On April 15, the House passed the Taxpayer Assistance and Simplification Act of 2008 (H.R. 5719). The bill, approved by a 238-179 vote, is a collection of provisions aimed at facilitating income tax compliance — especially among elderly and low-income taxpayers. Most significantly, the bill would end the Internal Revenue Service's (IRS) highly controversial private debt collection (PDC) program. This bill represents a successful attempt by the House to cancel authorization for the IRS to contract out tax collection services. It would bar the IRS from entering into contracts with private collection agencies (PCAs) and prevent the agency from renewing contracts with the two PCAs with which it currently does business.

Prior attempts to end the PDC initiative met with strong Republican opposition in both the House and Senate and were ultimately defeated. Similarly strong opposition to H.R. 5719 came from supporters of the IRS's private debt collection program this time around. Indeed, President Bush registered his opposition to repeal of the program in a veto threat on April 14.

One of the many arguments over the program concerns its ability to close the "tax gap," which is difference between what taxpayers owe and the amount the IRS collects. According to the IRS, the program generated $32 million in gross collections in FY 2007, $12 million of which was paid to the collection agencies, netting the government $20 million. During that period, the IRS spent $71 million in start-up and maintenance costs for the program. All told, the program has lost over $50 million for the government and is expected to continue to lose money for another three years. These figures do not include opportunity costs of not investing the $71 million in traditional, more productive IRS collection programs. National Taxpayer Advocate Nina Olson has recently testified these opportunity costs are upwards of $100 million per year, and she estimates the PDC program would lose almost $500 million over the next six years when these costs are factored in.

Yet because the debt collection program generates revenue, the Congressional Budget Office (CBO) scores the cancellation of the program as a $578 million revenue loss over ten years. That means that under pay-as-you-go (PAYGO) requirements, those revenue losses need to be offset with either additional revenue or entitlement spending cuts. The discretionary resources the IRS has spent on administering the program are not included in PAYGO calculations.

In addition to the PDC program cancellation, the bill contains three other provisions that would result in additional revenue losses. One of these would drop a requirement that businesses list individual calls in order to deduct mobile phone expenses. This widely supported measure would, over ten years, result in a $237 million revenue loss. Another provision would delay for one year the onset of a requirement that three percent of the cost of goods and services purchased by the government be withheld. This provision would cost $316 million over ten years. The third revenue loser is a modification of the rules regarding penalties applied to tax preparers for underreporting income, costing the Treasury some $22 million over ten years.

Despite these revenue losers, the CBO scored the legislation as PAYGO-compliant, as it generates $288 million for the federal government over the next ten years. Of the two provisions in the bill that would offset these losses, only one drew emphatic opposition when the bill was in committee — a proposal to require Health Saving Account (HSA) account holders to document that they use funds withdrawn from the account for approved purchases. This provision touched off a contentious exchange between Ways and Means Committee members during the mark-up on April 9.

Currently, HSA account holders are not required to provide proof that withdrawals from their accounts are applied only to approved uses; such unauthorized payments are subject to a 10 percent penalty. H.R. 5719 would require that when disbursements from HSAs are made, account users submit documents (e.g., receipts) proving the withdrawal was for an approved use. The measure would provide $308 million in offsetting revenues.

The most vocal opponent to the new HSA requirements in the mark-up session was Rep. Paul Ryan (R-WI). Ryan suggested that such a change was substantial enough that it warranted further hearings to ascertain the effects of such a move. Citing concerns the provision would place an inordinate burden on account users, thus causing fewer contributions to be made to such plans, Ryan offered an amendment striking the measure from the bill. The vote failed along party lines during the committee mark-up.

The bill's largest offset is an $860 million provision based on a stand-alone bill, H.R. 5602, the Fair Share Act of 2008. Introduced at the end of March in both the House and Senate, the Fair Share Act would require U.S. firms that employ American citizens overseas through foreign subsidiaries to pay Social Security and Medicare taxes when contracting with the federal government. A Boston Globe story in March reported that Kellogg Brown & Root, a former subsidiary of Halliburton, avoided about $100 million in payroll taxes by using foreign shell companies to employ U.S. workers in Iraq.

In addition to these important changes, the Taxpayer Assistance and Simplification Act would also:

• Prevent employment tax liability for elderly and disabled individuals receiving in-home care under certain government programs
• Allow IRS employees to refer taxpayers needing assistance with tax cases to qualified low-income taxpayer clinics
• Authorize an annual $10 million grant for Volunteer Income Tax Assistance ("VITA") programs
• Require the IRS to notify taxpayers of their potential Earned Income Tax Credit (EITC) qualification
• Prohibit the IRS from providing debt indicators to private parties if it is determined that the resulting refund anticipation loan plus related fees are predatory
• Require the IRS, to the extent permitted by law, to notify taxpayers if it determines that there may have been an unauthorized use of the identity of a taxpayer or the taxpayer's dependent
• Allow the IRS to disclose taxpayer identity information for unclaimed refund notification purposes

The abrogation of the IRS private debt collection program is probably the bill's most significant and controversial measure. In addition to Olson, good government groups and consumer rights organizations have been openly critical of the program, claiming it is fiscally wasteful, puts sensitive taxpayer data at risk, opens citizens to abusive collection practices, and lacks the transparency necessary to conduct proper oversight. OMB Watch has also called for repeal of the program and for strengthening the IRS capacity to close the tax gap.