HEARING BEFORE THE SUBCOMMITTEE
ON
GOVERNMENT MANAGEMENT,
ORGANIZATION AND PROCUREMENT
COMMITTEE ON OVERSIGHT AND
GOVERNMENT REFORM
April 19, 2007
The Honorable J. Russell
George
Treasury Inspector General
for Tax Administration
STATEMENT OF
THE HONORABLE J. RUSSELL
GEORGE
TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
before the
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, ORGANIZATION AND PROCUREMENT
COMMITTEE ON
OVERSIGHT AND GOVERNMENT REFORM
April 19, 2007
At the outset, I must note that the Secretary of the Treasury has
delegated to the Assistant Secretary for Tax Policy exclusive authority to
determine the Department’s position on all tax policy matters. As Inspector General for Tax Administration
(TIGTA), I am authorized under the Inspector General Act to review proposed
legislation relating to Internal Revenue Service (IRS) programs and
operations. My comments today,
therefore, address prospectively the potential impact on IRS’ tax
administration efforts of the proposals the Subcommittee is considering. I have based my observations on TIGTA’s prior
reviews in somewhat analogous circumstances.
Contractor Tax Enforcement Act
The draft Contractor Tax Enforcement Act
would effectively make any person with an
outstanding Federal tax debt ineligible to enter into a contract with or to receive
a loan from a Federal agency. The legislation
would also authorize the Secretary of the Treasury to disclose to the head of a
Federal agency information about whether a prospective contractor or a loan
applicant has a delinquent outstanding debt under the Internal Revenue Code
(I.R.C.).
In Fiscal Year (FY) 2002, the Department
of Defense (DOD) awarded contracts totaling nearly $165 billion. Those awards are approximately 14 times more
than the
FY 2008 budget request for the IRS. DOD contract
awards accounted for nearly two-thirds of the Federal Government’s contracting
activity in FY 2002. The sheer dollar value
of Federal contracts makes contractor compliance with Federal tax obligations a
serious matter.
There is significant room for improvement
with contractor tax compliance. In 2004,
the Government Accountability Office (GAO) reported that DOD and IRS records indicated
that over 27,000 DOD contractors had nearly $3 billion in unpaid Federal taxes
as of September 30, 2002. Of that debt,
78 percent was more than a year old. Among
those contractors, over 25,600 were businesses that primarily owed unpaid payroll
taxes.[1]
The GAO also estimated that the DOD,
which functions as its own disbursing agent, could have offset payments and
collected at least $100 million in unpaid taxes in FY 2002 if it had worked
with the IRS to effectively levy contractor payments. The GAO further noted that its review of IRS
collection efforts against DOD contractors selected by the IRS for audit and
investigation indicated that the IRS attempted to work with the businesses and
individuals to achieve voluntary compliance, pursuing enforcement actions such
as levies of Federal contract payments later rather than earlier in the
collection process. This resulted in many
businesses and individuals continuing to receive Federal contract payments
without making any payments on their unpaid Federal taxes.
In February 2006, the IRS estimated that,
based on tax year 2001 data, the annual gross tax gap due to underpayment of
tax obligations is $33.5 billion.
Collecting additional taxes owed from potential Federal contractors
could provide another means for helping to reduce the annual tax gap
attributable to underpayment of Federal tax obligations. This compliance check would reduce
opportunities for Federal contractors to avoid paying their tax obligations and
would also support the Secretary of the Treasury’s comprehensive strategy for
reducing the tax gap.[2]
Federal
Government contractors receive an estimated $377.5 billion in Federal dollars
annually. For some, these Federal
contracts represent a considerable share of their gross revenue. It is for Congress and the Department of the
Treasury to consider whether, as a policy matter, contractor eligibility should
include tax compliance requirements. TIGTA
has not performed work directly on this matter; however, from our limited
reviews of such requirements and their implementation in other contexts, we
would anticipate that the impact on the IRS’ other tax administration efforts
would be fairly minimal if the proposed requirement is implemented in a manner
similar to current practice regarding electronic return originators (EROs).
For example, the IRS’ electronic filing (e-file)
program offers taxpayers an alternative to filing a traditional paper tax
return. The e-file program enables tax returns to be
sent to the IRS in an electronic format via an authorized IRS e-file provider known as an Electronic
Return Originator (ERO).
An ERO is the first point of contact for
most taxpayers filing a tax return through the IRS’ e-file program. An ERO originates the electronic submission
of a return to the IRS. The IRS is
responsible for reviewing applications from individuals applying to participate
in the e-file Program, as well as ensuring that the individuals who have
been authorized to participate maintain a high degree of integrity and adhere to
the highest professional and ethical standards.
To become an ERO,
an applicant is required to prepare and submit to the IRS an Application to
Participate in the IRS e-file Program (Form 8633), along with a
fingerprint card. The IRS allows
individuals who have a professional certification to send a copy of the
certification in lieu of a fingerprint card.
In order to qualify to merely transmit tax returns to the IRS
electronically, not necessarily preparing those tax returns, applicants must
meet the following criteria:
- An applicant must be a
- An applicant must be 21 years of age as of the date of
the application.
- An applicant must pass a criminal background check.
- A determination must be made as to whether individual
and business tax returns were filed and taxes owed were paid.
EROs do not
receive compensation from the Federal Government for submitting tax returns
electronically to the IRS.
Pilot Program for Local
Governments to Offset Federal Tax Refunds
Legislation to amend title 31 of the United States Code to test
the feasibility and potential for collecting certain local tax debts has the
potential to assist local governments with their collection efforts. Experience at the Federal level has
demonstrated that such a program has significant collection potential.
I.R.C. §§ 6402(c)
and (d) require a taxpayer’s overpayment to be applied to any outstanding
non-tax child support or Federal agency debt prior to crediting an overpayment
to a future tax or to issuing a refund. However,
a tax overpayment must be offset to an outstanding tax debt before it may be
offset to non-tax debts or applied as a credit to a future tax period. The IRS has facilitated these offsets since
1984.
The Debt
Collection Improvement Act (DCIA) of 1996[3]
authorized the Department of the Treasury’s Financial Management Service (FMS) to
combine the IRS’ Tax Refund Offset Program, which offset IRS refunds to
outstanding debts, with the Treasury Offset Program (TOP). Effective January 11, 1999, FMS began
initiating refund offsets to outstanding child support or Federal agency
debts. These offsets are referred to as
TOP offsets. A TOP offset reduces the
amount of an IRS refund by the amount of the debt.
FMS established
the TOP, a computer matching program, to carry out its responsibilities under
the DCIA to collect Federal debt. The
TOP compares the names and taxpayer identification numbers (TINs) of debtors
with the names and TINs of recipients of Federal payments. If there is a match, the Federal payment is
reduced (levied) to satisfy the overdue debt.
FMS issues
refunds for the IRS. A TOP offset occurs
after the IRS has certified a refund to FMS for payment but before the FMS
direct deposits or mails the refund check.
The amount of a refund certified by the IRS to FMS for payment may not necessarily
be the amount that is issued by FMS to the taxpayer. The taxpayer may receive less of a refund or
none at all if the whole amount is offset.
FMS will issue a
TOP offset notice to a taxpayer when a refund is reduced. If the refund is offset in part, the notice
is issued at the time the remainder of the refund is direct deposited or is
sent as an attachment with the paper check.
If the refund is offset in full, a separate notice is sent within the
same time frames. The notice informs the
taxpayer of the amount of the offset, the agency(s) receiving the offset, and
the agency’s address and telephone number.
According to FMS, for FY 2005, payment types subject to offset
included Office of Personnel Management retirement payments, IRS tax refunds,
some vendor payments (Treasury disbursed and non-Treasury disbursed payments), Federal
employee travel payments, some Federal salary payments, and Social Security
benefit payments. Offset of Federal tax
refunds for State income tax debts began in January 2000 when FMS started
collecting State income tax debts by offsetting Federal income tax refunds, as
authorized by the Internal Revenue Service Restructuring and Reform Act of 1998.[4]
As of September 30, 2005, the TOP database contained $255.5
billion in delinquent receivables. The
largest component of TOP's delinquent debtor database was the $129.5 billion in
Federal income tax debts submitted for continuous tax levy.
The TOP has collected a significant amount of outstanding
debt. Since enactment of the DCIA in April 1996, $23.9 billion
has been collected through the TOP. In
FY 2005, total collections through the TOP were $3.1 billion. Total tax refund offset collections for child
support debts, Federal non-tax debts and State income tax debts totaled $2.8
billion, accounting for 90 percent of the TOP’s collections. Child support collections in FY 2005 totaled
$1.58 billion, which was an increase of $96 million over FY 2004 collections. Also in FY 2005, total collections of State
income tax debts by offsetting Federal tax refunds totaled $232 million, an
increase of $14 million over the $218 million collected in FY 2004.
Given the nature of the proposal under consideration to allow
certain local tax debt to be collected through the reduction of Federal tax
refunds, it is unlikely that enactment of the proposal would affect the IRS or Federal
tax administration. The proposal would
establish a pilot program for collecting past-due, legally enforceable local
government obligations. If current
practice in analogous circumstances is an accurate indication, it is likely
that
the proposed pilot program would operate through the
TOP and therefore affect the FMS but not the IRS.
The pilot program would require eligible States to notify the
Secretary of the Treasury on behalf of a local government, under conditions
prescribed by the Secretary, of individuals who owe past-due, legally
enforceable tax obligations to the local government. If the Secretary of the Treasury finds that
any such amount is payable, the Secretary may reduce the amount of a Federal
tax refund by an amount equal to the debt owed to the local government. The Secretary would be authorized to pay the
amount of the refund offset to the State and the State would pay the local
government. It is also likely that the
FMS would notify the taxpayer that a Federal tax refund has been reduced by an
amount necessary to satisfy a past-due, legally enforceable tax obligation to
the local government.
I hope my
discussion of these two legislative proposals will assist you with your consideration
of them. Mr. Chairman and Members of the
Subcommittee, thank you for the opportunity to provide background information for your consideration in
evaluating these proposed measures. I would be pleased to answer any questions
you may have at the appropriate time.