NAEA Sr. Director, Government Relations, Rober Kerr Testifies Before IRS Panel on Proposed SEE User Fee Regulations

December 29, 2016

Oral Statement from Robert Kerr
Senior Director, Government Relations
National Association of Enrolled Agents
Regarding Special Enrollment Examination
User Fee Proposed Regulations (REG-134122-15)

December 29, 2016

Thank you for the opportunity to testify before you this morning. My name is Bob Kerr and I have the privilege of serving the National Association of Enrolled Agents (NAEA) as Senior Director, Government Relations.

NAEA represents the interests of 50,000 enrolled agents. Our organization is entirely EA focused. We have worked for many years with the agency to advance the IRS’s highest credential, to distinguish Circular 230 practitioners from those who lack true credentials, and to protect the rights of taxpayers worldwide. This organization is uniquely positioned to comment on the increased user fees.

I sit before you for the second time this year offering NAEA’s concerns with the proposed SEE oversight user fee. Many of my remarks will echo the concerns my organization expressed in February because our concerns have not changed in the intervening ten months.

Before I offer our concerns, however, I thank the agency for publishing proposed regulations, which allow for comment before the agency changes fees, rather than temporary regulations, which would have increased the fees and then asked for comment. The order matters a lot. I also thank the agency for two changes responsive to concerns we raised in February in the new proposed regulations:

  • including the user fee calculations within the re-proposed regulations; and
  • reducing the user fee from $99 per part to $81 per part.

We urge the Service, going forward, to include calculations on any and all proposed user fee actions.

We have submitted separate, formal comments for the record in which we provide detailed concerns. I will limit my comments this morning to the agency’s interpretation of OMB Circular A-25 (“Circular A-25”) and to the size of the increase.

Speaking simply, we are troubled by how the agency interprets government-wide user fee requirements and we cannot see how IRS arrived at what is still, viewed through any prism, an enormous fee increase.

Circular A-25 establishes Federal policy regarding fees assessed for Government services[i]. The general policy statement is:

A user charge…will be assessed against each identifiable recipient for special benefits derived from        Federal activities beyond those received by the general public. [emphasis added]

Of note, Circular A-25 requires the agency in question to determine when special benefits exist and also instructs:

The provisions of this Circular cover all Federal activities that convey special benefits to recipients           beyond those accruing to the general public. [emphasis added]

We enter this conversation at a disadvantage because we don’t know how IRS assesses user fees consistent with the two aforementioned Circular A-25 requirements. But here’s what we know:

  • the agency assesses fees for 18 “services[ii]
  • in its recent installment agreement final regulations, the agency suggested the “special benefits” hurdle is the Seafarers standard (i.e., “providing specific services to specific individuals)[iii]
  • the agency provides services for which it does not assess a user fee

Are we to conclude that all other agency activities do not fall within the ambit of conveying “special benefits?” That would be surprising, given the wide range of services on which IRS doesn’t assess a user fee: it doesn’t charge taxpayers for toll-free telephone service, or for continuing education webinars, or for walk-in service, or for placing a taxpayer into CNC status, or for a variety of examination services (e.g., CP 2000 notice), or most notably for the annual filing season program record of completion.

The Service has not articulated its user fee standards, most fundamentally whether it believes it may charge user fees for special services or whether it believes it must charge user fees for special services. Prospective enrolled agents have a right to know. Taxpayers, who ultimately foot the bill, also have a right to know.

If we step away from consistency challenges, we are left with the question of how the agency determines special benefits in the extant case. IRS attempts this to clear this hurdle in both the initial proposed regulation and the re-proposed regulation, which identically assert:

The IRS confers a benefit on individuals who take the…SEE beyond those that accrue to the general         public by providing…an opportunity to demonstrate special competence in tax matters by passing a           written examination and therefore satisfying one of the requirements for becoming an enrolled agent           under Circular 230 §10.4(a).

We don’t find this assertion particularly compelling, particularly given that we questioned in February how the agency determined “special benefit” with respect to SEE oversight. And we don’t know why IRS chose not to avail itself of one of the exceptions to the general OMB user fee policy[iv].

Leaving aside our significant macro issues with IRS’ assessment of user fees, we are also troubled by the size of the fee increase and how the agency calculated the proposed user fee increase.

The present $11 per part oversight fee is 11.2 percent of the $98 per part fee assessed by the private sector contractor who designs, ensures psychometric validity, processes payments, and administers the test worldwide. In contrast, the proposed $81 per part oversight fee is 82.7 percent of the $98 per part fee the private sector testing expert charges.

The sevenfold increase will raise the total cost of taking the SEE by 64 percent. If a candidate passes each of three parts on her first attempt—and that is far from assured—she will spend nearly $550, 55 percent of that going to the organization that develops and administers the test at a network of thousands of secure test centers in more than 160 countries[v] and 45 percent of that going to IRS oversight.

These are enormous costs, regardless of whether one measures as an increase or as a proportion of the cost of the test the agency is overseeing, even taking into account IRS claims it needs to cover three increased costs[vi] and five tasks[vii] it didn’t include in the original (2006) cost estimate.

Further, the back-of-the-envelope on the math is not discernibly better than it was in February: the increase in cost is $70 per part ($81 proposed fee - $11 current fee). IRS calculated the cost of its oversight based on 67,275 parts administered over a three-year period. The total increase in revenue to the agency is $1,569,750 annually.  

Assuming the background check increase of $289,000 is simply passed-through fees, we’re left with an additional $1,280,750 in revenue annually, or an additional 10 full-time equivalent GS-12 employees (with their $77,500 salaries fully loaded for overhead[viii]). To suggest these three additional costs and five additional tasks equate to ten full time civil servants is to strain credulity. For instance, how much staff time could possibly be involved in reviewing surveys of existing EAs or in setting the annual cut score?

We are left with the concern that no one actually looked at the result of the mathematical exercise and asked if it made sense.

Further, and this is not trivial, if IRS increased the number of SEE parts administered in any given year, then, all things being equal, the agency’s user fee per part would decrease. The only thing that drove down the costs in the re-proposed regulations was the agency’s decision to spread its calculated fixed costs over the last three years of SEE volume rather than to project forward three years at lower volumes.

The agency has in its hands a tremendous asset it could—and should—leverage. We live in a world in which taxpayers desperately need some assurance that the person they are hiring to prepare their tax returns is at least minimally competent. Those who pass all three parts of the SEE well exceed that hurdle.

We are left to wonder why IRS doesn’t charge a user fee to some 62,000 annual filing season program record of completion participants[ix], yet has given to those participants the right to limited practice without any requirement whatsoever to demonstrate representation skills. We note IRS could double the number of exams administered annually if only a third of the program participants took just one part of the SEE.

*****

IRS must articulate a clear, consistent, and transparent policy with respect user fee assessment, one that is consistent with the IOAA and Circular A-25. The agency also needs to consider seriously the broad benefits that enrolled agents provide the tax administration system and taxpayers, and a public policy exception for assessing the user fee. We simply cannot understand how the agency requires somewhere in the neighborhood of a dozen staff years to provide oversight to a private sector firm that provides gold standard testing services.

We urge the agency to withdraw the proposed regulations until the agency is better able to articulate how it applies user fee requirements enterprise wide in a consistent fashion and why it requires a dozen or so staff years to oversee the SEE, and until the public policy questions this significant price increase raises are addressed.

Thank you once again for taking under advisement NAEA’s user fee concerns. This concludes my testimony.

[i] User fees are authorized by the Independent Offices Appropriation Act of 1952, codified at 31 U.S.C. 9701, and set forth in OMB Circular A-25.

[ii] IRM 1.35.19.21 (Types of User Fees).

[iii] IRS in TD 9798 (User Fees for Installment Agreements) asserted “Even if it is argued that the government derives some general benefit from collecting outstanding tax liabilities to which it is inarguably entitled, it is still appropriate under the OMB Circular to charge a user fee…because installment agreements provide “specific services to specific individuals.” Seafarers Int’l Union of N. Am. V. U.S. Coast Guard, 81 F. 3d 179, 183 (D.C. Cir. 1996).

[iv] OMB Circular A-15, Section 6(c)(2)(b) states “Agency heads…may recommend to the Office of Management and Budget that exceptions to the general policy be made when…any other condition exists that, in the opinion of the agency head…justifies an exception.”

[vi] The three increased costs are: “The cost for background checks…for individuals working at the contractor’s testing centers increased by $289,000 per year”; a significant reduction in the number of parts of the SEE that will be administered annually (from 34,000 to 20,000); and “IRS’ costs of verifying contractor’s compliance with [IT] security requirements.”

[vii] The five new tasks are: review and approval of materials the developer uses to develop the SEE; review of surveys of existing enrolled agents; composition of potential SEE questions in coordination with the contractor’s external law experts; Office of Chief Counsel review and revision of potential questions; and analysis of the answers and raw scores…to determine…a passing score.

[viii] 2016 Salary for a GS-12/1 employee with Washington DC locality pay is $77,490, multiplied by 1.6565 for overhead and multiplied by 10 equals $1,283,622.

 

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