Reforming How the IRS Resolves Taxpayer Disputes

Comments for the Record

United States House of Representatives

Committee on Ways and Means

Subcommittee on Oversight

Hearing on Reforming How the IRS Resolves Taxpayer Disputes

Wednesday, September 13, 2017, 2:00 P.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.

We will leave it to outside and Administration witnesses on how the current system is to be reformed. We are sure that their best counsel will work in the regime we suggest.

There will likely be problems to resolve in our proposed system, where the states collect by the Value Added Tax and the Net Business Receipts Tax and forward the money and records to the Internal Revenue Service. This will not impact most taxpayers, since once they have bought a product, no further action is necessary. Data management blips and cases of fraud to be investigated by state and federal revenue agencies are also outside the scope of this discussion.

Employees with children will need to annually verify the information provided by employers and, if they received less than was reported to the government, notify the IRS who will send a refund and collect the difference from the employer. This may trigger a dispute, but likely most employers will simply pay if there was an error. Fraud is another matter, which is criminal not a dispute to be settled. Other disputes may involve parents double dipping on two jobs or two earners, but these will likely work out a payment plan or contact their divorce lawyers to negotiate who pays.

The more complicated disputes will be on business filings, which will be common for all types of firms, including sole proprietors. The less complicated the VAT and NBRT are, the fewer disputes to be resolved. Indeed, the information on the collections for each will reinforce each other, although calculations will be different. VAT is transaction based while NBRT is based on total revenues less total purchases (1099 contractors will be considered employees). Credits and deductions will be more for employee benefits rather than industry specific tax breaks, so there should be few disputes, especially as any outside employee service organizations will also file their own consumptions taxes to confirm or dispute amounts.

The final area of taxation where disputes may occur is in the high income and inheritance surtax. Whenever an employee or an heir is paid interest, a dividend, a capital gain or an heir sells an inherited asset, information will be transmitted to the IRS, as well as sales to a qualified Employee Stock Ownership Program (untaxed) and aggregated by Social Security Number. Verification will be accomplished to make sure that tax avoidance does not occur through use of multiple SSNs.

Individuals making over $50,000 per year and joint filers making over $100,000 will have their information stored to compare to tax filings, unless the Congress authorizes an automatic filing system.  If the charitable deduction is maintained, it will be added in as well from submitted information. Disputes would occur if the data does not agree, which might trigger an in-person audit if claimed amounts are unreasonable.

Simplicity will minimize disputes and workload, making it easier to solve real problems quickly. Mutual data verification will probably make it too easy to conduct fraud, so there will be spot checks at both the state and federal levels to make sure that ease of service does not lead to criminality and identity theft. Of course, attempting to steal from wealthier taxpayers may lead the perpetrators of fraud in trouble from both the government and their victims, with both having the resources for adequate retribution. Financial fraud leaves a money trail. In the end it may be a stupider crime than robbing a bank.

We suspect that one final matter on the minds of the Committee are disputes over the non-profit status of a political organization receiving charitable contributions. To not quickly provide such status may amount to prior restraint, as long as the IRS and Treasury General Counsel have the budgetary resources to do their job. Cut the budget too much (and it has been cut too much) and both sides of the fence will be slow to receive status (which is what actually occurred). Recent events in Charlottesville have brought the matter forward in a different way.

This raises the question of whether the charitable contributions deduction can be used by Nazi donors or non-profits. Are these contributions considered hate speech? Again, it is doubtful that we can determine this using prior restraint. If the recipient commits acts that qualify as hate speech, essentially acts of terrorism based on race, gender, religion, etc., then we can always disallow the donations that funded it and collect the taxes. Bear in mind that the same rules should also apply to Islamic organizations that may or may not be funding overseas or domestic terrorists. Homeland Security cannot go after donors unless they can prove that terror was the result.

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.