EMPLOYMENT TAX PAPERWORK AND BURDEN REDUCTION

Excise Tax-Form 2290, Heavy Vehicle Use Tax Return Initiative

Each year, the IRS sends out approximately 790,000 Form 2290 tax packages to taxpayers potentially liable for the tax. Research performed by the IRS Cincinnati Service Center determined that approximately 265,000 taxpayers receiving the package had not filed a Form 2290 for the past three years.

By analyzing our internal databases, the IRS was able to notify over 239,000 taxpayers that they may no longer be liable for the tax. This will have a significant impact on paperwork reduction. It takes approximately 30 minutes to read the Form 2290 filing instructions and determine if a liability exists. Multiplying this time by the 239,000 taxpayers, the IRS will reduce taxpayer burden by 119,793 man hours. There are 500,000 Forms 2290 filed annually with tax liabilities of $800 million dollars.

Automated System for Tracking Tips

As a result of our partnerships with the tip industry, businesses and associations, a significant portion of the food and beverage industry has implemented an automated system that tracks tips on a per-shift or daily basis and incorporates them into the withholding process on a weekly basis.

Prior to the automated system, employees were required to keep tip records on a daily basis on a worksheet. This worksheet was submitted monthly to the employers on the tenth of each month. The employer would then have to incorporate the employeerecorded data into wage and withholding records.

The new program provides for the employees to record the tips as they check out each day. The employees no longer have a paper-intensive, daily record-keeping requirement. The tip recording is part of an existing employer required checkout process. Employers no longer have a separate accounting to integrate into their books each month, nor a monthly reporting process. The tip reporting process is quickly becoming a transparent part of daily business for these industries.

Taxpayer Identification Number (TIN) Matching Program

The TIN Matching system under development will significantly decrease the number of notices requiring corrections to TINS and penalty notices for late filed, incorrect or missing TINS. In addition, this system will encourage businesses not currently filing electronically, or required to file electronically, to convert to electronic filing so that they can use the TIN Matching system to validate their TINs before submitting them to the IRS.

The TIN matching program will provide a match of user supplied information against IRS' files. The results provided are based on an exact match, and no validation or perfection is performed on the data. The TIN matching program will be open to all

payers, employers, Electronic Return Originators, tax preparers, and other governmental entities. Requestors with the appropriate limited power of attorney will also have access. INTEREST & PENALTY ADMINISTRATION

FTD Threshold Increase

To provide additional burden relief to small businesses, the IRS also increased the threshold amount for quarterly tax deposits required on tax deposits from $500 to $1,000. This change means that almost one-third of the nation's 6.2 million small business employers will not have to deposit employment taxes, relieving them of the responsibility of making as many as 12 deposits annually. This change also reduces paperwork burden because, generally, these taxpayers used paper coupons to make these deposits.

ELECTRONIC

PIN Pilots

Millions of individual taxpayers used Personal Identification Numbers (PINs) to file totally paperless returns this year. The use of a PIN number eliminates the need to send a paper signature jurat to the IRS.

Through March 2, 2000, 3.7 million taxpayers have already participated in the Practitioner Signature Pilot where taxpayers choose a PIN when filing electronically through 18,000 participating practitioners. The March 2nd total was more than seven times the 500,000 PINS used for all of last year.

Another 700,000 taxpayers used e-file Customer Numbers (ECNs) to file using tax preparation software from their home computers. In December, the IRS mailed more than 11.5 million postcards with ECNs to people who did their taxes on a computer last year, whether they filed a paper or electronic return. By e-filing with the ECN, these taxpayers do not have to file any paper with the IRS. The ECN usage thus far this year already exceeds the 1999 total of 660,000.

Electronic Payments

A growing number of taxpayers are also enjoying the convenience of paying electronically. More electronic payment options (credit card and direct debit) have been made available to taxpayers this year, such as accepting debit payments through TeleFile and accepting credit cards for Forms 1040ES, estimated tax payments, and Forms 4868, extensions of time to file.

Through February 26, 2000, over 11,300 taxpayers chose the direct debit option where taxpayers can designate a checking or savings account at the time the return is filed and defer the debit until the due date of the return. Last year, 75,000 payments were made via direct debit.

Another 4,747 taxpayers used credit cards to pay their taxes. Taxpayers can charge their federal tax bill to an American Express, MasterCard, or Discover Card account by calling 1-888-2PAY-TAX (1-800-272-9829). In addition, a few software developers offer integrated e-file and pay combinations for individuals who want to pay their balance due with a credit card. This payment option is available to taxpayers who purchase tax preparation software and file their returns from a personal computer. Last year, over 53,000 tax payments were made via credit card.

Electronic Federal Tax Payment System

Approximately 2.8 million businesses are now enrolled in the Hammer-award winning Electronic Federal Tax Payment System (EFTPS) that allows taxpayers to make their federal tax deposits over the telephone or using a personal computer, eliminating the need for paper deposit coupons, checks, or trips to the bank. During FY 1999, over 55 million transactions, in excess of $1.3 trillion were made via EFTPS. Thus far in FY 2000 (through February 26, 2000), nearly 26 million transactions in excess of $610 billion were made through EFTPS.

Expansion of the Form 941 On-Line Filing Program

Since April 1998, small businesses that meet certain qualifications were able to file their Forms 941, "Employers Quarterly Federal Tax Return", using a touch-tone telephone. During FY 1999, over 915,000 quarterly employment tax returns were filed over the telephone by employers, in addition to 1,234,063 Forms 941 that were filed electronically by payroll service providers. In Fiscal Year 2000, the IRS expects 962,200 returns to be filed over the telephone and another 1,504,100 Forms 941 to be filed electronically. Over 220,000 employers participate in the TeleFile program, in addition to approximately 320,000 employers who participate in the Form 941 e-file program.

Beginning April 1, 2000, IRS offered the opportunity for employers to prepare and file their Form 941, “Employer's Quarterly Federal Tax Return", using their personal computer, modem, and off-the-shelf tax preparation software. The tax return information is transmitted to IRS through a third party. This program provides another option for filing Form 941 electronically, which will save time and reduce paperwork for employers.

Simplified Tax And Wage Reporting System (STAWRS)

Under STAWRS, the IRS is working with other federal agencies and states to reduce the wage and tax reporting burden on employers through initiatives such as the Single Point Filing projects conducted in Montana and Iowa. Approximately 80 Montana employers participated in each of the four test quarters by filing one quarterly (paper) return, Form MTQ/941, with the Montana Department of Revenue.

The employers used the Form MTQ/941 to report their Montana state withholding tax, Montana unemployment insurance tax, Federal withholding tax, and

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Social Security and Medicare taxes. Montana extracted the Federal data, encrypted it and sent it via a secure gateway to the Tennessee Computer Center for processing. Based on the test results, Montana is planning for a phased-in implementation. It plans to offer the combined form to 5,000 additional employers each quarter until all employers in the state have the opportunity to participate. Montana is hopeful that half of their 30,000 employers will ultimately participate in combined filing.

The Iowa project was similar to the Montana project except that it involved electronic filing of the quarterly return rather than paper filing. Because of limitations with the pilot software, which was provided by the STAWRS Project Office through Iowa, only three employers participated in the pilot during the three test quarters.

Electronic Form W-4

The IRS is developing a computerized Form W-4 that will be simpler for employees to use and more accurate than the current paper Form W-4. Employees use the Form W-4 to tell their employers how much tax to withhold from their paychecks. The paper form helps employees determine either their correct number of withholding allowances (to avoid having too much withheld) or how much additional tax to withhold per-pay-period (to avoid having too little withheld).

Since the paper form has to accommodate most individuals' situations and requires the employee to perform several calculations, it is often burdensome and nonintuitive to use. Moreover, since the complex tax calculations must be approximated on the paper form, the amount actually withheld can deviate substantially from one's actual tax liability.

The electronic W-4 will be both easier to use and more accurate than the paper form by having the computer do the work and by customizing the calculations based on user input. Users will be prompted to enter only the information relevant to their situation (e.g., based on marital status, number of jobs, etc.), and the program will provide them with accurate withholding information. The program is being developed as a Web-based application, but can be distributed to employers in other forms as well.

Future versions may even be able to print out a completed Form W-4 at the conclusion of the program. In addition to reducing taxpayer burden, the electronic W-4 may help to reduce unexpected under-withholding, and therefore, may prevent many balance due and non-filing cases.

COMPLEXITY

In addition to paperwork reduction, the IRS believes that complexity must be addressed to effectively reduce taxpayer burden and improve taxpayer compliance - two key components of the IRS' mission.

Reducing complexity can reduce taxpayer burden by cutting the time and costs taxpayers face in meeting their tax obligations and increase compliance by making those

obligations easier to understand and meet. Reducing complexity also will make it easier for IRS employees to do their job of providing top quality service to taxpayers and ensuring that the taxes that are due are paid.

In fact, reducing complexity will aid the IRS in achieving all of its strategic goals: (1) service to each taxpayer, (2) service to all taxpayers, and (3) productivity through a quality work environment.

Burden results from taxpayers spending time and money trying to understand and meet their filing, reporting and payment responsibilities. Complexity adds to burden by increasing their investment in these areas trying to figure out if, and how specific provisions apply to them. Significant reductions in burden, as well as increases in compliance may be driven by relatively small simplification that affects many taxpayers.

By the same token, noncompliance can result from taxpayers' frustrations with the complexity faced when trying to obey the law. Individual taxpayers cope with complexity as best they can. Some struggle with it themselves, while others rely on tax preparation software or paid preparers.

When tax laws change, individuals often face uncertainty as to how to comply with the changes, especially if they are frequent, or if the individuals and IRS are given little time to prepare before the changes become effective.

Since 1986, when the Tax Code was rewritten for the first time in almost 30 years, there have been 78 tax laws enacted. Just one of these, the Tax and Trade Relief Extension Act of 1998, contained 25 sections of tax changes. Of these, 11 were effective retroactively and four were effective within 90 days of the end of the calendar year. The Earned Income Tax Credit (EITC) has been changed almost yearly for the past decade.

Situations such as these challenge both the IRS and taxpayers. The IRS needs to issue clear guidance and forms covering the changes in time for the next filing season. Taxpayers face the uncertainty that late changes pose to their current and future tax obligations. With short lead times, both the IRS and taxpayers have little time to become knowledgeable about the changes. This creates additional chances for error as well as heightened frustration and conflict.

Many taxpayers, tax practitioners, scholars, and stakeholders emphasize that even the simplest of changes to the Tax Code can have complex consequences if change is frequent and/or has a retroactive or short lead time for the effective date.

Frequent change increases the uncertainty that taxpayers face in tax planning, record keeping, and the filing of their returns. The inability to stay current has been cited by small business owners and individuals as a primary reason for their use of paid preparers.