Senate Finance Leaders Offer Blank-Slate Approach to Tax Reform


The two leaders of the Senate Finance Committee have offered to take a “blank slate” approach as a starting point for tax reform, in which there would be virtually no tax breaks available, and called on their Senate colleagues to provide suggestions on which tax provisions need to be added back and improved in a reformed tax code.

“Over the past three years, the Finance Committee has been working hard on tax reform on a bipartisan basis,” Senate Finance Committee chairman Max Baucus, D-Mont., and ranking Republican member Orrin Hatch, R-Utah, wrote in a letter to colleagues. “We’ve held more than 30 hearings and heard from hundreds of experts on reforming the tax code. We’re now entering the home stretch. We need your input and partnership to get tax reform over the finish line.”

Baucus and Hatch emphasized that any tax provisions should be added back only if they help grow the economy, make the tax code fairer, or effectively promote other important policy objectives. Senators have until July 26 to submit their proposals.

“This blank-slate is not, of course, the end of the discussion,” Baucus and Hatch wrote. “Indeed, we both believe that some existing tax expenditures should be preserved in some form. But the tax code is also littered with preferences for special interests.”

To help inform submissions, the Senators had the nonpartisan Joint Committee on Taxation and their staffs analyze the relationship between tax expenditures and the current tax rates if the current level of progressivity is roughly maintained. The amount of rate reduction would depend on how much revenue was reserved for deficit reduction, if any, and from which income groups.  However, JCT and Finance Committee staff determined that every $2 trillion of individual tax expenditures that are added back would, on average, raise each of the seven individual income tax brackets by between 1.3 and 2.2 percentage points from what they would be under the blank slate.

Likewise, every $200 billion of corporate tax expenditures that are added back would, on average, raise the top corporate income tax rate by 1.5 percentage points from what they it would be under the blank slate.

Baucus and Hatch said the JCT report demonstrates that the more tax expenditures allowed in the tax code, the less revenue available to reduce tax rates or reduce the deficit.

The chairman of the tax-writing House Ways and Means Committee, Rep. Dave Camp, R-Mich., saw the move as a positive step forward in the tax reform efforts that he, Baucus and Hatch are pursuing.

“Today’s announcement by Chairman Baucus and Senator Hatch is welcome news for Americans who deserve a simpler, flatter, fairer tax code that leads to more jobs and higher wages.  This significant step forward underscores that the Senate and House are on the same page as they work in a bicameral, bipartisan manner to fix our broken tax code.”

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Small Businesses See Financial Conditions Improving

Small businesses across the U.S. are feeling more optimistic about the months ahead as financial conditions rebound, but concerns remain about hiring and growth, according to a new report.


Capital One’s Spark Small Business Barometer for the second quarter found that 45 percent of small businesses across the country are reporting that they believe their financial position will be better in six months, a seven-point increase from the fourth quarter of 2012 (38 percent) and a two-point increase from Q2 2012 (43 percent).


The survey indicated that small business owners are financially better off than a year ago, with 35 percent of small businesses saying their firm’s financial position is better than a year ago, compared with 18 percent who report that their financial position is worse—a significantimprovement over Q4 2012, when a two-year high of 27 percent said their finances were worse.

Sixty-four percent of small businesses are optimistic about the local economy where they do business, but slightly less than half (48 percent) are optimistic about the state of the national economy.


Despite the improving optimism about the economy, small businesses are still reluctant to hire. Two-thirds of the small businesses polled do not have plans to hire in the next six months, a 1 point decrease from Q4 2012 (68 percent), but seven points higher than Q2 2012 (60 percent).


“Our survey results for the second quarter indicate that while optimism and confidence are on the rise and more small businesses are on sound financial footing, concerns and uncertainty continue to hold back plans for staffing increases and growth,” said Jon Witter, president of direct, consumer and small business banking at Capital One in a statement. “While many small businesses have seen an uptick in sales over the past six months, this is not necessarily translating into significant new hires or investments in the business.”


More than half (52 percent) of small businesses across the country report that current business conditions are fair or poor, while 46 percent report that business conditions are excellent or good. While the majority of those surveyed report that they are less than optimistic about current business conditions, 35 percent of small businesses say their firm’s financial position is better than a year ago, compared with 18 percent who report that their financial position is worse. This is a significant nine point decrease from the two-year high of small businesses that said their financial position was worse in Q4 2012 (27 percent). This quarter’s results are on par with the slow, but steady trend of business owners feeling better about their firm’s financial shape and positive outlook about future prospects that has developed since Capital One issued its first quarterly survey in Q1 2009.


Nearly half of small businesses across the country are reporting that they believe their financial position will be better in six months (45 percent), which could be attributed to the increase in sales that 35 percent of small businesses saw during the past six months. This is a 7 point increase from Q4 2012 (38 percent) and a 2 percent increase from Q2 2012 (43 percent). This quarter, only 10 percent of small businesses report that they think their financial position will be worse in six months, a significant 10 point decrease from Q4 2012 (20 percent), but a 2 percent increase from Q2 2012 (8 percent). Forty-one percent of small businesses report they believe their financial positions will be about the same in six months.



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Trial Date Set for IRS Appeal of Tax Preparer Lawsuit

A federal appeals court in Washington, D.C., has scheduled oral arguments for September 24 to hear the Internal Revenue Service’s appeal of Loving v. IRS, the case in which a trio of independent tax preparers successfully sued the IRS to suspend its mandatory testing and continuing education requirements for tax preparers.

Three preparers—Sabina Loving of Chicago, John Gambino of Hoboken, N.J., and Elmer Kilian of Eagle, Wis.—won a victory against the IRS in January when U.S. District Court Judge James E. Boasberg ruled in their favor and found the IRS had exceeded its statutory authority in imposing its Registered Tax Return Preparer requirements (see Court Rules IRS Doesn’t Have the Authority to Regulate Tax Preparers).

The IRS appealed, and Judge Boasberg clarified the ruling in February, enabling the IRS to re-open its Preparer Tax Identification Number, or PTIN, online registration system for tax preparers. The judge also clarified that tax preparers could take competency tests and continuing education courses on a voluntary basis, but they would not be required to do so while his injunction remained in place (see Court Modifies Ruling Invalidating Tax Preparer Regulations). An appeals court in the District of Columbia later rejected the IRS’s request to lift the injunction, pending its appeal of the judge’s decision (see Appeals Court Refuses to Lift Injunction against IRS Tax Preparer Regulation).

The same appeals court, the U.S. Court of Appeals for the D.C. Circuit, has now scheduled oral arguments in the case for September 24. Up to now, the case has largely been argued and appealed in the form of legal briefs from the plaintiffs’ and defendants’ legal counsel, along with amicus briefs from supporters on either side, but the trial date will give the two sides a chance to air their views in court.

Dan Alban, the lead attorney on the case at the Institute for Justice, a libertarian law firm in Arlington, Va., which successfully represented the three tax preparers in their lawsuit against the IRS, is looking forward to the trial before the appeals court.

“As we’ve said since we first filed this case, Congress never gave the IRS the authority to license tax preparers, and the IRS cannot give itself that power,” Alban said in an email Tuesday. “The district court judge agreed that the IRS had overstepped its authority, and we look forward to making our case before the D.C. Circuit.”

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Lawmakers Urge IRS to Avoid Inventory Rule Change

A group of lawmakers from the tax-writing House Ways and Means Committee have written a letter to Treasury Secretary Jack Lew urging the Internal Revenue Service to back off of a proposed rule change modifying the retail inventory method of accounting, which retailers fear could cost them millions of dollars a year.

The National Retail Federation, a trade group representing retailers, welcomed the letter, which was signed by Congressmen Tim Griffin, R-Ark., Vern Buchanan, R-Fla., Pete Roskam, R-Ill., Ron Kind, D-Wis., Pat Tiberi, R-Ohio, Charles Boustany, R-La., and Kenny Marchant, R-Texas. They asked the IRS to reconsider its plans to modify regulations governing the retail inventory method of accounting. Used by many merchants, the method allows retailers to average out the cost of merchandise in inventory rather than tracking specific items. The committee members said the proposed changes would require creation of “costly new inventory tracking systems” and would cost retailers millions of dollars.

“Both effects would divert scarce resources from investments that could otherwise be made in additional jobs and economic growth for constituents in our districts,” the letter said. “We urge you to reconsider the disproportionate tax burden on smaller retailers that will result if the regulations are enacted as proposed.”

The letter noted that a small business regulatory analysis has not been performed as required by the Regulatory Flexibility Act.

NRF vice president and tax counsel Rachelle Bernstein pointed out that retailers already have one of the highest effective tax rates of any U.S. industry. “This move by the IRS would make that tax burden even higher and amount to a hidden tax increase,” she said in a statement. “With the economy still recovering and retailers trying to create jobs, this is not the time to change a policy that has been in place for half a century.”

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IRS Needs Better Controls over Partial Payment Agreements

The Internal Revenue Service is not always properly monitoring or establishing the partial payment installment agreements it enters into with taxpayers, according to a new government report.

The report, by the Treasury Inspector General for Tax Administration, noted that taxpayers who enter into a partial payment installment agreement will not fully pay all of their delinquent tax liability, so it is important that PPIAs are carefully and accurately administered. If the IRS does not effectively pursue collection of unpaid tax through the use of PPIAs, it could create an unfair burden on the majority of taxpayers who fully pay their taxes on time, the report noted.

When establishing a PPIA, the IRS is required to complete a financial analysis of the taxpayer and assess the financial condition of taxpayers with a PPIA every two years. TIGTA reviewed a random sample of 100 PPIAs and found that the two-year reviews were not always properly performed and that some PPIAs were established without a complete financial analysis and/or manager approval.

To begin the two-year financial assessment, the IRS performs an automated review process of PPIAs at the two-year mark. However, the automated two-year review processes did not occur in eight (or 10 percent) of the 84 PPIAs requiring a two-year review.

If the automated review process determines that the financial condition of the taxpayer may have improved, a manual review is required. However, the manual reviews were not performed properly for 15 (or 52 percent) of the 29 PPIA cases for which a manual review was required. IRS procedures do not require managers to review or approve the results of the two-year review of PPIAs.

In addition, 15 of the 100 PPIAs sampled were established without a complete financial analysis. Without a complete financial analysis, there is a higher risk that the taxpayers are not paying the maximum amount they can afford or that they are unable to afford the amount in the agreement, TIGTA. Furthermore, 34 of the 100 PPIAs did not have evidence that the manager approved the PPIA. The absence of documented manager approval indicated that managers are not reviewing the PPIAs before they are established.

The IRS Collection Process Study report recommended that the IRS expand the use of PPIAs by offering a modified minimum PPIA to all individual taxpayers in uncollectible status. The report estimated that if PPIAs were offered to 230,000 individual taxpayers classified as unable to pay, the collection potential could be as high as $69 million annually. TIGTA was advised that the IRS does not have plans to implement this recommendation due to limited resources, however.

TIGTA made several recommendations to improve controls over the two-year review process and establishment of PPIAs. TIGTA also recommended that IRS management test the viability of expanding the use of PPIAs on a sample of taxpayers in uncollectible status.

In response to the report, IRS officials agreed or partially agreed with six of the seven recommendations. The IRS plans to revise procedures to improve controls over the two-year review process and plans to establish controls to prevent PPIAs from being established without manager review or approval.

The IRS did not agree with the recommendation to test the viability of expanding the use of PPIAs, saying it conducted similar tests with the Offer in Compromise program for taxpayers in currently not collectible status, which did not yield significant results.

TIGTA argued that the IRS’s tests involved taxpayers who were asked to consider applying for an Offer in Compromise, not a PPIA. Because of the differences between the two programs, TIGTA said it does not believe it is appropriate to draw conclusions about taxpayer willingness to establish a PPIA. For example, unlike a PPIA, taxpayers entering into an Offer in Compromise may have to pay 20 percent of their balance due before the IRS will consider their request.

“We are proud of the actions taken to improve the PPIA program,” wrote IRS Deputy Inspector General for Audit Michael R. Phillips in response to the report. “We have enhanced tracking reports for PPIAs, revised notices and improved telephone systems to better serve customers.  Through training and Internal Revenue Manual updates, employees are well aware of PPIAs as evidenced by their increased use over the past several years.”

Phillips generally agreed with TIGTA’s recommendations for financial analysis and managerial approval, but said he was concerned that the date ranges chosen for the sample review might have skewed the results of TIGTA’s findings. The sample of reviewed cases only included PPIAs established between Jan. 1, 2008 and July 1, 2009 and did not include any recent agreements, he pointed out.

“While this was necessary for the two-year review portion of the process, your findings may not be indicative of current case work,” he wrote. “In addition, your review did not include any supporting documentation submitted by the taxpayer or any physical supporting documentation associated with a case file when a PPIA was established. Analysis of supporting documentation may provide additional insight into a taxpayer’s ability to repay a liability. As such, we will conduct a review of recently established PPIAs and supporting documentation to determine if proper financial analysis, managerial review, and managerial approval are being done.”

He agreed to include PPIAs in campus operational reviews of installment agreements to ensure Internal Revenue Manual procedures were followed, but added that since PPIAs represent less than 2 percent of installment agreements, he did not believe it was appropriate to conduct separate National Quality Review System product line reviews for PPIAs.

With respect to the Collection Process Study recommendation to test the viability of expanding the use of PPIAs on a sample of taxpayers in uncollectible status, he said he did not believe it was an efficient use of the IRS’s limited resources.

“We conducted two similar tests with the Offer in Compromise (OIC) program for taxpayers in currently not collectible (CNC) status,” Phillips noted. “These taxpayers received a letter of solicitation informing them of the OIC program as a viable collection alternative. Even when offered an alternative that would fully resolve their accounts, the response rate was less than 3 percent.”

Based on the assumptions in the report, Phillips agreed with TIGTA’s proposed outcome measures for taxpayers who had their monthly payments reduced. However, he did not agree with the outcome measure for offering a modified PPIA to taxpayers in CNC status, noting that similar tests have not yielded significant results and do not mirror the estimated outcomes identified in the Collection Process Study.

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Congress Probes IRS Seizure of Medical Records

Leaders of the House Energy and Commerce Committee have sent a letter to Internal Revenue Service acting chief Daniel Werfel requesting information about a March 2011 IRS search and seizure of as many as 60 million medical records from a California health care provider.


The letter comes after a recent lawsuit was filed over the IRS’s alleged seizure of over 10 million American patients’ medical information in the course of executing a warrant related to a former employee’s financial records. As the IRS will be tasked with implementing much of President Obama’s signature health care reform law, committee leaders said they are concerned about what restrictions and safeguards are in place to ensure that Americans’ medical information remains protected.

The letter to Werfel was signed by House Oversight and Investigations Subcommittee chairman Tim Murphy, R-Pa., Oversight and Investigations and Health Subcommittees vice chairman Michael C. Burgess, M.D., R-Texas, committee chairman emeritus Joe Barton, R-Texas, and committee vice chairman Marsha Blackburn, R-Tenn. They wrote, “(T)he Committee on Energy and Commerce is investigating allegations that the Internal Revenue Service (IRS), in the course of executing a search warrant at a California health care provider’s corporate headquarters in March 2011, improperly seized the personal medical records of millions of American citizens in possible violation of the Fourth Amendment to the United States Constitution.”

The letter continued, “According to a March 14, 2013, report by, the unnamed health care provider is now suing the IRS and 15 unnamed agents in California Superior Court alleging that the agents stole more than 60 million medical records from more than 10 million American patients during a search conducted March 11, 2011. The warrant authorizing that search was apparently limited to the financial records of a former employee of the company and in no way authorized the sweeping confiscation of the personal medical records of millions of Americans who had no connection to the initial IRS investigation. … In light of these allegations and in anticipation of the IRS’s increased role in implementing health care under the Patient Protection and Affordable Care Act, we are writing to request information regarding your agency’s ability to both protect the confidential medical information of millions of Americans and respect the safeguards imposed by HIPAA [Health Insurance Portability and Accountability Act].”

The lawsuit cites a Forbes article in alleging that the medical records included “information on psychological counseling, gynecological counseling, sexual and drug treatment, and other sensitive medical treatment data.”

The committee leaders asked Werfel to respond the letter by Tuesday, June 25.

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Net Investment Income Tax: What You Need to Know

Now that the 2012 tax season is over, it’s time to focus on tax planning for 2013. One of the most significant tax changes this year is the Net Investment Income Tax (NIIT), which went into effect on January 1, 2013 as a result of health care reform enacted in 2010. Here’s what you need to know.

What is the Net Investment Income Tax?

The Net Investment Income Tax is a 3.8% tax on certain net investment income of individuals, estates, and trusts with income above statutory threshold amounts, referred to as modified adjusted gross income (MAGI).

What is Included in Net Investment Income?

In general, investment income includes, but is not limited to: interest, dividends, long and short term capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities, and passive business activities such as rental income or income derived from royalties.

What is Not Included in Net Investment Income?

Wages, unemployment compensation, operating income from a nonpassive business, Social Security Benefits, alimony, tax-exempt interest, self-employment income, Alaska Permanent Fund Dividends, and distributions from certain Qualified Plans are not included in net investment income.


Individuals whose modified adjusted gross income exceeds $250,000 (married filing jointly) or $200,000 (single filers) are taxed at a flat rate of 3.8% on investment income. Net Investment Income Tax is paid in addition to other taxes owed and threshold amounts (e.g. $200,000 for single filers) are not indexed for inflation.

Non-resident aliens are not subject to the tax; however, if a non-resident alien is married to a US citizen and is planning to file as a resident alien for the purposes of filing “married filing jointly” tax return, there are special rules. Please consult us if you have any questions.

Because investment income is generally not subject to withholding, taxpayers should be aware that the NIIT might affect tax liability for the 2013 tax year. In addition, it’s possible that even lower income taxpayers not meeting the threshold amounts could be subject to the tax if they receive a windfall such as a one-time sale of assets that bumps their MAGI up high enough.

Give us a call if you are expecting a windfall this year. We’ll help you come up with a strategy such as an installment sale, minimizing AGI, or figuring out the best timing for sale, that will help you to avoid or minimize taxes when you file your 2013 return next year.

Sale of a Home

The Net Investment Income Tax does not apply to any amount of gain excluded from gross income for regular income tax purposes ($250,000 for single filers and $500,000 for a married couple) on the sale of a principal residence. In other words, only the taxable part of any gain on the sale of a home has the potential to be subject to NIIT, providing the taxpayer’s income is over the MAGI threshold amount.

Estates and Trusts

Estates and Trusts are subject to the Net Investment Income Tax if they have undistributed net investment income and also have adjusted gross income over the dollar amount at which the highest tax bracket for an estate or trust begins for such taxable year. In 2013, this threshold amount is $11,950.

Special rules apply for certain unique types of trusts such a Charitable Remainder Trusts and Electing Small Business Trusts, and some trusts, including “Grantor Trusts” and Real Estate Investment Trusts (REIT) are not subject to NIIT at all.

It should be noted that non-qualified dividends generated by investments in a REIT are considered taxable income and taxed at ordinary tax rates. As such, they may be subject to the Net Investment Income Tax.

If you need guidance on the topic of Net Investment Income Tax and estates and trusts, don’t hesitate to call us.

Reporting and Paying the Net Investment Income Tax

Individual taxpayers should report (and pay) the tax on Form 1040. Estates and Trusts report (and pay) the tax on Form 1041.

Individuals, estates, and trusts that expect to pay estimated taxes in 2013 should adjust their income tax withholding or estimated payments to account for the tax increase in order to avoid underpayment penalties. For employed individuals, NIIT is not withheld from wages; however, you may request that additional income tax be withheld. Call us if you need assistance with this.

Wondering how the new tax affects you? Give us a call @ (310) 820-1080 or It’s never too early to start tax planning!


IRS Modifies Policy for First-Time Penalty Relief


The Internal Revenue Service has modified its “first time abate” policy, which provides a one-time consideration of penalty relief, based on the taxpayer’s compliance history, for taxpayers who have been subjected to a first-time penalty charge.

 The recently updated policy modifies the IRS first time abate policy for penalty relief, the IRS said in an email to tax professionals Friday. This type of penalty removal is a one-time consideration available only for a first-time penalty charge and based on taxpayers’ compliance history.

According to the policy, the FTA penalty relief option for failure to file, failure to pay and failure to deposit penalties, under certain conditions, does not apply if the taxpayer has not filed all returns and paid, or arranged to pay, all tax currently due. For example, the taxpayer is considered current if they have an open installment agreement and are current with their installment payments.

The FTA relief only applies to a single tax period for a taxpayer, the IRS noted. For example, if a request for penalty relief is being considered for two or more periods of a taxpayer, and the earliest period meets the FTA criteria, FTA would apply only to the earliest period, and not for all periods.

Penalty relief under the first time abatement provision does not apply to returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return; Form 709, U.S. Gift (and Generation-Skipping Transfer) Tax Return; Form 1120, U.S. Corporation Income Tax Return; and Form 1120S, U.S. Income Tax Return for an S Corporation if, in the prior three years, at least one Form 1120S was filed late but not penalized. This list is not all-inclusive, the IRS cautioned.

The IRS said it would base decisions on removing any future failure to file, failure to pay or failure to deposit penalties on any information taxpayers provide that meets reasonable cause criteria.

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IRS Tries to Pre-Verify Tax Refunds


The Internal Revenue Service is exploring ways to improve its verification process before issuing tax refunds, but it needs to do a better job of managing the risks, according to a new government report.

The report, from the Government Accountability Office, noted that the IRS receives few information returns before issuing most tax refunds. In 2012, the IRS issued 50 percent of tax year 2011 refunds to individuals by the end of February, but had only received 3 percent of information returns.

Most information returns are not received by the IRS until after mid-April, and the IRS conducts the first match of tax and information returns in July, with subsequent matches in February and May of the following year. For tax year 2010, an average of over a year passed before the IRS notified taxpayers of matching discrepancies, which the IRS recognizes is a long time lag that burdens taxpayers. For tax year 2011, IRS matched over 140 million individual income tax returns against the 1.6 billion information returns it received from third parties such as employers. Generally, this match does not occur until well after refunds are issued.

In early 2011, then-IRS Commissioner Doug Shulman outlined a vision for a “Real Time Tax” system, a strategy to improve verification by matching third-party information to income tax returns during the pre-refund screening process rather than after refunds are issued. In 2012, the IRS launched a three-phase exploratory effort to assess the tradeoffs inherent in pursuing Real Time Tax.

Moving the matching of third-party information during the pre-refund screening process could have significant impacts on taxpayers, third parties, and IRS processes and systems. But it could also require congressional action to authorize changes to the Tax Code, including, perhaps, changes to some information return due dates. Considerations associated with moving the due dates include whether third parties have the information they need before the current due dates and whether they would have sufficient time to detect and correct errors before reporting. IRS officials noted that they do not yet consider Real Time Tax a “project” and have not decided whether to pursue Real Time Tax.

The GAO report acknowledged that the IRS is generally following leading practices in its Real Time Tax exploratory effort by, for example, dedicating a team and defining program goals. However, the IRS did not develop an overall timeline because IRS management views Real Time Tax as a broad goal, and officials wanted to avoid causing concern that the IRS had already decided on a path. Without a timeline for the overall exploratory effort, though, the IRS cannot know if its efforts will be completed in even the broad time frames the IRS is considering, the GAO pointed out, and Congress may not be able to determine what legislative action might be required.

IRS officials stated that managing risk is a high priority, but they have not developed an overall risk management framework, as they are still in the early stages of the exploratory effort, according to the GAO. Officials said they plan to further develop the strategy if the IRS pursues the Real Time Tax effort. But without systematically identifying and evaluating the risks of Real Time Tax options, IRS officials may miss critical factors that could complicate the effort, the GAO warned. A record of prior risk analyses could help prevent unnecessarily repeating the same analyses.

The GAO recommended that the IRS identify time frames for the exploratory effort’s critical phases and activities and develop a risk management framework for Real Time Tax. IRS agreed with the GAO’s recommendations.

“We agree with GAO’s selection of leading practices for exploratory efforts, such as real time tax, and appreciate acknowledgement of IRS efforts in implementing four of the six leading practices selected,” wrote IRS Deputy Commissioner for Operations Support Beth Tucker in response to the report. “The IRS also agrees with GAO’s recommendation. As the IRS continues to engage stakeholders and explore the real time tax concept, we will identify timeframes for critical phases and key activities and develop a risk management framework.”

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