Statement of James D. Leimbach, EA
before the Ways & Means Oversight Subcommittee
1100 Longworth House Office Building
March 30, 2004
Mr. Chairman and members of the Oversight Subcommittee, I am deeply honored today to present this statement on behalf of the National Association of Enrolled Agents (NAEA), the professional society of Enrolled Agents.
I am James Leimbach, and I became an Enrolled Agent in 1997 while on active duty in the United States Air Force. My wife, Kelly, and I jointly operate our private practice in Panama City, FL where we work with both individual and small business taxpayers in the preparation and electronic filing of their returns. I also represent taxpayers before the IRS for problem resolution. I believe you already have a copy of my biography in your notebook.
Today, I am representing NAEA whose 10,000 members are tax professionals licensed by the U.S. Department of Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service (IRS).
Enrolled Agents were created in 1884 to ensure ethical and professional representation of claims brought to the Treasury Department. Members of NAEA ascribe to a Code of Ethics and Rules of Professional Conduct and adhere to annual Continuing Professional Education standards that exceed IRS requirements.
Like attorneys and CPAs, we are governed by Treasury Circular 230 in our practice before the IRS. We are the only tax professionals who are tested by the IRS on our knowledge of tax law.
Each year, we collectively work with millions of individual and small business taxpayers by providing tax preparation, tax planning, representation, and other financial services. Consequently, Enrolled Agents are uniquely positioned to observe and comment on the average American taxpayer’s experience within our system of tax administration.
Filing Season Readiness
Overall, filing season has run very smoothly. NAEA members did experience some processing problems in e-filing during the opening of filing season. Practitioners received a number of erroneous reject notices from overwhelmed filing centers. Most software companies were able to quickly recover. I would have to praise IRS for its Quick Alert system by which practitioners can receive e-mailed notices of problems. Information is the key. If we have it, we can plan around it.
A greater problem occurred with late delivery of the IRS 2003 CD-ROM. Many practitioners rely on this to get their updated forms and publications. It’s particularly important for practitioners who live in areas where they don’t have access to high speed Internet service. Unfortunately, some practitioners reported that they didn’t receive their CDs until as late as February 20, long after the start of filing season.
Another problem involved distribution of Volume 2 of Package X, a paper bound volume which contains essential tax forms and instructions. Some NAEA members reported that their copy did not arrive until mid February which is far later than normal.
In both cases, these glitches are unfortunate because these are tools practitioners have come to rely upon to get their tax returns prepared accurately. We hope that this lateness will not be repeated.
IRS Budget and Modernization: E-Services: Electronic IRS Representation
NAEA has long supported full funding of the IRS. We believe that a properly resourced IRS can efficiently process tax returns, collect taxes, and resolve taxpayer problems. For far too long, IRS has been hamstrung by its legacy computer system. NAEA realizes that billions of dollars have been poured into the modernization effort. I am here today to tell you that it has not been in vain as I am one of 14 NAEA members who is testing the new Electronic Account Resolution Service (EAR). I have attached two EA Journal articles which explain the EAR program.
In January of this year, the IRS reached a major milestone in the development of new electronic capabilities that will revolutionize the way we, as tax practitioners, will conduct future business with the IRS. This major milestone involved using real taxpayers in the final testing of the suite of new capabilities that will be available through the IRS’ e-services secure Web site this year. I was very pleased and honored to have been chosen by the IRS to be the first tax professional to use this new e-services capability. The new suite of e-services products, which will allow tax practitioners to represent their clients electronically and in a highly secure environment, has left me utterly speechless. I can assure you that I do not make that statement lightly.
This new electronic capability which I prefer to call “E-Representation,” will enable tax practitioners to quickly resolve their client’s IRS individual or business account problems via the Internet in a secure environment. The goal of the IRS is to provide a response to the tax practitioner within three business days versus the weeks and months we currently experience.
It is important to note that the effort to provide this capability has been ongoing since November 26, 1997, when the Electronic Tax Administration (ETA) released a Request for Agreement to which NAEA responded. NAEA submitted a proposal that members be provided the capability to resolve exam and collection issues with the IRS via secure email.
In response, the IRS established a working group in July 1998 that determined it would be expedient to provide the capability to address electronically the types of account and notice issues normally resolved by the IRS’ Customer Service sites.
From that 1997 NAEA initiative, the IRS in February of 2000 launched a prototype secure Web site that would be used to develop and test the concept of electronic representation and was the forerunner of the final secure Web site that will be implemented nationwide this year. The prototype was called the Practitioner Secure Messaging System (PSMS) and it provided NAEA members with the ability to securely resolve account and IRS notice related issues.
After two years of extensive testing by approximately 450 NAEA members, Terence Lutes, Director of ETA, deemed the PSMS prototype a success. Mr. Lutes stated in his email to the PSMS participants that, "For the first time in the history of the Service, we demonstrated the capability to interact securely with our practitioners over the Internet to resolve account-related inquiries."
The PSMS prototype was unfortunately discontinued in May of 2002 due to budgetary constraints, but that did not hamper the IRS’ effort with the development of the final secure Web site. Usability Testing of the IRS’ final secure Web site was conducted on April 22–23, 2003, by a small group of tax practitioners, myself included.
In January 2004, the IRS reached a major milestone when live taxpayers were represented electronically through the IRS’ e-services secure Web site. It has taken the IRS seven years to reach the point we are at today and I do not find that unusual in the least. The difficulty in integrating a 1960s era mainframe with the Internet and doing so in an environment using highly complex encryption is enormous, costly, and worth every effort and every dime spent. This new capability is truly going to revolutionize the way we conduct future business with the IRS. The ultimate beneficiary is your constituent, the American taxpayer. I am truly amazed and thrilled beyond description at this new way of doing business with the IRS and I would like for you to understand why I feel as I do.
Representing taxpayers before the IRS is very challenging due to the complexity of our tax code. It is also very frustrating due to the difficulty we encounter in trying to obtain the necessary information we need in order to resolve the taxpayer’s problem and receiving a timely response from the IRS. There are three crucial steps. The first is to establish with the IRS the taxpayer’s authority to represent them, which is done via a Power of Attorney. The next step is to obtain the information the IRS has on the taxpayer for the year or years in question. The final step is in receiving the response from the IRS on our proposed resolution for the taxpayer.
In our current way of doing business with the IRS, the first step of establishing the authority to represent the taxpayer is done by either faxing or mailing in the IRS’ Form 2848, Power of Attorney and Declaration of Representative or acceptable substitute. An IRS employee then manually enters the POA into the IRS’ computer system. The normal turnaround for this to occur is two to three days via fax, and slightly over a week for those that are mailed in to the IRS.
Today, I have the ability, 24 hours a day, seven days a week, to submit directly into the IRS’ computer system the POA for instant processing. This electronic version of the POA is called the Disclosure Authorization.
Through Disclosure Authorization, I can also view and modify those POAs that were previously faxed or mailed into the IRS. This is an enormous step forward and one that is certainly going to result in a cost savings to the IRS by reducing the manpower needed to manually input those POAs into the IRS’ computer system.
The next step is to request transcripts, which are printouts of the taxpayer’s account reflecting pertinent actions that have been recorded by the IRS. For example, these actions would include the date a tax return was received by the IRS and tax assessed, the detailed information on the return, penalties and interest assessed, other crucial dates and the like.
When I first began representing clients before the IRS, the quickest I could ever obtain that information from the IRS was to drive 20 minutes to the local IRS office, stand in line for another 20 minutes, obtain the necessary transcripts, and then drive 20 minutes back to my office. I was fortunate in that the IRS office was only 20 minutes away. Others are not as fortunate as I am and they end up having to use either mail or fax services which can take days to weeks, sometimes months, to receive those crucial transcripts.
With very rare exceptions, I simply cannot represent a client before the IRS without transcripts.
Today, I have the ability, 24 hours a day, seven days a week, to submit directly into the IRS’ computer system a request for that crucial transcript. This capability within the IRS’ e-services Web site is known as the Transcript Delivery System.
The process of preparing the Transcript Delivery System submittal takes about one minute. Once I submit the request, the transcript is delivered immediately. I now find it takes me longer to print the transcript than it does to receive it from the IRS. This remarkable capability leaves me speechless.
The cost savings to the IRS because of TDS will be significant. The tax practitioner is going to be thrilled beyond words, and the taxpayer will be the ultimate beneficiary in that his or her representative can begin addressing their IRS issues more quickly than ever before.
The final step in resolving the taxpayer’s IRS problem is receiving a timely response from the IRS to our proposed solution. This is the most frustrating aspect for the taxpayer when he or she is told to expect an IRS reply in several weeks if we are lucky; but more than likely it will take months before we have an IRS reply.
These taxpayers are very anxious for their problem to be resolved and I am unable to adequately describe the anguish I have witnessed that some of these people go through waiting for their IRS problem to finally come to an end.
Today, I have the ability at any time of the day or week to submit directly to the IRS’s Customer Service Representative our proposed resolution. This capability within the IRS’ e-services Web site is known as Electronic Account Resolution.
The IRS’ goal is to provide a response to our Electronic Account Resolution submittal within three business days. That has been achieved.
When you combine the capabilities of Disclosure Authorization, Transcript Delivery System, and Electronic Account Resolution, the end result is phenomenal e-representation capability. This is going to revolutionize the way we do business with the IRS; it will result in cost savings in the days to come; and it will have a significant positive impact on taxpayers dealing with perhaps the most stressful and agonizing experience of their lives, running afoul of the IRS.
All of this testimony is not to imply that the system is working flawlessly, it is not. The system is undergoing the final stages of testing for security, disclosure, and privacy issues. Users are encountering some processing problems and this is the normal result for such a complex project as Disclosure Authorization, Transcript Delivery System, and Electronic Account Resolution. Those processing problems are being identified and resolved which is the whole intent of this final testing stage. I witnessed the same while in the U.S. Air Force with the new technology they brought into operation.
Much like a child who is learning to take his first few steps, this new capability will encounter some stumbling and an occasional bruising of the knees. So long as the tax professional community is allowed and encouraged to help nurture and guide the maturing of this new capability, I foresee e-representation becoming the standard way of practice when resolving taxpayer problems.
Like any parent with a newborn child, concerns for the future will arise and the tax professional community has already recognized concerns about the future of this new capability.
Concerns of NAEA Members:
The ability to electronically represent taxpayers through the e-services Web site is limited by the IRS to only those tax practitioners who e-file more than 100 individual returns in a season. The intent of the IRS is to offer this extraordinary capability as an incentive to tax practitioners who continue to prepare returns and file them in paper format to start incorporating e-filing into their practices. It is working. I have seen tax practitioners who were adamantly opposed to e-filing incorporate e-filing into their practice solely upon hearing about this new capability.
Enrolled Agents Denied Access:
The unfortunate aspect of the IRS’ decision to restrict this capability to only those tax practitioners who meet the e-file requirement is that many of our most experienced and knowledgeable tax professionals will be denied this access because they do not prepare returns. Their sole focus is on IRS representation. Another type of tax professional is one who prepares far fewer than 100 individual returns and will never meet the e-file requirement.
This will be a huge travesty that will adversely affect thousands of tax professionals and millions of taxpayers if left unresolved.
Limitation of Problem Resolution Issues:
Another concern we have is the level of issues that can be addressed electronically through the Electronic Account Resolution element of e-services. Issues that are currently being handled by the collections and under reporter entities within IRS cannot be addressed through Electronic Account Resolution. This represents a large segment of our workload that will continue to be handled in a less efficient manner and it does not need to happen. A possible remedy would be either expanding the level of authority and responsibility of the Customer Service Representative responding to the Electronic Account Resolution submittals or integrating both collections and under reporter entities within e-services. Either of which need to be done soon since not being able to address collection and under reporter issues will undermine to some degree the intent of this new way of doing business; namely, the timely resolution of taxpayer problems and encouragement of tax practitioners to e-file.
Access Granted to Unenrolled Tax Preparers:
Allowing unenrolled tax preparers who have no training, experience, or knowledge in IRS representation full access to the e-services capabilities while at the same time denying access to highly-trained, experienced, and knowledgeable tax professionals is nothing more than a disaster just waiting to happen. Aside from the huge uproar you can expect to hear from the tax professional community about this inequity, unenrolled tax preparers pose a significant problem. In all states except California and Oregon, all it takes to declare yourself a tax preparer is to hang out a shingle. There are no CPE requirements, no code of ethics, no disciplinary action by IRS, except loss of ERO status if the individual is an e-filer. The end result is they can potentially bog the Electronic Account Resolution capability with frivolous and wasteful submissions thereby denying the tax professional the attention of the Customer Service Representative in a problem resolution submission that is based on sound knowledge of tax law and regulations.
NAEA would strongly urge you and the IRS to at the very least limit the Electronic Account Resolution portion of e-services to just Circular 230 tax practitioners—Enrolled Agents, CPAs, and attorneys.
Lead by Example:
The IRS needs to lead by example when promoting e-filing to the tax practitioner community. They can do so easily by requiring all IRS employees to e-file their personal individual returns. If this suggestion were to be adopted, then it would need to be promulgated to the tax practitioner community and NAEA believes it would have a positive impact on the tax practitioners’ perception of the importance of e-filing.
Premature Nationwide Deployment:
NAEA is concerned that disastrous results may occur due to a premature deployment of this new capability. It is imperative that the actual deployment of this new capability only occur after all involved in its development have had an opportunity to voice—in an environment free from coercion—any and all problem areas they feel could undermine the success of this long and expensive effort. Much like Mission Control at the Kennedy Space Center prior to a launch, everyone has an opportunity to give a “go” or “no go” from their respective areas. Without such input from all involved in the development, we could be setting ourselves up for disastrous consequences.
Regulation of Commercial Preparers
At this point, I would like to include NAEA’s recent statement before the IRS Oversight board in my testimony. NAEA is aware of S. 882, the Tax Good Government Act which includes a proposal by National Taxpayer Advocate Nina Olson on registration and regulation of commercial preparers. The NAEA statement follows:
“The members of NAEA are dedicated to the integrity of the tax system and the roles professional responsibility and ethics play in preserving that integrity. It therefore is disturbing to us that there is an increase of taxpayer belief that tax returns will be accepted regardless of the facts reported on them. This growth principally emanates from the declining rate of audits conducted on returns in recent years. It seems that a great number of taxpayers have been lulled into concluding that gaming the system and playing the audit lottery are acceptable behavior. A recent Gallup survey of taxpayers found that there is a marked increase in taxpayers feeling it is all right to cheat on their tax returns. An obvious centerpiece concern in this respect is that promoters and some tax professionals are selling a wide range of tax schemes and devices designed to improperly reduce taxes based on the simple premise that they can get away with it. It is clear that addressing this concern is needed. However, its resolution undoubtedly will not be limited to such schemes and devices.
“The IRS has undergone major changes in the last several years. Former Commissioner Rossotti’s reorganization of the IRS and the emphasis he placed on customer service may in part have been a catalyst in modifying taxpayer attitude. Most agree that his initiatives were good, were consistent with the 1998 IRS Restructuring and Reform Act, and have produced a better IRS. However, their implementation resulted in resources being shifted away from enforcement activities. Other contributing factors include discontinuance of the Taxpayer Compliance Measurement Program (TCMP), ineffective technology, and tax law complexity.
“Commissioner Everson has begun efforts to turn that around. While he acknowledges that customer service plus enforcement equal compliance, he has announced that effective enforcement of the tax laws rather than further improving customer service will be the main focus of his administration. In this connection, he implicated the tax practitioner community in the diminishment of compliance and challenged all practitioners to raise their ethical standards in order to avoid actions being taken against them by the government. While much of this was done in regard to abusive tax schemes, it seems clear to NAEA (and we believe him) that his efforts will not stop there. For example, at a November  meeting of the IRS Advisory Council (IRSAC), he was asked what IRSAC could do to help his enforcement endeavor. The IRSAC members were told in essence to stress the important role practitioners play in making our tax system work as it should. He did not limit his response to abusive tax schemes. Recent amendments to the regulations governing practice before the IRS (Circular 230) bear this out. The increased staffing in the Office of Professional Responsibility, the office that enforces those regulations, emphasizes his intent. Very recent proposed amendments to Circular 230, designed primarily to deal with abusive tax schemes, contain a “best practices” section that appears to address all aspects of tax advice and return preparation, which is further evidence of the role ethics play in our tax system. In addition, Mark Matthews has joined the IRS as deputy commissioner for services and enforcement. Mr. Matthews has a strong enforcement background, including having served as director of the IRS Criminal Investigation Division. Cono Namorato recently was appointed Director, Office of Professional Responsibility, replacing the incumbent who was in office for just one year. We surmise that it is Mr. Namorato’s enforcement experience that resulted in his entry into the Office of Professional Responsibility and further evidence of the Commissioner’s resolve.
“Other initiatives, such as the replacement of TCMP by the National Research Program, enforcement programs being implemented in all four divisions of the IRS, and the recent announcement by the Commissioner of reallocation of human resources in order, in part, to complement his enforcement mandate, help round out the conclusion that cannot be escaped. He means business.
“All who provide tax services must be cognizant of the strong enforcement component of tax compliance. It has the possibility of touching every aspect of tax advice and return preparation. Consequently, the topic of this panel at today’s meeting is both important and timely.
“NAEA finds that commercial return preparers are an enigma in today’s tax practice world. We all seem to know there are problems in connection with services performed by paid preparers, but in many respects those problems are unknown and the product of anecdotal information and conjecture.
“The first order of business is to define commercial return preparers. We define them as those (1) who prepare federal tax returns for a fee and (2) who are not required to possess any knowledge of tax law and procedure. At the state level, only California and Oregon regulate commercial tax return preparers and it is unlikely that there will be a significant increase in states engaged in that type of program in the future.
“The number of commercial preparers is not known with any accuracy, but estimates of upwards of 1 million individuals have been bandied about. With 55% of returns having been prepared by someone other than the taxpayers in 2001 and perhaps even more in 2002 and 2003, it seems safe to conclude that the number of returns prepared by commercial preparers is considerable and growing. A great number of these commercial preparers probably work in a structured environment, such as being with a return preparation chain, or those who are entrepreneurs in the tax business. Others undoubtedly are seasonal tax return preparers who set up shop in January and close them down in April—sometimes referred to as “card table jockeys.” Still others may be somewhere in the middle. Even if we had the numbers, we do not know the extent of training, if any, many of the commercial preparers have had and the manner in which they keep abreast of the changes in tax laws and procedures. Perhaps of greatest concern is the belief the public is not aware of the fact that many commercial preparers have no credentials. This may in part be the reason taxpayers “shop” for preparers who will prepare tax returns the way taxpayers wish them to be prepared (often unsigned by those preparers), to the detriment of responsible return preparers and the integrity of the tax system.
“NAEA understands that tax return preparer penalties asserted in recent years have been minimal in number as related to the apparent potential for such penalties. Those that have been imposed in large measure have not been collected. We also know that attempts to implement recognition procedures in the electronic filing area, i.e. electronic filer originators (EROs), have been the subject of criticism due to systemic problems in background checks and the like as documented in the Treasury Inspector General for Tax Administration (TIGTA) report of June 2002. Further, many of the problems in the Earned Income Tax Credit (EITC) program are attributable to paid preparer involvement. Again, there does not seem to be a great deal of empirical data to support a conclusion as to the number of commercial preparers involved in the program and whether or not they do a consistently worse job than other preparers, even though there have been some informative and well-written white papers on the subject.
“Last year the National Taxpayer Advocate recommended in her report to Congress that there be a program to register commercial return preparers. It was an extremely ambitious program and one that would be expensive to establish and run. The IRS disagreed with the recommendation citing, among other factors, the expense of the program and that the issue is one for states to address rather than the federal government. NAEA believes there are problems both with the recommendation and the IRS response. We understand that Ms. Olson plans to propose more rigorous penalties and liability for commercial EITC preparers. While it may be unfair to opine on this year’s proposal since we have not seen it, a threshold concern is the basis for believing that the IRS will be more successful than it has been in the past in collecting the penalties, buying into the program, and/or putting the troublesome violators out of business.
“So what is the solution? There does not seem to be an easy one. We don’t have hard facts. The available data is said to be inconsistent. Attempts to address the issues have not been successful. The IRS in fact may not be interested in the subject at this moment in time. Attempts by former advisory groups to come to grips with commercial preparer issues have met resistance. While there was support for a commercial preparer program by the National Commission on IRS Restructuring, it was removed from its final report. In addition, legislation sponsored by Senator Bingaman of New Mexico appears not to have gone anywhere. A recommendation by last year’s IRSAC did not endorse a course of action for recommendation to the Commissioner, even though a subgroup supported a preparer certification program that would enhance the competency of individuals or firms that prepare tax returns for a fee.
“In spite of all the above, NAEA supports Ms. Olson’s quest, if not her vehicles for achieving it. If left unchecked, the perceived problems will continue to grow. In this connection, we believe the IRSAC Wage & Investment and Small Business/Self Employed subgroup reports warrant favorable consideration. In particular, the SB/SE subgroup’s belief that the IRS should begin working with outside stakeholders to develop a program after examining a number of the “unknowns” would be beneficial.
“NAEA subscribes to the belief that ethics are the fabric that holds a profession together. In the tax arena, Congress has identified those who qualify as federally-authorized tax practitioners (FATPs), i.e., Enrolled Agents, Attorneys, and CPAs. All are licensed individuals whose professional practice is circumscribed by codes of professional conduct and continuing education requirements. NAEA, of course, believes that the most meaningful step in overcoming the commercial preparer issues is to have all preparers attain Enrolled Agent status. Perhaps our Attorney and CPA colleagues have similar aspirations.
“With the above said, FATPs have dual loyalties. One, of course, is to their clients. The other is to the tax system itself. NAEA thinks it safe to conclude that all FATPs share the goal of safeguarding the integrity of our tax system and would be willing to work to make that happen. A possible beginning to assist the IRS in this respect is to form a task force comprised of representatives from the Enrolled Agent, attorney, and CPA organizations to work with the Service and others to help make this happen. NAEA would be pleased to head a practitioner organization steering committee to do this. Other organizations, individuals, academicians, and the like with similar goals could be invited to participate to the extent that the numbers would be manageable.
“We are eager to move off dead center in our support of overcoming the frustrations we all share with respect to the unknown factors relative to the issue and doing our part in establishing a program evidencing ethics as a vital part of our tax system’s integrity.”
Mr. Chairman and members of the subcommittee, I am pleased and honored to have been able to share with you our members’ views. If I may answer your questions or provide you with any additional information, it would be an honor and my pleasure to do so.
“Lend Me Your EAR”
By James Leimbach, EA
January•February 2003 EA Journal
“Electronic Account Resolution (EAR) Update: Are You Listening?”
By Jim Leimbach, EA
September•October 2003 EA Journal