that error rate 60 versus 50 for self prepared returns. The meat though this out. When the taxpayer stops using the services of a paid preparer and instead uses software to self prepare their own return, do we have any statistics or do we know it happens to the quality of the tax filings . Data that the irs ,ollects through random audits they looked at various error rates for those preparers and self prepared returns. In aggregate and also specific tax issues online items, one for example was an income tax credit. In that case, the estimates in the data showed that returns prepared by paid preparer seven error rate of 51 , versus 44 for self prepared returns. Concernhave expressed will drivetion unethical preparers underground, throwing them into what turning them into what is called a ghost preparer. How big is his problem of ghost preparers. Is a problem getting worse and what is being addressed to that particular problem . Im not aware of any data that exists. Again, the gao feels that the baseline level of regulation can help consumers with some assurance that the people theyre going to have their returns prepared by meet certain qualifications and have a certain level of assurance that their tax returns will be compliant as they expect. I want to thank all of you. H r block certainly does a good job, as do others. I would like to put this into it the letter into the record. Senator casey. Thank you, mr. Chairman. Ill have time for one question. Another panel wont necessarily be upset about that. I want to ask your question about your testimony. Whatge 12 you summarize vida folks have to go through in their minimum standards. That that isagree especially important. Those types of standards are toecially important vulnerable populations, folks or oftenasily misled isolated and have to depend upon someone who they come into contact with who might mislead them. I would assume that when we talk about basic minimum standards here that you would hope that everyone would have the opportunity to be served by an individual to go see the minimum standards. That would be comparable to your which would require that socalled volunteer tax repairs go through training, is that generally accurate . We have continuing education every year for people who start out wanting to be a tax preparer for us. It is over 100 hours of training. Hours. 75 forverage around 35 years anyone, whether youre a bit tax prepare for 30 years, you have to come and get that very it certainly we can adjust the hours, depending on the statute very generally, we agree with your point. Would what is set forth in this appendix, these requirements that you just you would think that would be the best direction that the federal government should move in . In other words, how do you effectuate this is a matter of National Policy . Again, i think we have a great model. The chairman has pointed out with pride what oregon does. Offe is a model to be built of. The research we have done shows that this youve heard all day about fraud in various cases that people have cited. We have a standard which has been implemented for number of years we have the test market, if you will. We do a lot of training. I think the outline is there to put the National Policy in place. Plus, you have, consumers, who in our research are saying, of course i want to know that the person sitting across from me has certain standards. It is usually people in my position are not in front of a Committee Like this. We want a level playing field. This is not about anticompetitive behavior, this is about going against people who youve heard horror stories. We dont do refund anticipation loans. We want to clean up this industry. Thank you very much. We want to thank all of our witnesses for their participation. Members of the committee will have until the close of business on friday, april 11, to submit questions for the record. I want to make a short statement and give the last word to senator hatch on this topic. Last week in this room, on a bipartisan basis, our committee, committed to the tax extenders. There are number of provisions that inspire that will inspire that will expire this year. We indicated this was going to be the last time this committee did this. Recall the proposal the expire act because it was meant to expire. Hearing, we this begin the effort and overhauling of the tax system, making it simpler, doing it in a bipartisan way so that americans this time of year dont feel like theyre going through bureaucratic water torture to comply with the tax rules. You have given us some very helpful suggestions here. Senator hatch and i will be working together on this in a bipartisan way. The challenge is to figure out with our colleagues on both sides of the aisle the appropriate oversight of repairs. The two of us are going to talk about it and then we will inform members of our proposal. Clearly, what we learned today, starting with the gao, is this problem persists. You have documented it is second time. It is consistent not just with your analyses, but with others. The independent Taxpayer Advocate said that not only does a problem exist now, but there are incentives for additional opportunities for the unscrupulous, who are fortunately a meyer a their clients. Ee those are usually the most vulnerable. Then, to celebrate, were glad you came because you have shown once again that oregonians know theres a better way. We dont just sit around and say oh, this is wrong and that is wrong. We roll up our sleeves and come up with solutions. You all have been very helpful to us and i want you to know im going to work for closely with senator hatch on conference of tax reform, on appropriate oversight with respect to tax repairs. I want to give my friend and colleague the last word here. Thank you, mr. Chairman. All, im grateful to all of you for being here