Tax Policy Updates

Protecting the EITC and other tax refunds and benefits for Legal Immigrants: The month of May saw a flurry of amendments to the pending Immigration Bill (S. 2611) seeking to curb tax benefits to immigrants.

a. Big victory: There will be no cuts to the EITC for legal immigrants. In a vote of 60-37, the Senate rejected a proposed amendment (No. 4108) that would deny EITC to immigrants after they have adjusted their status. Several Republicans, including Sen. Brownback (R-KS) and Sen. Spector (R-PA) got up on the floor to support the EITC! The relentless calls from our affiliates—you—made a big difference.

b. Close victory: No cuts for social security benefits for immigrants. In a vote of 50-49, the Senate narrowly agreed to TABLE an amendment (No. 3985) that would deny Social Security benefits to immigrants, even though they pay into the system in the form of payroll taxes.

c. Close loss: Cuts to ALL tax credits and ALL refunds for immigrants during the years they are undocumented if they adjust their status after 2006. In a 50-47 vote, the Senate agreed to the amendment (No. 4136) proposed by Sen. Ensign to S. 2611 to ensure that undocumented immigrants who adjust their status under this bill do not receive any tax refunds or credits when they pay their back taxes to adjust their status.

d. It’s not over till it’s over! An agreement on a compromise of the House and Senate versions of the immigration bill is being delayed until after the Congressional summer recess and probably the fall elections. House members will hold hearings across the country in August. We will have talking points and letter to the editor template in case there is a hearing near you!

Congressional Outreach Campaign: An Opportunity to take Action [posted 4/18/06]

Over 20 Members of Congress have visited National Community Tax Coalition affiliate tax sites, experiencing first hand the vital tax services that our organizations provide. If you have contacted a Member of Congress, thank you so much for your effort and please let us know who you have contacted and how it went by clicking here.

If you have any questions or are in need of assistance, please feel free to contact Diya Bose at 312-630-0292, or via e-mail at dbose@centerforprogress.org

Affiliates met over the phone with numerous Senators’ tax staffers who are either on the Senate Finance Committee or the Senate Appropriations Committee for Treasury to push for $10 million for funding for free tax prep. At these calls, affiliates from each Senator’s home state gave engaging presentations on their local work and the impact the EITC and free tax prep programs have on working families in their communities. The National Community Tax Coalition set up these meetings, recruited affiliates to participate and prepared affiliates for the call. If you are from any of the following states, you can help us by contacting your senator’s tax staffer, as your Senator is on the Senate Appropriations Committee:

Senate Finance Committee is moving forward with the authorizing bill for $10 billion for free tax preparation. Now as outlined above, we need the Appropriations Committee to appropriate the money. We still need your help! For more information, contact dbose@centerforprogress.org.

Success! Major Step Towards Federal Funding of Community Tax Prep [posted 4/6/06]

We had outstanding success on our mid-March campaign asking Senators to support funding for community tax preparation programs. Twenty-six Senators, including three Republicans, signed on to the Appropriations Committee letter sponsored by Sen. Durbin. Over one-quarter of the Senate signed on—an excellent result for a first-time sign-on letter!

Thanks to the over 250 of our affiliates who wrote and called your Senators! You made all the difference! Click here to see the actual letter and here to see the list of Senators who signed on. There will be a chance in the future to have your Senator weigh in in favor of the appropriation even if they didn’t sign the letter—we will keep you updated.

The Coalition will continue to work hard with Senator Durbin’s office and the appropriations committee to make this appropriation come to fruition. If you have any comments on what you think an appropriation for low-income tax preparation should look like, please send these to dbose@centerforprogress.org.

National Community Tax Coalition comment letter expresses the group’s deep concern regarding the proposed IRS regulations for a new VITA record-keeping system [posted 4/6/06]

The Steering Committee of the National Community Tax Coalition strongly urged the IRS to withdraw its proposed regulations that would burden free tax preparation sites with unnecessary reporting requirements and allow the IRS to reassign your volunteers. Click here for the comment letter and here for the federal register announcement of the proposed changes.

Ellie Cimaglia, the Director of SPEC, W&I addresses the National Community Tax Coalition’s concerns about the proposed IRS regulations for a new VITA record-keeping system. [posted 4/6/06]

Cimaglia responds to the concerns raised by the National Community Tax Coalition about the Proposed New Privacy Act System of Records (see above). Click here to view the response (please note this is not an official IRS response to whether the new regulations will move forward).

In a November 4 report, the Treasury Inspector General for Tax Administration said IRS oversight of the Volunteer Income Tax Assistance program has improved, but that "challenges remain for an effective quality assurance process." TIGTA says that the IRS has made some improvements to VITA oversight, but has a ways to go to limit error by VITA preparers. You can find the report here.

a. Met with Commissioner Everson about the tax gap. The good news is that Commissioner Everson did not mention EITC audits as a major priority. The bad news is that his emphasis is clearly on enforcement rather than increasing services. We will be submitting questions for a hearing in June on the Senate Finance Committee.

b. Met with Peg Connell, who is the lead for the Taxpayer Assistance Blueprint, the IRS' 5-year service plan. This is a crucial document as Congress will base their funding for IRS services on it.

c. Met with Lisa McLane, who oversees the Innocent Spouse Form Redesign and shared our concerns, especially regarding information sharing and protecting the privacy of victims of domestic violence.

d. Met with Floyd Williams, Director, Legislative Affairs, who outlined what happened in the 12 or so Congressional hearings already held with the IRS this year, and three more to come. Good news: the House is becoming less rabid about attacking the EITC.

IRS Commissioner Testifies before the House Ways and Means Committee on the 2006 Income Tax Filing Season and discusses Free File Alliance Agreement [posted 5/4/06]

Mark Everson reflected on the advantages of the free file system that makes tax filing easier and reduces the burden on taxpayers. However, he also acknowledged the concerns critics have raised regarding the aggressive marketing of RALs by some Free File Alliance members. Read his testimony.

Sens. Akaka and Bingaman have co-sponsored a bill, S. 2550, supported by consumer groups that would provide taxpayers with free direct electronic filing through the IRS website without involving a third party intermediary. Currently, taxpayers must go through a commercial third party website in order to file electronically. Some taxpayers can use the IRS-established Free File program to file electronically for free, but at the cost of being pitched various paid products such as state tax return preparation and review by a tax “professional.” Certain members of the House, led by Republican Congresswoman Melissa Hart (PA-4) and supported by the tax preparation and computer industries, are promoting a bill to explicitly prevent just such services. (For full text of these two bills go to http://thomas.loc.gov/ and type in the bill number, as in “S. 2550” or “H.R. 5114”.) Several national consumer groups have sent a letter of support for the Akaka/Bingaman bill and issued a press statement about their support plus criticism of HR 5114.

Center for Economic Progress participates in Treasury Inspector General for Tax Administration (TIGTA) audit of IRS services [posted 4/6/06]

Click here for the Center for Economic Progress' response to the audit. The section on SPEC services to VITA was written with extensive input from National Community Tax Coalition Steering Committee members and affiliates. Several Coalition affiliates also responded to the opportunity to participate in the audit which the National Community Tax Coaltion announced on our Tax Roundtable listserv. Click here to join the listserv.

IRS Commissioner praises VITA [PDF, 18KB, posted 3/10/06]

Commissioner Everson said he expects to rely heavily on Volunteer Income Tax Assistance (VITA) programs to improve services. "That is the future," he said. "The footprint of our walk-in centers is not going to grow." Click here for a report of his remarks.

National Community Tax Coalition requests input into Congressionally Mandated Refund Anticipation Loan (RAL) Study [posted 4/6/06]

The Coalition and national partners led by the National Consumer Law Center and Consumer Federation of America wrote to Treasury Secretary Snow and IRS Commissioner Everson to request that groups that have done extensive research and have been working on the issue directly are consulted as a part of the development of the study. The Coalition received a response from the IRS stating it was too late for consultation for the June 30 report. Click here to view the letter.

National Community Tax Coalition Requests Congressional RAL Study be vigorous [posted 2/28/06]

The National Community Tax signed on to a letter with the National Consumer Law Center, the Consumer Federation of America, the Consumers Union, U.S. PIRG, and the Children’s Defense Fund requesting that a study of Refund Anticipation Loans (RALs) commissioned by Congress address serious questions about the IRS role in facilitating RALs and the level of hardship and abuses created by RALs. Click here for a copy of the letter.

The IRS should not need to carry out major service cuts, as their overall budget remained the same in the President’s proposal. Read more details in the Treasury news release and the FY 2007 Budget in Brief.

Ensign Amendment Dropped from Treasury Appropriations Bill in Conference [posted 12/2/05]

Congress has passed its funding bill for the Department of Treasury and the Internal Revenue Service without a provision that would have prohibited the IRS from developing its own on-line tax preparation services. The National Taxpayer Advocate opposed this provision, pointing out that it would have made IRS negotiations with professional tax software companies involved with the IRS' free-file program difficult. For more background on the amendment, known as the Ensign Amendment, click here.

National Community Tax Coalition affiliates have participated extensively in the Treasury Inspector General's studies on the possible impact of TAC closures. This study was required by Congress before any TACs could be closed. After the study, input from stakeholders, including the Coalition and our affiliates, will be required by the IRS. The National Community Tax Coalition met with representatives of the IRS in a meeting open to the Coalition's affiliates.

In this column in The American Prospect, John Alexander Burton criticizes the unfair treatment EITC recipients face. Low-income taxpayers are not only more likely to be audited, but the criminal enforcement wing of the IRS also denied their basic rights by neglecting to give them an advanced notice before taking action. Click here for the full article. For the position of the National Community Tax Coalition on the targeted crackdown on EITC recipients, click here.

The National Community Tax Coalition strongly opposes the IRS Refund Freezes revealed in the National Taxpayer Advocate’s report and subsequently in the national media last month.

IRS Commissioner Everson recently announced changes to the program, including notification of taxpayers that their refunds are frozen and speeding up processing times. He did not, however, address the overtargeting of EITC taxpayers for refund freezes.

Click here to find the Coalition's estimates of EITC refund freezes in your state and here for the Coalition's position on refund freezes.

The Internal Revenue Service will revamp a fraud detection program and start notifying taxpayers this spring when freezing their refunds for further examination, the nation's tax collectors announced Monday.

The changes address criticism that the agency's Questionable Refund Program deemed thousands of refunds fraudulent and withheld the money without telling taxpayers. The IRS said taxpayers can expect to get notification as quickly as they would have expected to receive the refund.

When the IRS proposed a “precertification” audit initiative of 1-2 million taxpayers per year three years ago, members of the public and Congress strongly objected and the program was scaled back to 25,000 audit “tests”. It seems the IRS has developed a back-door mechanism to audit this many EITC taxpayers – thus thwarting the intent of Congress to prevent such targeting.

Seventy-five percent of the estimated1.6 million Americans who had their refunds secretly over the last five years (as reported in January by the National Taxpayer Advocate) were EITC taxpayers; the median income of all those targeted was $13,330 and their median refund was $3,519. The hundreds of thousands of secret refund of EITC freezes annually are in addition to nearly half a million audits of EITC taxpayers by the Wages &Investment examination unit, 300,000 “automated underreporting of income” audits, and 60,000 special EITC audit “tests”. Thus the number of annual EITC audits is likely over 1,000,000 per year.

The Center for Economic Progress is strongly opposing the refund freeze program, with the following talking points:

We’ll be sending more information about what you can do, and state-by-state data on the refund freezes later this week. For an excellent mention of this issue in a recent speech by John Edwards, click here.

If you wish to join a new administrative advocacy mailing group, please email Don Wedd.

The Senate passed its Tax Reconciliation package with an item (Section 523) that would significantly change the way the IRS accepts Offers-In-Compromise for taxpayers who have controversy with their taxes. Passed as a revenue-generating measure, Section 523 proposes adding a 20-percent down payment requirement to lump-sum offers-in-compromise. It is apparently intended that the lump-sum down payment would be nonrefundable and retained by the IRS if the offer is rejected. We have serious concerns about this proposal. A successful offer-in-compromise program raises revenue both from the offer and by bringing taxpayers back into the system. Because the 20-percent nonrefundable down payment requirement could dramatically reduce available outside funding for potential offers, there is a significant risk that the proposal could decrease the number of legitimate offers submitted, the number of offers accepted and the number of individuals reentering the tax system.

The measure still has to survive the conferencing of House and Senate versions of the tax bill to become law. To view section 523, click here and search for s.2020.PCS, then scroll to Section 523.

Lawmakers grill Mark Everson on proposed disclosure regulations, privatization of collections, and EITC audits and refund freezes [posted 5/4/06]

On March 29 lawmakers questioned IRS Commissioner Mark Everson about proposed return disclosure regulations which would allow tax preparers to sell taxpayer information to third parties, and about the use of private debt collectors, who will track down taxpayers who agree they owe taxes but have not paid. According to Dustin Stamper of Tax Analysts, Representative Olver (D-MA), minority leader of the House Appropriations Subcommittee on Transportation, Treasury, HUD, Judiciary and District of Columbia, “criticized Everson for spending too much time going after low-income taxpayers who claim the Earned Income Tax Credit, arguing that the big money is elsewhere.” The complete transcript of the hearing is yet to be released.

Confidentiality of Taxpayer Information is Eroded to Benefit Private Industry [posted 4/6/06]

National Community Tax Coalition Opposes IRS Outsourcing of Debt Collection, and IRS Allowing Paid Preparers to Sell Taxpayer Information

See an excellent New York Times Editorial on both of these issues. The erosion of confidentiality of taxpayer information will only worsen if provisions in the House Immigration bill (HR 4437) become law, requiring the IRS to work with DHS (formerly INS) to help identify undocumented immigrants.

Coalition affiliates express concern over IRS and DHS (formerly INS) sharing data [posted 2/28/06]

Members of the National Community Tax Coalition’s Immigrant Taxpayer Working Group sent a letter February 15 to the House Ways and Means Committee's Oversight and Social Security subcommittees. The groups expressed opposition to proposals that would allow the IRS and the Department of Homeland Security (formerly INS) to share confidential information about immigrant taxpayers. The letter, coordinated by the Consumer Federation of America, was signed by representatives of:

The tax preparation giant has agreed to settle a class-action lawsuit on refund anticipation loans (RALs) in Illinois. However, despite this outcome and the mounting pressure from consumer advocacy groups and others concerned about RALs, H&R Block does not plan to stop offering these high-interest loans. (April 21, 2006)

For up-to-date information on research and resources on state Earned Income Tax Credits, visit the State EITC Online Resource Center maintained by The Hatcher Group.

Read 11 ideas for tax reform that would benefit southern states. From the Georgia Budget and Policy Institute. [posted 8/10/06]

On November 2nd, Colorado voters streamed to the polls and delivered a devastating blow to anti-government activists by passing Referendum C by a margin of 52 - 48.

By suspending the so-called Taxpayers’ Bill of Rights (TABOR), Coloradans rolled back the harshest government spending limits in the nation. This vote will help Colorado rebound from economic crisis and reinvest in education, health care, and public safety.

TABOR, which passed several years ago in Colorado, greatly reduces state budgets by locking them into any reductions in revenue caused by economic recessions and downturns. There have been active TABOR initiatives in Wisconsin, Pennsylvania, and Ohio just to name a few states. In Colorado, TABOR was used to temporarily eliminate the state EITC. Congratulations to all the individuals and groups across Colorado who worked so hard to achieve this important victory. Click here for more information on TABOR.

In his report on tax reform and poverty, Jason Furman of the Center on Budget and Policy Priorities discusses the impact of the Earned Income Tax Credit and ways to improve it. Further, Furman notes the hazards of making the dividend and capital gains tax cuts permanent and the dangerous precedent it may set for making future tax cuts permanent without off-setting their costs.

In this New York Times Op-Ed piece, Dorothy Brown blasts Congress for funding and pushing the IRS to target low-income taxpayers with audits rather than doing the work to simplify the credits to reduce burden and error. She argues strongly against the notion that low-income tax credits are a form of welfare (introduced into our lexicon by Bill Clinton). Interestingly, she never uses the term “EITC”.

The New York Times reveals that President Bush’s investment tax cuts mainly benefit the super-rich (the top one-tenth of the top 1%) [posted 4/6/06]

The super-super rich (those earning over $10 million) benefitted so much they now pay the same tax rate as those earning between $200,000 and $500,0000. Our tax code has become much less progressive! David Cay Johnston, keynote speaker at our last conference, analyzes all the data on these tax cuts as Congress prepares to debate on whether to make them permanent. Click here for the full article.

An additional $70 billion in tax breaks were approved by the Senate by a margin of 66 to 31 on Thursday, February 2. The $70 billion in tax breaks are not paid for, deepen the deficit and mostly benefit higher income households. The tax cut bill (H.R. 4297) is phase two of the budget reconciliation bill (see story in this issue) that cut nearly $40 billion mostly from services for the low-income. To see how your senators voted: http://www.senate.gov/legislative/LIS/roll_call_lists/roll_call_vote_cfm.cfm?congress=109&session=2&vote=00010

Several key differences remain between the House and Senate bills and those differences will have to be worked out in a conference committee:

Size. The House bill contains a little less than $60 billion in new tax breaks, compared to the Senate's $70 billion. Although the original instructions in the budget resolution allowed a $70 billion tax cut reconciliation bill, Congressional budget rules limited the size of the tax bill to $60 billion unless the budget cuts were enacted. Keeping the tax cuts within the reconciliation dollar limits is important because such a package can pass with only 51 votes. Tax cuts exceeding the limit require 60 votes. When Congress considered earlier versions of the tax bill last year, only about $60 billion in tax breaks had the special protections granted by reconciliation (because the budget cuts had not yet been passed.) The House's passage this week of the $40 billion cuts in spending (S. 1932), allowed the Senate to move forward with the full amount of the tax cuts. In addition, the tax reconciliation bills considered last fall included Katrina-related tax breaks that were subsequently passed as part of other legislation. Eliminating the no-longer-needed Katrina provisions freed up additional money for more tax breaks. Observers expect a $70 billion bill to emerge from conference.

Capital gains and dividend rate cuts. The centerpiece of the House tax reconciliation bill would extend for two years a tax break for those who claim capital gains and dividends - which overwhelmingly benefit the wealthy. Even though the provision extends the rate cut for just two years, the federal government would lose $23 billion in revenue over five years and as much as $30 billion over ten years. Households with more than $1 million in income would get 45 percent of the benefits from the capital gains and dividend breaks.

The Senate tax reconciliation bill does not include the capital gains and dividend provisions. When the Senate first considered the bill, Sen. Olympia Snowe (R-ME) threatened to oppose it if the capital gains and dividends pieces were included. It is likely conference negotiators will continue to push for capital gains and dividend rate cuts in the final conference report and will look for ways to include the tax break.

Alternative Minimum Tax. The Senate tax bill includes provisions exempting certain households from paying the alternative minimum tax (AMT). The AMT provisions primarily benefit households with income between $100,000 to $500,000. Less than one percent of the benefits of AMT exemption would go to households with income of more than $500,000. Those same households, in contrast, would get 55 percent of the benefits of the capital gains and dividend provisions. Last December the House passed a separate AMT bill that was not part of tax reconciliation.

A Tax Credit or a Handout? [posted 4/21/06]
An Op-Ed by Dorothy Brown published in the New York Times on April 18, 2006.

Senator John Kerry (D-MA) has introduced a positive piece of legislation to expand the EITC. S 1824 would increase the credit for married couples (by reducing the "marriage penalty"), single filers, military families who receive combat pay (by making 2004 provisions permanent), and filers with three or more children. Coalition staff are working with Kerry's staff on making EITC increases a reality. If you have comments on the legislation or suggestions for improving it, please email dbose@centerforprogress.org with your ideas. For more information on the Kerry legislation, click here.

Erika Schafer
Advocacy Associate/Organizer
National Community Tax Coalition
Center for Economic Progress
29 E. Madison Street, Suite 910
Chicago, Illinois 60602Phone (312) 252-0280
Fax (312) 252-0285
E-mail eschafer@centerforprogress.org
Web www.tax-coalition.org