IRS Electronic Record Retention Policies: Improving Compliance

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Subcommittee on Oversight

Hearing on IRS Electronic Record Retention Policies:

Improving Compliance

Tuesday, July 25, 2017, 10:00 A.M.

By Michael G. Bindner

Center for Fiscal Equity

Chairman Buchanan and Ranking Member Lewis, thank you for the opportunity to submit these comments for the record to the Oversight Subcommittee.  As usual, we will preface our comments with our comprehensive four-part approach, which will provide context for our comments.

• A Value Added Tax (VAT) to fund domestic military spending and domestic discretionary spending with a rate between 10% and 13%, which makes sure very American pays something.
• Personal income surtaxes on joint and widowed filers with net annual incomes of $100,000 and single filers earning $50,000 per year to fund net interest payments, debt retirement and overseas and strategic military spending and other international spending, with graduated rates between 5% and 25%.  
•  Employee contributions to Old Age and Survivors Insurance (OASI) with a lower income cap, which allows for lower payment levels to wealthier retirees without making bend points more progressive.
• A VAT-like Net Business Receipts Tax (NBRT), which is essentially a subtraction VAT with additional tax expenditures for family support,  health care and the private delivery of governmental services, to fund entitlement spending and replace income tax filing for most people (including people who file without paying), the corporate income tax, business tax filing through individual income taxes and the employer contribution to OASI, all payroll taxes for hospital insurance, disability insurance, unemployment insurance and survivors under age 60.

There are two issues in records retention and retrieval. The first is whether an individual taxpayer and get last year’s return easily when it was filed electronically (or older) for both tax preparation and other filings, like bankruptcy. This is not easy when using forms for higher income filers ineligible for Free File, although getting the current year is surprisingly easy, say for retrieving information for state returns. For prior years, it seems like information protection has overcome ease as a priority, especially when having to use a credit card as an identification document is required.

The second issue is whether government agencies can get the information for investigatory purposes. I am sure that there are those both inside and outside the government who are surprised at how easy it is, without naming names, let’s call him Ducky J. Club. Ducky should not be shocked that the Justice Department can get his returns for the asking. It is listed on the form.

Our main aim in submitting these comments is to illustrate how they may work in the tax reform we propose. How retention and retrieval work today is a matter for government witnesses and taxpayer advocates to address in their testimony.

Both the value added and net business receipts taxes will collect tax identification numbers at the transaction level. For the NBRT only, Social Security Numbers will also be collected for payroll, contractor reimbursement (assuming that sole proprietor consultants are not given employee status, which is recommended), distribution of the child tax credit, with payroll. Income taxes will require SSNs at distribution of dividends and stock sales, either directly or through a fund or holding company (wage information would already be collected for the NBRT). Charitable contribution data would also be sent to IRS if this deduction is retained.

VAT and NBRT information would be collected at the state level and used by State agencies to assure compliance (to check that receipts claimed in lieu of tax were authentic). Interstate collections within a federal region (we propose a reorganization to equal electoral vote strength) would be verified by the regional IRS element, while interregional collections would be verified by the national IRS, usually for ”border” cities like New York, Chicago where business and employment cross regional lines.

Aside from consumption tax verification, the records of which will likely be archived very quickly, there is the verification of child tax credit payments to assure that the employer payment equals what was reported and to assure that households were paid the correct amount by all employers, especially when both parents work or one or both have more than one job. There will be protocols for who can collect the credit, whether it is split and prevention of the second job distributing the credit at all.

This information will be aggregated at the regional or federal levels as above, with a notice sent to each household on what was disbursed. Employers will also provide a record of these payments every year. Families will review these records and, if under-paid, file for a refund (which the employer will be billed for, with penalties if credits were claimed and not disbursed) and if overpaid, contact the IRS for a repayment schedule. These records would be retained by IRS, although families need not retain them if this is their only tax matter, although most probably will.

All income and investment information, including distributions from interest or dividends and sales of stock from an estate (100% taxable) or normal investment (capital gain taxable), as well as sales to a qualified Employee Stock Ownership Program (untaxed) will be forwarded to national IRS and aggregated by SSN. Verification will be accomplished to make sure that tax avoidance does not occur through use of multiple SSNs. Individuals making under $50,000 per year and joint filers making under $100,000 will have their information stored while information on the remainder will be used for tax compliance purposes. It is possible that, because all relevant capital gains information has already been compiled that IRS could simply bill the taxpayer, although charitable deductions might trigger an in-person audit if claimed amounts are unreasonable.

Thank you for the opportunity to address the committee.  We are, of course, available for direct testimony or to answer questions by members and staff.