Written Comments of Francis X. Degen, EA
President-Elect, National Association of Enrolled Agents†
before the House Ways and Means Committee
Subcommittee on Oversight
April 7, 2005
Thank you, Mr. Chairman, Ranking Member Pomeroy, and members of the Oversight Subcommittee for asking the National Association of Enrolled Agents (NAEA) to testify before you today. As you know, NAEA is the premier organization representing the interests of the 40,000 enrolled agents (EAs) across the country. EAs are the only practitioners for whom the IRS directly attests competency and ethical behavior. Over the years, NAEA has worked tirelessly to increase the professionalism of its members and the integrity of the tax administration system as a whole.
The 2005 filing season has progressed relatively smoothly this year. EAs have reported precious few problems. Those reported are fairly insignificant and range from the inability to e-file some complex returns (i.e., cases in which more than 50% of pension or wages are withheld for taxes) to a printing problem with thousands of Forms 1120H (Income Tax Return for Homeowners Associations), which, as printed, would have credited tax to another homeowners association. On the flip side, EAs are by and large pleased with the quick e-file cycle time and the new Schedules K-1 (notwithstanding any difficulties with businesses that prepare them incorrectly).
Using the success of the 2005 filing season as a springboard, we would like to take this opportunity to emphasize three areas for the subcommittee to focus its attention on in the coming months and years to ensure future filing seasons are equally successful.
First, we urge the subcommittee to dedicate its substantial prestige to advocating your fellow Members of Congress for adequate resources at the IRS, which includes both enforcement and service—and service includes service to the taxpayer as well as to the practitioner community. Second, please continue to act as the conscience of the tax-writing committee when it comes to the creation of tax laws that are both administrable by the agency and understandable to the public. Finally, we urge the subcommittee to move expeditiously to pass legislation to require all people doing tax returns to demonstrate competency and ethical standards under the existing regulatory framework.
We cannot urge too strongly that the subcommittee—in its capacity as the overseer of the IRS and its budget—continues to advocate that the IRS budget is adequate for the agency to meet its strategic goals. An adequate budget includes funding to meet reasonable goals for both compliance and service, as well as funding for the technology investments the agency needs to support its strategic objectives in those two areas. NAEA urges you to act as a bulwark against the tendency of policymakers to pendulum wildly back and forth between funding taxpayer/practitioner service on one side and funding compliance programs on the other. As to service, we need to stress that IRS is uniquely positioned to provide assistance and education to taxpayers as well as to practitioners. The truth of the matter is that both of these strategic objectives—service and enforcement—must be adequately funded for the system to work correctly. Particularly in light of IRS’ recent tax gap estimate, which pegs the gap between $312 and $353 billion annually, we hope that members of the committee can work with the appropriators to ensure sufficient funding. Let’s not forget that the IRS collects nearly all the government’s revenues and interacts with more citizens than any other government agency. As a result, we believe the Service’s budget allocation should reflect the agency’s essential position within the government.
At a micro level, Congress should continue to support (and urge the agency to support) a number of programs that at first blush appear to be strictly taxpayer service oriented, but upon closer inspection have real returns for compliance. The public liaison program is one such function. Immediately after the passage of the IRS Restructuring and Reform Act, the IRS instituted a significant field-base public liaison effort with practitioners around the country. These forums made a real contribution to improving efficiency in helping taxpayers comply with the tax laws. Recently, our members have seen these meetings curtailed drastically or eliminated completely. We have every reason to believe this shortsighted movement will serve only to increase downstream costs for the agency as it attempts to respond—after the fact—to problems that could have been resolved with better communications upfront at a lower cost.
The e-services program is another example of front-loaded investment that will produce untold millions of dollars of return. By allowing practitioners to go online to resolve a large number of taxpayer problems, it has freed up thousands of staff hours at the agency and saved taxpayers millions of dollars worth of practitioner costs. We applaud the recent IRS announcement expanding the program to preparers e-filing five or more returns. At the same time, we sincerely hope Congress and the IRS will continue to expand this program with new technology investments and by making it accessible to all Circular 230 practitioners, without respect to the number of returns e-filed. We note that some Circular 230 practitioners provide representation services exclusively and comprise, in our opinion, one of the populations that could benefit most from Electronic Account Resolution. While expanding electronic filing continues to be an important priority, it should not happen in spite of good tax administration. Our members have noticed a marked increase in advertising that seems to suggest that being an ERO indicates some level of competency in the preparation of returns. This is a serious problem for the system.
Tying e-services back to the budget, we are seriously concerned to hear that due to cuts for business systems modernization, the IRS has cancelled all scheduled improvements and additional rollouts of the e-services program. While we acknowledge the current budget constraints, we believe canceling the technology expansions of the program is a quintessential example of being penny wise and pound foolish.
In the area of simplification, the President’s Advisory Panel on Tax Reform, the Department of Treasury, IRS, and Congress are well advised to heed Commissioner Everson’s trenchant comments when he unveiled the new tax gap estimates. He said, “Complexity obscures understanding.” Everson went on to say, “Those who try to follow the law but cannot understand their tax obligations may make inadvertent errors or in the end simply throw up their hands...”
The recent push for tax reform provides a wonderful opportunity to create a simpler system. We hope policymakers remember that for low and middle income people—who comprise the vast majority of all taxpayers—the measure of simplification is straightforward: How long does it take or how expensive is it to do my return every year? We hope that in the search for a new system, practical simplification proposals are not lost in the search for more academic or theoretical solutions. Additionally, and I cannot stress this enough, do not add to the IRS’ woes by creating a whole new tax system for it to administer without repealing an old tax regime. For instance, if policymakers are going to institute a VAT or new consumption tax, they need to eliminate one of the existing systems such as the corporate tax or payroll tax. At the risk of sounding like Chicken Little, such a move could be the last straw for the tax administrator.
During the last Congress, key members of the tax-writing committees considered whether to regulate all return preparers. NAEA has worked closely with Senators Grassley and Baucus as well as Congressman Portman and former Congressman Houghton to ensure they do not reinvent the wheel. We believe strongly that if Congress is going to expand oversight of all preparers, its legislative changes should focus on expanding and promoting the current regulatory regime rather than creating an overlapping and possibly confusing new system. We feel strongly that to avoid confusion and possible opposition from state accountancy boards, the legislation should direct the Department of Treasury to enroll individuals under a modified Circular 230. Additionally, the legislation must ensure adequate funding to IRS’ Office of Professional Responsibility by dedicating all fees and penalties for practitioners to its operation. Simply passing the regulation of potentially hundreds of thousands of new enrollees without beefed up enforcement will merely push the problem preparers underground.
Additionally, the IRS needs encouragement from policymakers at Treasury and Congress to do everything within its means to promote Circular 230 practitioners to taxpayers and to support and enhance this credential. The IRS is making a major shift toward bolstering compliance. What we can learn from the current system is that the professionalism of the practitioner doing the return in the end is one of the most important factors in increasing compliance. The old adage, “An ounce of prevention is worth a pound of cure,” is certainly apt here. If the information on the return is purposely incorrect, then the cost of compliance shifts dramatically over to the agency. Let’s face it, the IRS has gone through the time and money to create a regime of certifying competency and integrity; it needs strenuously to support those practitioners that equally have gone through the effort and cost to enroll and stay current under this program.
In closing, Mr. Chairman and members of the subcommittee, the National Association of Enrolled Agents and its members stand prepared to work with you and the IRS in ensuring a strong tax administration system and improving voluntary compliance. It is up to Congress, however, to do its part to provide the agency with the proper level of funding; simplify the tax system; and to encourage the use of Circular 230 practitioners, expanding and enhancing the current system of regulating practitioners to include all people paid to complete a tax return.
Thank you and I stand ready to answer any questions you may have.
†The National Association of Enrolled Agents (NAEA) is the professional society representing Enrolled Agents (EAs), which number some 40,000 nationwide. Its 11,000 members are licensed by the U.S. Department of the Treasury to represent taxpayers before all administrative levels of the Internal Revenue Service (IRS), including examination, collection and appeals functions.
While the Enrolled Agent license was created in 1884 and has a long and storied past, today’s EAs are the only tax professionals tested by IRS on their knowledge of tax law and regulations. They provide tax preparation, representation, tax planning and other financial services to millions of individual and business taxpayers. EAs adhere to a code of ethics and professional conduct and are required by IRS to take Continuing Professional Education. Like attorneys and Certified Public Accountants, Enrolled Agents are governed by Treasury Circular 230 in their practice before the IRS.
Since its founding in 1972, NAEA has been the Enrolled Agents’ primary advocate before Congress and the IRS. NAEA has affiliates and chapters in 42 states. For additional information about NAEA, please go to our website at www.naea.org.