FROM THE OFFICE OF PUBLIC AFFAIRS

Madame Chairman and Distinguished Members of the Subcommittee. I am pleased to be able to submit testimony today on the subject of electronic tax administration (ETA). I understand that Deputy Commissioner, and currently Acting Commissioner, of the Internal Revenue Service, Michael Dolan, and Acting Assistant Secretary for Tax Policy, Donald C. Lubick, will be appearing before you to testify in more detail on current efforts underway at the IRS in this area.

I would like to focus my comments on three areas. First, I would like to describe our overall strategy for increasing the level of electronic filing and reporting. Second, I will discuss legislation introduced yesterday by Congressman Coyne to give us the tools we need to further improve our system of electronic tax administration. Finally, I will comment briefly on other legislation that has been proposed.

I. OUR STRATEGY FOR ELECTRONIC TAX ADMINISTRATION

Since Secretary Rubin and I announced a sharp turn in our approach to modernization of the IRS, we have dramatically strengthened leadership and increased oversight of the IRS. Our goal has been to promote continuity, accountability and increased access to outside public and private sector expertise.

As you know, we have identified a new Commissioner for the IRS with a background in information technology. We have in place a new Chief Information Officer, Art Gross, who has assembled a new team to modernize the information architecture of the Service. Next month, a new Assistant Commissioner for Electronic Tax Administration will assume his duties. All in all, we have put new leadership in place with knowledge about information technology.

At the same time, we have significantly expanded our partnership with industry. We are in the process of identifying a new prime contractor for information technology. Next week, we will release a draft Request for Proposals (RFP) for comment from a variety of electronic tax administration partners. After making necessary changes, we expect to issue the RFP in final format by the end of the year. Our new IRS Management Board, the successor to the Modernization Management Board (MMB), as well as the new Advisory Board, which the President has created by Executive Order, will bring outside expertise to the administration of our system of taxation.

While we are committed to deep and significant structural reform, we are not waiting for these deeper changes to take place to improve the level and quality of electronic tax administration.

Madame Chairman, we believe -- in common with many members of this body -- that electronic transactions are an indispensable part of building the IRS of the future. Electronic tax administration may offer many advantages to taxpayers and the government compared with traditional paper processing. It can reduce costs and errors. It speeds up the process of tax administration. It expedites refunds. For most Americans who have access to computers, it will be generally more efficient and economical than paper-based methods.

Over the last two years, we have begun a process to markedly improve the quality and level of electronic service for taxpayers. We have seen increases in the use of existing electronic products and we are taking steps that will expand and enhance those products while at the same planning for new products and services. Let me go through a number of specific examples.

II. 1998 - INVESTING IN SUCCESSFUL PROGRAMS

The IRS currently has two major programs that permit electronic filing. Of the more than 118 million individual tax returns filed this year, 14.4 million were filed through the Electronic Filing (ELF) program, including 366,000 in which taxpayers used a personal computer and tax preparation software to file from home through a transmitter. An additional 4.7 million filers, eligible to file a 1040 EZ return, participated in the TeleFile program using a touch tone phone. Both of these programs have been expanding at a steady pace. In 1997, 19% more taxpayers filed using the ELF program than in 1996, while use of TeleFile was up 65%. TeleFile is a finalist for the 1997 "Innovating in American Government" award program sponsored by the Ford Foundation.

In 1998, we are committed to investing in and expanding these successful programs.

TeleFile

At present, for fraud control and technical reasons, taxpayers who have moved in the last year are unable to file using the TeleFile program. Therefore, for 1998 we have developed a methodology which will allow us to update our TeleFile address directory, making approximately six million more taxpayers eligible to use the system.

Second, based upon a pilot currently underway, we expect that next year 25% of the businesses required to file quarterly Form 941 returns will be able to use the TeleFile system to file those returns with a 10 minute phone call. This group will represent smaller businesses, a significant step in our efforts to minimize burden for those taxpayers.

Electronic Filing (ELF)

This year almost 50% of individual taxpayers used a paid preparer to complete their returns. Almost all returns prepared by these paid preparers are completed using computer programs. This makes nearly 60 million taxpayers potentially eligible for the ELF program on this basis alone. Approximately eight million taxpayers prepared their returns on their home computers, many with software that could have been used to transmit the return to the IRS electronically. However, most of these returns are still filed on paper. A primary focus over the next several years will be to get those returns already being prepared on a computer program sent to the Service electronically.

Next year we hope to launch a large educational campaign to inform more practitioners and taxpayers about the benefits of this program and have already awarded a contract for design and development of this campaign.

We are also continuing with steps to assure that the ELF system ultimately will be open to all forms and schedules. Several new forms are being added for 1998 and the system will also be ready to accept Adoption Taxpayer Identification Numbers (ATINs) and Individual Taxpayer Identification Numbers (ITINS).

III. 1999 - PAPERLESS FILING

These are important steps. But looking forward to 1999, we have additional improvements in mind. First, we have asked the Service to undertake all possible efforts to accept an alternative signature for the ELF system for the 1999 filing season. The need to send the IRS a paper signature document is the most frequently criticized element of the ELF program. However, the signature is a legal requirement for a tax return. The Department believes that in the electronic age, what we need is not a traditional paper signature per se, but rather a system for authenticating that the return filed is that of the taxpayer identified on the return. The Service, in common with many other government agencies, has been using some signature alternatives for a number of years and is testing others. We believe it time to apply the available technology to the ELF program.

In addition, in 1999 we hope to make it possible for those taxpayers filing balance due returns to be able to authorize an electronic payment as part of their electronic return. This will eliminate the need for paper payments and will represent a big step forward in our quest to offer taxpayers a suite of electronic options for making tax payments. I should add at this point that the IRS is beginning an effort to implement the legislation provided in the Taxpayer Relief Act of 1997 to accept credit card and debit card payments.

IV. 2000 AND BEYOND - ADDING VALUE THROUGH NEW SERVICES

In the year 2000 and beyond, we will continue to enhance the ELF and TeleFile programs and aggressively market their advantages for taxpayers. But we also plan to add additional value to our electronic services by incorporating features such as an electronic Power of Attorney and, when we are comfortable that such a system can adequately protect taxpayer privacy, even on-line account access. I must note, however, that we will not develop concrete plans for these additional services until we see the results of the ETA Request for Proposals (RFP). This process will both help us determine what additional services taxpayers and other stakeholders value most and help the IRS focus its resources on those investments that will receive widespread acceptance.

V. OUR LEGISLATION

We can and will accomplish most of our goals under current law. But to accelerate progress in electronic filing, greater flexibility is needed. Yesterday, Representative Coyne introduced legislation, supported by the Administration, entitled the Internal Revenue Service Improvement Act of 1997, to further improve our system of tax collection. In coming weeks and months, I expect this proposed legislation to be widely discussed. I would like to focus my comments today on one section of the bill, section 201, entitled Promotion of Electronic Tax Administration.

Madame Chairman, the IRS has a demonstrated need to inform the public about its programs and activities such as electronic filing. Yet every year, the Treasury Department appropriations specifically bar the use of appropriated funds for promoting departmental programs. This has forced the Service to rely primarily on free public service advertising to promote the advantages of electronic services. We believe, and have been advised by stakeholders and consultants, that we need to reach a broader audience if we are to see dramatic growth in taxpayer use of electronic filing. Proposed subsection 6011(g) would explicitly authorize the Secretary to use appropriated funds to promote and encourage the use of electronic filing methods.

The legislation would also authorize the use of appropriated funds to provide financial incentives for electronic filing. Our RFP will open the door for such proposals and we would like clear legislative authority to use a portion of the savings gained through electronically filed returns to make incentive payments, provided the proposals are in the best interest of the government.

Currently the tax code requires that certain statements and supporting documents, which are difficult to accept electronically, be filed as part of the return. The legislation would permit the Secretary to prescribe alternative ways of receiving information necessary to ensure that the return is accurately filed.

The legislation would also explicitly establish that the Secretary has the authority to establish signature requirements for electronic returns and other forms. It would also clearly establish the legal standing of documents authenticated by means other than the traditional paper signature. This step is necessary if we are to truly move the maximum number of transactions to electronic media while maintaining our ability to address civil and criminal fraud.

Finally, the legislation would also enable the Secretary to explicitly establish that the acknowledgment of return acceptance, which is provided by both the ELF and TeleFile systems, constitutes prima facie evidence of filing. This will establish a clear legal basis for what we believe to be one of the major advantages of electronic filing for the taxpayer: proof that the return was, in fact, received and accepted on a timely basis by the IRS.

We believe these provisions will give the IRS the statutory authority it needs to dramatically increase electronic filing.

VI. OTHER LEGISLATIVE ALTERNATIVES

We believe the approach to electronic tax administration taken by our bill, combined with the RFP and our proposed management structure, is the best one to prepare the IRS for the twenty-first century. However, we realize that the Subcommittee is also considering the legislation introduced by Congressman Portman, based on the report of the National Commission on Restructuring the IRS.

We share the overall goals of that legislation and the objective of increasing electronic filing. A comparison of our legislation with Senator Kerrey’s and Congressman Portman’s bill will also demonstrate that we agree on many, but not all, of the particulars. I believe that there are some key principles that should be followed in negotiating this legislation.

First, we must not force people to file electronically. Secretary Rubin and I believe the marketplace will work better than arbitrary targets or the equivalent of mandates. While computer access is steadily climbing, it is important to recognize that more than half of Americans do not have computer access. Any requirement that taxpayers file electronically would force those without a computer to use tax preparers or a public computer, for example, in a library. This would unfairly disadvantage a large segment of our population. We must recognize that paper returns will remain important, and we must continue to support paper submissions for the foreseeable future. It would be wrong for example to require that some specified percentage of forms be filed electronically by a certain date.

Second, we need to be realistic about adding major new burdens to the IRS. We should avoid adding major new elements of complexity to tax administration.

Finally, as we all know, the electronic environment and the marketplace are evolving rapidly. What works today may not work tomorrow. For this reason, it is vital that we retain flexibility. The Congress and the Administration should agree on objectives and overall direction; however, like the private sector, we as a government should not impose rigid targets or lock ourselves into solutions that will soon be outdated.

These principles should guide us in looking at the specific proposals included in the Restructuring Commission report and the legislation offered by Senator Kerrey and Congressman Portman. As I have previously testified, there is much we agree with in this report. And we share many of the same goals. We do, however, differ in some specific requirements regarding electronic filing. Let me briefly discuss some of these differences.

Portions of the proposed legislation would make major changes in the overall filing program. In my view, these could be disruptive and are unnecessary. Instead, we need to rely on the judgment and abilities of taxpayers, government employees and the continued strong oversight by Congress and Treasury, working in partnership with the IRS, to keep us on track.

First, the bill mandates the implementation of specific programs that have not been tested or evaluated, may expose the system to fraud and may entail major new costs. Madame Chairman, I do not believe that this is the best way to implement public policies. The mandates in the bill do not meet the criteria I described above, which I am sure we jointly share.

Second, H.R. 2292 would extend the filing dates for electronically filed individual, corporate and information returns. This provision would significantly increase the complexity of the system, making it harder for taxpayers to understand and harder for the IRS to administer. Indeed, Madame Chairman, it would devalue what may be one of the IRS’s greatest intangible assets, the public’s knowledge that returns are due April 15. The proposal also favors sophisticated, balance-due taxpayers over middle and lower income filers who are owed refunds. Changing the filing date would cost the Federal government several hundred million dollars each

year in additional interest. We do not believe this is a wise use of Federal resources for the purpose of encouraging electronic filing.

The bill would also mandate a program to pay fees to transmitters (not preparers) of electronic returns. In the absence of clear evidence that these provisions are worth what they would cost, we believe they are ill-advised and premature. While government may be able to structure incentives to encourage electronic filing, these incentives should be carefully developed. Our RFP will clearly be open to such proposals, and we will pursue them if they prove to be the best, most cost-effective method of increasing electronic filing.

Finally, the Kerrey-Portman legislation provides for new regulation of return preparers -- although we note that it does not provide any funding and actually prohibits the IRS from administering examinations in order to qualify as a return preparer. While there are some clear advantages to the proposed regulations, the administrative cost of effective regulation, and enforcement of those regulations, covering everyone who prepares tax returns for a fee would be significant. We do not believe this would represent the best use of the IRS’s limited resources.

VII. CONCLUSION

In conclusion, we are making progress on increasing electronic filing. But going forward, additional legislative authority is required. I have outlined our approach as well as the principles that I believe will best guide legislative action in this area. As we go forth, we look forward to working closely with members of this Subcommittee and others on our shared goal of increasing the level of electronic filing.